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White Collar Mafiosos (And Their CPA) Arrested For Strong-Arming Their Way To Business Ownership

A mobster, a lawyer and an accountant walk into a bar… Okay, maybe not.

Yesterday, thirteen people – including five lawyers and a Certified Public Accountant – were arrested in early morning raids in New Jersey, Florida and Texas for their part in a complicated scheme that involved taking a mortgage company by force and frittering away its assets.

Federal prosecutors say the son of imprisoned crime boss Nicodemo D. “Little Nicky” Scarfo and his associate Salvatore Pelullo took over Irving, TX mortgage company FirstPlus Financial Group, a company with plenty of cash but very little sophistication. The change in ownership was not amicable for both involved parties. According to the indictment, Pelullo told a member of the FirstPlus board that if he did not go along with the planned takeover, “your kids will be sold off as prostitutes.” Harsh. At what B-school do they teach that tactic?


The indictment goes on to allege that Pelullo wanted the company’s board to agree to give control over to his and Scarfo’s new board of directors and that he wasn’t willing to wait around for this to happen. “I don’t care if they’re in a funeral parlor, I don’t care if they’re in a [bad word] hospital on a respirator, we’ll send somebody there. I want their vote, I want their signature, and I want it done by the close of the day today,” he is alleged to have said to other individuals also charged in the scam.

Among those indicted are former FirstPlus Chief Executive Officer John Maxwell and former Chief Financial Officer William Handley. Court documents show that both individuals were placed on the board by, er, unconventional means that don’t include the desires of shareholders ifyouknowwhatI’msayin.

Fun fact: former Vice President Dan Quayle was once a FirstPlus board member. He is not mentioned in any indictments. Also, former Miami Dolphins quarterback Dan Marino used to be a shill for FirstPlus. The company filed for bankruptcy in 1999 and, according to a Chapter 11 filing from June of this year, was dormant but profitable due to a securitized pool of mortgages it expected to make a profit from for at least a decade. Ernst & Young resigned as the company’s auditor in 1999, citing, uh, irreconcilable differences but not anything to do with accounting issues or, you know, the fact that the company was basically broke.

The 25-count indictment includes charges of money laundering, bank fraud, wire fraud, mail fraud, securities fraud, extortion and obstruction of justice.

Authorities say that the (alleged) criminal masterminds took $12 million from the company in a year and spent it on multiple homes, weapons and ammo, pricey luxury vehicles, a plane, jewelry and a yacht. You know, the usual.

FirstPlus Financial Was Hit by Mob Takeover, 13 Charged, Prosecutors Say [Bloomberg]
US Attorney For NJ Alleges Mafia Crime Family Took Over FirstPlus [Dow Jones]

COSO Study Finds Accounting Frauds Getting Larger, Execs Named in Nearly 90% of Cases

If you could sum up the years of 1998 to 2007, how would you do it? Promising career crushed in a millisecond? A seemingly endless loop of awkward moments? Various forms of experimentation?

If you’re the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) you’re more or lessway: Financial reporting fraud is getting bigger. Financial reporting fraud causes businesses to fail. CEOs and CFOs are usually the ones blamed.


If you’ve been paying attention at all, this probably doesn’t surprise you one iota but it is nice that COSO took it upon themselves to wrap it up in a nice little package entitled, Fraudulent Financial Reporting 1998-2007, An Analysis of U.S. Public Companies.

The report examined cases of alleged accounting fraud that were investigated by the SEC for the period. Some of the more interesting findings:

• Financial fraud affects companies of all sizes, with the median company having assets and revenues just under $100 million.

• The median fraud was $12.1 million. More than 30 of the fraud cases each involved misstatements/misappropriations of $500 million or more.

• The SEