Another SEC Victory

"The [SEC] suspected Texas financier R. Allen Stanford of running a Ponzi scheme as early as 1997 but took more than a decade to pursue him seriously, according to a report further tarring the agency that missed Bernard Madoff's huge fraud. The report by the SEC's inspector general says SEC examiners concluded four times from 1997 to 2004 that Mr. Stanford's businesses were fraudulent, but each time decided not to go further. ... The former SEC official, Spencer Barasch, is now a partner at law firm Andrews Kurth LLP. ... The inspector general referred Mr. Barasch for possible disbarment from practising law. ... SEC Inspector General David Kotz's report suggests the agency's mistakes in the Stanford case were in part the result of a culture that favored easily resolved cases over messier ones. Cases such as the alleged Stanford fraud weren't considered 'quick hit' and 'slam dunk,' and examiners were discouraged from pursuing them, Mr. Kotz found. ... Examiners noted that Mr. Stanford was promising to pay investors a return well above the market, without any apparent way of delivering on that promise. ... SEC enforcement officials also appeared to have ignored warnings from insiders at Stanford's operations", my emphasis, Michael Crittenden & Kara Scannell at the WSJ, 17 April 2010, link:

http://online.wsj.com/article/SB10001424052702303491304575188220570802084.html.

Another day, another missed fraud at the SEC.

Sic Semper Whistleblower-3

"With the benefit of hindsight sharpened by the view from the Pennsylvania prison where he began serving three-plus years in January, Mr. [Bradley] Birkenfeld says he is an informant who blew on the wrong whistle. ... The former UBS AG banker was the central informant in an investigation that led to a wide-ranging IRS crackdown on secret offshore bank accounts. That he also is the only person so far to be sentenced to substantial prison time--40 months, for conspiring to defraud the US government--has made Mr. Birkenfeld a popular hero in some corners of the tax community, though others disagree. ... At his sentencing hearing in August, Justice Department [sic] prosecutor Kevin Downing said: 'I will say that without Mr. Birkenfeld walking into the door of the Department of Justice [sic] in the summer of 2007, I doubt as of today that thus massive fraud scheme would have been discovered by the US government.' ... Mr. Birkenfeld says he came to the Justice Department [sic] ready to tell everything, and asked the agency to subpoena him so that he wouldn't break the law by naming names", Arden Dale at the WSJ, 9 April 2010, link:

http://online.wsj.com/article/SB10001424052702303720604575170362357298800.html.

What can you say? Who at the misnamed Justice Department didn't want this case prosecuted? Why? When the IRS wants information, it issues a subpoena. What's going on here?

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?

Sic Semper Whistleblower-2

"A crusading legislator who had made a considerable reputation following up on whistleblower charges once told me that nearly all the whistleblowers she had met shared two qualities. First, they were onto something--that is, there was at least some truth to what they were saying. Second, they were 'a little bit nuts.' ... Through common sense at first, but ultimately through brilliant analytical detective work, Mr. Markopolos [HM] figured out precisely what Mr. Madoff was up to--and showed why Mr. Madoff could not bea earning the amazingly consistent returns that he claimed for his investors. ... The response of the SEC's enforcement staff was nothing less than appalling--a complete derelication of duty. ... The crook simply outmatched the watchdog. As Mr. Markopolos observes: 'The quants who create these financial products understand differential equations and nonnormal statistics; they program in languages the SEC doesn;t speak; they run statistical packages the SEC doesn't even know exist. The quants are busy data mining with supercomputers while the SEC is still panning by hand.' ... Mr. Markopolos writes: 'In my mind, at leat, I was convinced that someone high up at the Journal had decided it was too dangerous to go after Bernie Madoff.' No evidence for this charge is offered or even suggested. ... Now we come to the second quality that whistleblowers often sow. The author of 'No One would Listen' is fond of describing himself as 'slightly eccentric,' but he is not exactly self-aware. ... Mr. Markopolos tells us that for years, fearing for his own and his family's safety, he checked for bombs under his car; he also carried a loaded gun and slept with it at his bedside. He did so becase he believed--though he offers no evidence--that Mr. Madoff's clients included Russian mobsters and Latin drug cartels", Richard Tofel books review at the WSJ, 9 March 2010, link:

http://online.wsj.com/article/SB10001424052748703936804575108180543849168.html.

RT's condescending manner to HM indicates RT never blew the whistle. My experience with the (In)Justice Department makes me believe HM missed his biggest danger: the SEC would turn him over to Madoff and Madoff's cronies. Having blown the whistle in 1991 on a fraud, admittedly small by today's standards, only about $210 million in 2010 dollars, HM's fears were justified. I had the tires of my car slashed four times. I then parked it blocks away from my apartment. My apartment was burglarized. Strangely, nothing was taken. The investigating Los Angeles Police Department officer asked me who I thought did it and why. I told him. He said I might be in big trouble. I told him If I got killed tell the FBI it was a witness killing, punishable under 18 USC 1513(a). He saw I meant it. I looked under my car for bombs every day for 18 months. I had over 200 "hang up" phone calls from midnight to 1:00 AM in the morning. Who the hell does RT think he is talking to?

Lehman's Fiddles

"A scathing report by a US bankruptcy-court examiner investigating the collapse of Lehman Brothers Holdings Inc. [LBHI] blames senior executives and auditor Ernst & Young [E&Y] for serious lapses that led to the largest bankruptcy in US history and the worst financial crisis since the Great Depression. ... The document runs thousands of pages and contains fresh allegations. In particular, it alleges that Lehman executives manipulated its balance sheet, withheld information from the board, and inflated the value of toxic real estate assets. ... The examiner said in the report that throughout the investigation it conducted regular weekly calls with the SEC and Department of Justice. There have been no prosecutions of Lehman executives to date. ... Mr. [Anton] Valukus, chairman of law firm Jenner & Block, devoted more than 300 pages alone to balance-sheet manipulation, accusing Lehman of using accounting methods to move assets off its books. But because the moved assets represented 105% or more of the cash it received in returns, accounting rules allowed the transactions to be treated as 'sales' rather than financings. The result: Assets shifted away from Lehman's balance sheet, reducing the amount of debt it showed to investors. ... Lehman's own global financial controller, Martin Kelly, told the examiner that 'the only purpose or motive for the transactions was reduction in balance sheet' and 'there was no substance to the transactions.' Mr. Kelly said he warned former Lehamn finance chiefs Erin Callan and Ian Lowitt about the maneuver, saying the transactions posed 'reputational risk' to Lehman if their use became publicly known. ... Mr. Valukus' report is among the largest undertakings of its kind. Those singled out in the report won't face immediate repercussions. Rather, the report provides a type of roadmap for Lehman's bankruptcy estate, creditors and other authorities to pursue possible actions against former Lehman executives, the bank's auditors and others involved in the financial titan's collapse. ... One party singled out in the report is Lehman's audit firm, [E&Y], which allegedly didn't raise concerns with Lehman's board about the frequent use of the repo transactions. ... '[E&Y] took no steps to question or challenge the non-disclosure by Lehman of its use of $50 billion of temporary off-balance sheet transactions,' Mr. Valukus wrote", Mike Spector, Susanne Craig & Peter Lattman at the WSJ, 12 March 2010, link:

http://online.wsj.com/article/SB10001424052748703625304575115963009594440.html.

"Many executives inside [LBHI] quietly fretted about the firm's accounting as the company headed to the brink in September 2008. Matthew Lee did something about it. In May 2008, the former Lehman senior vice president wrote a letter to senior management warning that the company may have been masking the true risks on its balance sheet. ... His warnings, disclosed for the first time in a report by a US bankruptcy-court examiner, could trigger legal consequences for Lehman's auditor [E&Y], as well as former senior officials. ... 'We are dealing with a whistle-blower letter, that is on its face pretty ugly and will take us a significant amount of time to get through,' William Schlich, a former lead partner on [E&Y's] Lehman team, wrote in a June 5, 2008, email to a colleague, which is included in the examiner's report. ... In a June 12, 2008 interview with [E&Y], Mr. Lee raised the issue that Lehman was moving as much as $50 billion off its balance sheet, using a practice the firm called 'Repo 105,' the report says", Michael Corkery at the WSJ, 13 March 2010, link: http://online.wsj.com/article/SB10001424052748703447104575118122594094284.html.

We know E&Y. Substance over form? From the Big 87654? You're joking! E&Y accepts the ".001 standard", my 5 March 2008 post: http://skepticaltexascpa.blogspot.com/2008/03/enron-accounting-redux.html. Did Uncle Sam know about LBHI's accounting chicanery? Probably. See my 6 February 2008 post: http://skepticaltexascpa.blogspot.com/2008/02/treasury-and-banks.html. Yves Smith has a related 11 March 2010 post at her Naked Capitalism: http://www.nakedcapitalism.com/2010/03/ny-fed-under-geithner-implicated-in-lehman-accounting-fraud.html.

Innumerate Attorneys

"What was it like to spend nine years trying to persuade the [SEC] that Bernard Madoff was a fraud, only to learn that the agency thought he was perfectly reputable? For nine years I was the SEC's dormat. Now you're triumphant, a hero in investment circles who exposes the SEC as the most futile of agencies in your new book, 'No One Would Listen.' It was a trip though the twilight zone. ... They've reorganized. They redisorganized the enforcement unit. I actually approve of that. I think Robert Khuzami, the new head of the enforcement division, has got fire in his belly. Are you saying the SEC under Schapiro is about to catch fraud on Wall Street? She has the wrong staff. They're a bunch of idiots over there. What do you mean? The five commissioners of the SEC are securities lawyers. Securities lawyers never understand finance. They don't have the math background. Of you can't do math and if you can't take apart the investment products of the 21st century backward and forward and put them together in your sleep, you'll never find the frauds on Wall Street. ... They're overlawyered. They're poisoned by lawyers", my emphasis, Deborah Solomon interview with Harry Markopolos (HM) at the NYT, 28 February 2010, link:

http://www.nytimes.com/2010/02/28/magazine/28fob-q4-t.html.

HM is too kind to the SEC. It is worse than full of idiots. It is corrupt from top to bottom. That it is overlawyered and lawyers are innumerate is old news. See my 22 December 2007 post: http://skepticaltexascpa.blogspot.com/2007/12/us-injustice-system-at-work.html.

The SEC staffers' incentives are all wrong. That's why idiots like Meaghan Cheung work there, 18 January 2009:

http://skepticaltexascpa.blogspot.com/2009/01/meaghan-moron.html.

Mike Nifong Does Texas

"A Texas nurse who was brought up on criminal charges for filing an anonymous complaint accusing a doctor of unethical conduct was acquitted by a jury Thurday in a case that watchdog groups warned could have a chilling effect on health care workers and patients. ... After the jury returned its verdict, [Anne] Mitchell siad her complaint 'had nothing to do with perosnal feelings,' and she would continue to report doctors if she believes they are not gicing patients proper care. ... Dozens of nurses filled the courtroom throughout this week's trial, and many wept when the verdict was announced. ... 'Whether Ms. Mitchell was convicted or exonerated, was largely irrelvant to the long-term impact her prosecution will have on Texas patients,' [Allen Winslow of Texas Watch] said in a statement. 'The very fact that she was prosecuted will make individuals who could have information that could save lives wuill think twice before speaking up, putting Texas patients at risk.' ... Mitchell's complaint filed in April acused [Rolando] Arafiles of improperly encouraging patients to buy herbal medicines and wanting to use hospital supplies to perform a procedure at a patient's home", Betsy Blaney at the Houston Chronicle, 12 February 2010, link:

http://www.chron.com/disp/story.mpl/headline/metro/6862938.html.

"Now it's time for the sherriff who investigated her and the district attorney [DA] wwho prosecuted her to be brought to justice. We can only fantasize. ... The Medical Board [MB] already knew Arafiles. In 2007 it had placed him under certain restrictions for three years. Two days after receiving the anonymous letter, the board notified him of the complaint and some of its details. ... In addition, according to testimony at trial, he joined in pushing doc's $40 bottles of herbal supplement, even holding meeting at Pizza Hut to recruit other salesmen. ... [MB] offficials assumed he was investigating the doctor, according to a spokeswoman. In a letter to him, they said that under the law the letter could not be released except to a law enforcement official 'conducting a criminal investigation of a license holder of the TMB.' Nurses are not licensed by the [MB]. ... Instead of coorrecting the board's assumptions, the sherriff used the letter to identify the nurse who was over 50 and had been with the hospital since the 1980s. He obtained a search warrant of her computers and found a copy of the letter. ... Within weeks however, [DA] Mike Fostel offered a deal: The indictment would be dropped if the women agreed not to sue the county or its hospital. Smart man, but it didn't work. The nurses filed a federal lawsuit. ... Meanwhile the Texas [MB] has expressed its 'grave concern' about the indictments to Fostel and Tidwell. And national nursing organizations, outraged, raised $40,000 for the women's defense according to the [New York] Times", my emphasis, Rick Casey at the Houston Chronicle, 12 February 2010, link: http://www.chron.com/disp/story.mpl/metropolitan/casey/6863319.html

"A West Texas jury took but an hour Thursday to acquit a nurse who had been charged with a felony after alerting the state [MB] that a doctor at her hostpital was practising unsafe medicine. ... The jury foreman said the panel of six men and six women voted unanimously on the first ballot, and questioned why Mrs. Mitchell had ever been arrested. ... The prosecution has so polarized the small town of Kermit, where the hospital is located, that the judge moved the trial to a neighboring county. The case was investigated by Sherriff Robert L. Roberts Jr. a friend and admiring patient ot Dr. Arafiles, and tried by the county attorney, Scott M. Tidwell, a political ally of the sherriff and, according to testimony, Dr. Arafile's personal lawyer", Kevin Sack at the NYT, 12 February 2010: http://www.nytimes.com/2010/02/12/us/12nurses.html.

This case shows why we need juries. The jury deliberated less than an hour to acquit Mitchell.

Amazing. A 2009 version of a "traveling medicine show". Well, how about an indictment of Fostel and Tidwell for "extortion under color of right", 18 USC 1951?

Quoted without comment.

Debt Bomb

"Kyle Bass has bet the house against Japan--his own house, that it. ... 'Japan is the most asymmetric opportunity I have ever seen,' he says, 'way better than subprime.' ... If 2008 was the year of the subprime meltdown, 2010, he thinks, will be the year entire nations start going broke. ... National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average for mature economies over the preceeding five years. ... Whether or not you believe the spending spree was morally justified, you have to be concerned about the prospect of a dismal, debt-burdened fiscal future. More debt weighs heavily on GDP, says Carmen Reinhart, a University of Maryland economist. ... America is a nation of spendthrifts, addicted to easy credit and dependent on the kindnesss of savers overseas to keep us comfortable. ... The personal savings rate has climbed from negative 0.4% in 2006 to a positive 4.5% rate now, but that it still a pathetic figure for a nation whose government is un-saving all that and more with its budget deficit. ... If the GDP doesn't expand at 'normal' rates of 3% to 5% coming out of this recession, wrestling down the debt will be very tough, indeed--perhaps impossible without drastic cuts in spending and higher taxes of many fronts. ... US corporate tax receipts were down 55% in the year ended Sept. 30, 2009 to $138 billion. ... If Congress and the Obama Administration don't trim spending [Benn Steil] says, 'we will get to the point where credit is much more expensive in the US than it has been in the past.' ... 'US states are like emerging markets,' says Reinhart. 'They spent a lot during the boom years and then were forced to retrench during the down years.' ... But Brian Coulton, head of global economics at Fitch Ratings in London, warns that once rock-solid economies like the US and UK could join shakier nations like Japan and Ireland in losing their AAA ratings if they don't get their bad habits under control. ... Most investors seem to believe, as the late Citibank chairman Walter Wriston put it, that 'countries don't go bust.' The opposite is true. ... Even if countries don't stiff creditors outright, they can sometimes accomplish the same thing through inflation", Daniel Fisher at Forbes, 8 February 2010, link:

http://www.forbes.com/forbes/2010/0208/debt-recession-worldwide-finances-global-debt-bomb.html.

"In 2009 investors were warned about bubbles: a bubble in Treasuries, a gold bubble, and, finally, warnings of a rapidly expanding bond mutual fund bubble forming. It's brought to us by the [Fed's] 0% interest rate policy. Whether the flood into bond funds of all types was an intended consequence or not, it's now a flood that could go just as quickly the other way. ... There is a lot of unsophisticated money in bonds now, and I'm not sure investors understand how miserable things can get when the low interest rate party ends", Marilyn Cohen at Forbes, 8 February 2010: http://www.forbes.com/forbes/2010/0208/finances-junk-bonds-yield-interest-capital-markets.html.

If you have any type of bonds, no matter in what currency, sell! As for Walter Wriston, see my 30 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/book-review-walter-wristons-bits-bytes.html.

I agree, the bond market is a disaster waiting to happen.

Sic Semper Whistleblower

"Former UBS AG private banker Bradley Birkenfeld, the key informant in the landmark US case against the Swiss banking giant, reported to a federal prison in Pennsylvania on Friday, while his lawyers stepped up their criticism of the US Justice Department for prosecuting him. ... 'Every single UBS client is pretty much walking away free, either house arrest or probation,' said Mr. Birkenfled, who began serving a 40-month sentence for helping UBS clioents evade US taxes. He pleaded guility in 2008 and was sentenced last August. ... 'This decision is not only grossly unfair and personally harmful to Mr. Birkefeld, it will also have a radical chilling effect on the willingness of other bankers to step forward and expose fraud,' Mr. [Stephen] Kohn said. ... Prosecutors have conceded that they had no case against UBS without Mr. Birkenfeld's cooperation, but they said they sought jail time for the banker because he wasn't forthcoming about his own role in the scheme, an allegation that Mr. Birkenfeld denies", my emphasis, Brent Kendall & Aaron Dale at the WSJ, 9 January 2010, link:

http://online.wsj.com/article/SB10001424052748703481004574646562279548926.html.

"A former banker who provided key assistance in the US tax evasion probe of Swiss banking giant UBS reported to prison Friday and said his co-operation should have earned him the federal government's gratitude, not time behind bars. ... His sentence has drawn criticism from whistle-blower advocates because of Birkenfeld's importance in exposing tax evasion at UBS", Michael Rubinkam at the Houston Chronicle, 9 January 2010, link: http://www.chron.com/disp/story.mpl/headline/biz/6806545.html.

What nonsense. Igor Olenicoff (IO), my 20 May 2008 post: http://skepticaltexascpa.blogspot.com/2008/05/sentencing-snipes-2.html didn't go to prison. IO paid a $3,500 fine. How much did IO pay DOJ employees above and beyond the $3.500? Don't think that. Don't you know how upstanding most AUSAs are? They could leave the DOJ and join say Fredde or Fannie as general counsel. That's how upstanding. What's going on here? The DOJ just told would-be whistleblowers at Citigroup and Vampire Squid, AIG, etc., "shut up". Again I note, the DOJ couldn't have built the case without an insider. "Radical chilling effect", as Yves Smith says, "feature or bug"?

Does anyone remember the FBI's Richard Jewell fiasco?

Sarbox Loophole?

"Congress wants to close a legislative loophole that has led to the dismissal of many corporate whistleblower complaints, undermining the government's goal of protecting employees who report fraud at publicly traded companies. Democratic lawmakers are seeking to amend the Sarbanes-Oxley Act's whistleblower-protection provision. Under the law, employees who claim to have been dismissed for reporting wrongdoing can file an adminstrative complaint with the US Department of Labor. ... In articles last year, the [WSJ] reported that the Labor Department has dismissed many whistleblower complaints on a technicality, saying the law, as written, doesn't apply to corporate subsidiaries. ... Under the Bush administration, Labor Department lawyers issued a directive saying there is 'no legal basis for the argument that subsidiaries of covered corporations are automatically covered,' because the language of the law does't 'expressly' mention subsidiaries. Sen Patrick Leahy, a Vermont Democrat and one of the main authors of the whistleblower provision, says Congress never meant to exclude subsidiaries", Jennfier Levitz at the WSJ, 1 December 2009, link:

http://online.wsj.com/article/SB10001424052748703939404574568272685253690.html.

The Bush adminstration's interpretation of this law was indefensible. See my 16 September 2008 post:

http://skepticaltexascpa.blogspot.com/2008/09/sarbox-scam-2.html. Apparently I understand legal interpretation better than the DOL's lawyers. Big deal.

SEC-Two Views

"We can't deal with all of them in one week, so we take special note of the regulators on our turf. Although the [SEC] was founded in the 1930s, its efforts to protect consumers have not yet succeeded. But it knows why: All it needs is a little more money. ... After examining a recent report from the SEC's inspector general, we must add a codicil: A government pretending it can do a lot of good automatically will do a lot of harm. ... According to the report, the SEC conducted nine investigations and audits of Madoff's now-infamous operations and was unable to detect his Ponzi scheme or the fictitious nature of the trades he reported to his investors. ... Many people claim that the SEC is understaffed, overworked or underfunded. How about incompetent? As with most regulatory agencies, neophyte lawyers usually work at the SEC for sub-market wages, just long enough to acquire the expertise in regulatory arcana that makes them really valuable in private practice as advisers to those being regulated. ... 'Most of the investigation was directed at determining whether Madoff should register as an investment adviser or whether Madoff's hedge-fund investors disclosures were adequate.' Regulation and regulators frequently drift from substance to form. Paper-pushing and registration are a defense against inquisitive supervisors, but they are no substitute for forcible disclosure, aggressive investigation and well-supported prosecution. ... Though it looked down its nose at the SEC's staff, even the office of the inspector general hired two expert consulting firms to do its investigation. And the IG had the advantage of knowing what had happened. Even when the SEC does find a fraud or a failure to disclose, it almost never prosecutes. It reaches a settlement. ... The IG wants to add more forms, not more effort. It urges new systems to list complaints and keep track of them, to handle tips and assign them to knowledgeable investigators, to acquire and hold data, to train employees, to plan and to analyze enforcement", my emphasis, Thomas Donlan (TD) at Barron's, 5 October 2009, link: http://online.barrons.com/article/SB125452436061160553.html.

"The Inspector General of the [SEC] has provided suggestions on how the agency might improve its chances of catching the next Bernie Madoff. The report has an all-too-familiar-ring. Whenever a new financial scandal erupts the finger-pointing begins: Who knew what when, and why didn't they do something? ... In each case, the SEC's hybrid role as regulator, inspector and enforcer made it particularly difficult for the agency to explain why it came so late to the game. Often adding to its embarrassment in the discovery that someone had been pestering the SEC about the abuse it didn't uncover on its own. Whistleblowers told the agency that no money manager can really get a 10% return every year in perpetuity, that securities built from leveraged real-estate plays may prove problematic, and that no company can book billions of dollars in sales from products no one seems to buy. ... To reflate trust in the post-Enron stock market, Congress stuffed the Sarbanes-Oxley Act with protections for those who know how to out their lips together and blow. ... The IG said the problems include a lack of technical knowledge by line attorneys and many supervisors, little institutional memory for the enforcement staff to draw upon, and weak support from the SEC's other divisions. These are indeed persistent problems--so persistent that some skepticism is warranted that the IG's procedure-heavy recommendations will, in themselves, improve the SEC's investigative performance. ... The safeguards however, can quickly turn into new kudzu, doomed attempts to substitute institutional process for individual judgment. ... From my experience, however, the slush pile of unsolicited investor complaints yields few hits. ... Unfortunately, few of these professionals have any incentive to talk to the SEC. Corporate whistleblowers are often rewarded with a pat on the back followed by a shove out the door, Sarbanes-Oxley notwithstanding. ... And, unlike the criminal authorities, the SEC has no mechanism for giving a free pass to informants, although it's currently considering a move in that direction. ... That leaves short-sellers. ... Almost any public squaring-off against a company by short-sellers (or, for that matter, by journalists or analyst firms) invites a lawsuit. ... The Enforcement Division [ED] hires young lawyers who are smart and hardworking, but devoid of industry experience. ... They need all the help they can get, and the SEC should encourage industry professionals to volunteer information routinely. Additional examination of the tips that bounce into the agency is not enough", my emphasis, Richard Sauer (RS) at Barron's, 23 November 2009, link: http://online.barrons.com/article/SB125875977157458161.html.

My experience dealing with the SEC is that it's worse than TD thinks. The SEC's "neophyte lawyers" (NL) are mostly interested in who is the "relator". If the relator is a nobody and the complaint is about a potential employer, they jump through hoops to ignore the obvious. The NLs are primarily interested in filling up their rolodexes while on the public payroll. I would prefer an SEC that was merely incompetent to today's SEC. Substance vs. form at the SEC? Hahahahahahaha. The SEC's IG needed consultants too! Most SEC investigations are a waste of time. See my 9 December 2008 post about SEC success stories: http://skepticaltexascpa.blogspot.com/2008/12/linda-thomsen-please-go-home.html.

RS is a "former" SEC attorney. After reading this, I wonder if there are "former" SEC attorneys, any more than "former" Vampire Squid (VS) executives. How bad is the SEC? Remember the Ray Dirks fiasco? It led to a Supreme Court decision, my 6 October 2007 post: http://skepticaltexascpa.blogspot.com/2007/10/31-years-of-failure.html. I see SEC personnel as economic ignoramuses. They can't get past: "condition present, condition absent". Unlike IRS personnel, I have no confidence in SEC ED personnel's good faith efforts. I never encountered an IRS agent I thought corrupt. Stupid and ignorant, yes. How does RS know what is in his "slush pile"? Who is RS kidding? If VS's general counsel complained of something involving say $100,000, the SEC ED would be all over it! The SEC can tell registrants they will not file lawsuits against short-sellers without potentially subjecting themselves to securities fraud claims! When? Right now!

Marv Roffman-II

"But for Mr. [Brian] Kennedy, the call brought internal pressure and unexpected criticism. He found himself the subject of a complaint to the [SEC] brought by CardioNet and faced an in-house inquiry by Jeffries lawyers while his research was being pummeled by competitors. Mr. Kennedy's case is an example of the difficulty that analysts can face when their opinions on stocks are negative. In 2003, under federal and state pressure, securities firms agreed to rules for insulating analysts from colleagues who make big fees keeping corporate clients happy. ... Jeffries says 'sell' ratings represent 8% of its analysts' recommendations. 'Buys' make up 53% and holds 39%. ... Nevertheless, Mr. Kennedy said other senior Jeffries analysts chided him for 'rocking the boat.' ... Mr. Kennedy says his 'sell' rating came after weeks of research into CardiNet. The Conshocken, Pa., company went public in 2008 on the strength of its wireless system that sends data on a patient's heartbeat to a monitoring center for doctors. ... Mr. Kennedy quit his job in July. He says he is now considering working for an independent research shop that doesn't do any investment-banking work", my emphasis, David Armstrong at the WSJ, 20 November 2009, link: http://online.wsj.com/article/SB10001424052748704538404574542082056152414.html.

Investment-banking and retail brokerage are in inherent conflict. The SEC should prohibit firms from doing both. As for 2003's settlement, it will be as effective in producing better analytical work as the CPA industry's 1978 SAS 22, has in improving audits. Not very. This case reminds me of Janney Montgomery Scott's firing Marv Roffman in 1990, link: http://www.nytimes.com/1991/03/06/business/dismissed-in-trump-case-analyst-is-awarded-750000.html. No analyst can be independent when investment-banking fees are on the table. Any more than PWC is independent of Vampire Squid. The SEC again shows it is useless. It should have told Randy Thurman, CardioNet's CEO, "shove it up your arse", when he complained about Kennedy's call.

IEA Whistleblowers

gaius marius has a 10 November 2009 post at his Decline and Fall of Western Civilization about a recent international energy agency report about oil reserves and a whistleblower who claims the report was doctored to suit american interests. Here's a link: http://declineandfallofwesterncivilization.blogspot.com/2009/11/iea-accused-of-masking-peak-oil.html. Again: trust no government statistic.

Moody's Exonerated

"Moody's Corp., the owner of credit-ratings firm Moody's Investors Service, boosted its profit forecast for the year as a boom in corporate-debt issuance helped it maintain operating margins of almost 40%. The New York-based company also said an external investigation into allegations of impropriety by a former analyst has been completed and found no evidence of wrongdoing. ... Moody's had engaged a law firm to conduct the investigation into Mr. [Eric] Kolchinsk'y complaint. 'Investigators found that the allegations were not supported by facts and were without merit,' Moody's Chief Executive Raymond McDaniel said in a conference call on Thursday. ... Rep. Edolphus Towns (D, NY), chairman of the House Committee on Oversight and Government Reform, said the committee is still examining the matter and on Thursday sent a formal request to Moody's for a report of the investigation and copies of records provided to the law firm. An SEC spokesman declined to comment", Serena Ng at the WSJ, 30 October 2009, link: http://online.wsj.com/article/SB125681601973515657.html.

Big deal. Another nothingburger investigation by a "board-hired law firm". Why would anyone pay any attention to such report? I last mentioned Kolchinsky on 19 October 2009: http://skepticaltexascpa.blogspot.com/2009/10/rating-agency-snake-oil-2.html.

Waiting Whistleblowers

"A three-year-old [IRS] program that promises hefty bounties for information on big tax cheats has succeeded in drawing whistleblowers. It just hasn't paid out any rewards yet. ... In its second annual report to Congress last week, the office said it got 476 submissions on 1,246 taxpayers in fiscal 2008, each of which appear to meet the requirement that at least $2 million in taxes were evaded. ... Critics of the IRS office say it isn't doing enough to help whistle-blowers through what often turns into a long and frightening ordeal after they hand over information. They can lose their jobs and friends, and feel isolated, even from the IRS, once they have handed over information. ... The IRS is strictly limited in what it can tell whistle-blowers about investigations, said spokesman Bruce I. Friedland", Arden Dale at the WSJ, 14 October 2009.

How unlike the SEC and Mary Jo White, my 23 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/who-is-stephen-cutler-2.html. The IRS can do whatever it wants. I would never trust the IRS as a whistle-blower. I suspect less than 1% of these persons will ever see a dime from the IRS.

Ken Lewis Whistleblower?-3

"When [BofA] bought Merrill Lynch last winter, the political class applauded and called CEO Ken Lewis a solid citizen. Now, from the safety of noncrisis hindsight, our politicians claim that the bank's shareholders may have been mistreated. Few of those shareholders are complaining, given the profits Merrill has been generating for the bank in recent months, but the pols apparently want a scapegoat for bailouts and bonuses. Mr. Lewis fits the bill. ... Of course, proxies rarely make anything clear, because, like all SEC-mandated disclosures, they are created to ensure regulatory compliance rather than inform invstors. Was this one worse than average? ... Anyone who cared enough to read the proxy probably consumer enough financial news to understand that BofA was willing to pay to maintain Merrill's principal asset--its employees. ... But count us as skeptical that BofA managers would risk violating securities laws in order to make sure that other people could collect large bonuses, or to hide another firm's losses so they could have the privilege of overpaying to acquire it. ... If Mr. Cuomo wants to do a public service, he could focus on the government's own role in this episode. ... Here's a theory of the case that won't help Mr. Cuomo become governor, and won't help Mr. [Edolphus] Towns make headlines, but might even be true and fair: Amid the autumn and winter financial panic, everyone involved was operating under tremendous pressure with incomplete information. Federal officials all but ordered Mr. Lewis to buy Merrill and they certainly knew all about the bonuses", original italics, my emphasis, Editorial at the WSJ, 21 September 2009, link: http://online.wsj.com/article/SB10001424052970204518504574419050445773522.html.

"After fighting to keep his grip on the bank he helped build from a scrappy Southern outsider to the nation's largest in assets, [BofA] Chief Executive Kenneth D. Lewis said he will resign by year end. ... Even as the board backed Mr. Lewis publicly, there were signs that his interests and the bank's were diverging. Mr. Lewis has hired his own lawyers, former US Attorney Mary Jo White and James Wyatt III, a criminal-defense expert in Charlotte, while the board and the bank have separate representation on the various lawsuits and investigations relating to the bank's purchase of Merrill Lynch", Dan Fitzpatrick and Joann Lublin at the WSJ, 1 October 2009, link: http://online.wsj.com/article/SB125434715693053835.html.

It is inconceivable that Zimbabwe Ben and Hank Paulson didn't know.

Uh oh. Ken, watch your new lawyers like a hawk. You hired Mary Jo "Ping Pong Ball Fed" White. You don't know who your lawyers represent. My advice: get a Roy Cohn, if you can find one. One who would be unafraid to let the Fed, Treasury and DOJ know: If you come down, you will crash their whole corrupt system.

Rating Agency Snake Oil

"Regulators of some of the biggest bond buyers in the world are considering cutting credit-ratings firms' role in the market in response to botched ratings of complicated mortgage securities. Ratings firms including Standard & Poor's and Moody's Investors Service [MIS] are facing fresh dissent from state insurance regulators, who are cosidering moving away friom the firms ratings' are a way of measuring the health of insurer portfolios of mortgage-backed bonds. The move is a notable challenge to a ratings system that has long embedded itsdelf in the markets. Insurers are among the most important users of band ratings, collectiv ely holding some $3 trillion in rated bonds in their porfolios. ... The challenge from insurance regulators reflects the relentless criticism directed at ratings firms since the credit crisis began in 2007. ... Regulators say they have no plans now to move away from the leading agencies for corporate and other bonds considered less-difficult to rate. The regulators' action could subject them to criticism from consumer-advocacy groups that they are bending over backward to help insurers look good on paper, at the possible expense of policy holders", Leslie Scism & Aaron Lucchetti at the WSJ, 17 September 2009, link: http://online.wsj.com/article/SB125314357900717631.html.

"California Attorney General Edmund G. Brown Jr. began an investigation into three major US credit-rating companies and their role in the financial crisis, in part to determine whether the firms violated California law", Tess Stynes at the WSJ, 18 September 2009, link: http://online.wsj.com/article/SB125321131860920357.html.

"Throughout the financial crisis, the major credit-ratings firms were criticized for their overly rosy ratings of complex debt securities, which deteriorated soon after and led to billions of dollars of investor losses. ... The analyst, Eric Kolchinsky [EK], said [MIS] gave a high rating to a complicated debt security in January 2009 knowing it was planning to downgrade assets that backed the securities. Within months, the securities were put on review for a downgrade. ... The [MIS] spokesman declined to comment on the January rating that Mr. Kolchinsky questioned because a review of the matter 'is in progress.' Before he resigned, Mr. Kolchinsky was a managing director in a nonratings unit and wasn't involved in ratings of the securities in question. He was previously a Moody's rating analyst for six years and had experience with complex securities. ... In December, according to internal memos reviewed by Mr. Kolchinsky, Moody's executives approved changes to their ratings methodology that they expected to lead to the downgrades of many securities backed by corporate loans. The notes issued in January were tied to those types of securities, but Moody's analysts still gave the deal a high rating. ... In October 2007, Mr. Kolchinsky was told there was no role for him because the CDO ratings group was downsizing. He joined Moody's Analytics, a separate unit. ... A Moody's spokeman says that the firm 'has a strict nonretaliation policy' and that Mr. Kolchinsky 'has made an evolving series of claims of misconduct within the company and we have conducted multiple separate reviews.' In each case, Moody's 'found that his claims were unsupported,' the spokesman said", Serena Ng and Aaron Luchetti at the WSJ, 23 September 2009, link: http://online.wsj.com/article/SB125366267173132295.html.

"[EK], the former Moody's Corp. analyst who this week went public with allegations of inflated credit ratings, plans to tell a congressional committee on Thursday that the ratings industry is still hampered by conflicts of interest. He also believes the 'credit policy' and 'compliance' groups at [MIS] lack independence and are short-staffed, and analysts get 'routinely bullied' by business line managers, according to a draft of his testimony. ... Over the past year, he has given presentations within and outside Moody's on the causes and lessons of the financial crisis, detailing problems such as 'ignored incentives,' and overreliance on quantitative models, the highly complex nature of many financial instruments, and regulations that were inconsistently applied, according to a copy of his presentation", Serena Ng at the WSJ, 24 September 2009, link: http://online.wsj.com/article/SB125375108331535851.html.

"Credit-rating firms came under pressure as lawmakers and regulators renewed scrutiny of the ratings process. ... A Moody's spokesman said the company 'takes very seriously all allegations of impropriety,' and a review into Mr. Kolchinsky's most recent claims is in process. The spokesman said Mr. Kolchinsky's previous claims were found ny Moody's to be unsupported. ... [EK] also wrote that he fears that conflcits of interest, which arise bwecause Moody's is paid by debt issuers to rate securities, have become worse in recent months. the group that rates complex securities takes 'analytical short-cuts in their quest for revenue,' he wrote", Serena Ng, Sarah Lynch and Leslie Scism at the WSJ, 25 September 2009, link: http://online.wsj.com/article/SB125382176881638625.html.

This is another example of why we need federalism. It will be more difficult to capture all 50 state insurance regulators than the "systemic federal regulator".

Brown, good luck.

Aren't we impressed with MIS internal investigations. Did John Ashcroft do them? David Kotz may have a place at MIS if he gets pushed out of the SEC. CPAs have had SAS 22 since March 1978, now superceeded by SAS 108. So? SAS seemed to prohibit retaliation against CPAs for holding differences of opinion. Hahahahahahaha.

What? Incentives Count? How dare you? Analysts getting "bullied"? It sounds like EK worked for a Big 87654 firm.

As long as ratings agencies are paid by issuers, the conflcts of interest will remain. It like how CPA firms are paid. I'm sure MIS takes allegations of impropriety seriously. After they become lawsuits.

Harvard's Taxes

"Tax specialist Steven Rose, who is based in Walpole, Mass., resigned in protest in 2001 as Harvard Management's [HM] corporate tax director. ... According to Rose, a [CPA] who had worked for Coopers & Lybrand and consulted for [HM] for 10 years before he was hired there, the financial arrangements between Harvard and the private firms may have allowed Harvard for avoid taxes on [Unrelated-business taxable income] UBTI. Harvard sometimes would offset the fees it owed the firms for their services with a cut of the firms' overall revenue, in an arrangement known as netting. ... In effect, the netting canceled out both the fees Harvard would have owed the firms for their services and revenue that could have been seen as [UBTI]. ... Tom Ochsenschlager, a vice president of taxation at the [AICPA], said the IRS would have a strong case for viewing income derived from such an agreement as UBTI. ... Lawrence ... Summers is believed to have been concerned about UBTI, but an investigation by an independent party ended without recommendations. Rose then took his campaign to regulators and lawmakers", Robin Blumenthal (RB) at Barron's, 3 August 2009, link: http://online.barrons.com/article/SB124908669502998405.html.

"Iris ... Mack, 52, blasted the management company in March, telling the Harvard Crimson, the student newspaper, of a 'frightening' use of derivatives and statistical-modeling techniques during her brief tenure in 2002. ... Rose ..., too, talked to the Crimson, becoming, with Mack, a thorn in the side of Harvard just as it was trying to explain to students, professors and alumni exactly why the huge endowment was plunging 30%. In the ensuing months, Mack and Rose have compared notes on the phone and become friends. ... Mack ... had earned a doctoral degree in applied Mathematics at Harvard--only the second African-American woman to do so--and she had put in a stint as an executive in the derivatives group of BNP Paribas in London. Right before Harvard, she worked at Enron, the doomed energy concern. ... Mack raised her concerns privately in a letter to then-Harvard President Lawrence Summers. ... She was fired several days later; her attorney has cited a letter from [Jack] Meyer faulting her for spreading 'baseless allegations.' ... Mack has since returned to academia, teaching graduate-level math and finance at Embry-Riddle Aeronautical University in Daytona Beach, Fla. ... As with Mack, Harvard says, its investigations found Rose's charges to be 'without merit'," RB at Barron's 3 August 2009.

I agree with Ochsenschlager. Who were Harvard's "experts"?

Enron, poor dear. I'll bet Mack saw lots of economically senseless derivatives at Enron. Imagine, HM, with a $30 billion portfolio, might not understand the derivatives it uses to "manage" its risks.

The Fraudbusters

"Corporate conspiracy theorists, whistle-blowers and suspicious financial minds long have struggled to get an audience for accusations of business fraud. ... 'We're suddenly on Broadway, on the tip of everyone's tongue,' said Lewis Freeman, who has a forensic-accounting firm in Miami. 'Before it was off-Broadway, or even in Boston.' ... The group, the Association of Certified Fraud Examiners [ACFE], said it has 47,000 members, up more than 25% in the past few years. ... Thomas Gaber ... said he also has taken on health-care fraud, sometimes working with the [FBI] and [DOJ]. The FBI and [DOJ] didn't comment. ... Most fraud examiners share a suspicion that criminal activity is rampant within companies, and regulators are incapable of stopping it", Gregory Zuckerman at the WSJ, 8 August 2009, link: http://online.wsj.com/article/SB124968993676315921.html.

The ACFE organization always left me cold. Why? It's members seem to be dedicated to ferreting out frauds against companies, not by companies against the public. Which is not surprising. Who will pay them by the hour to find frauds against the public?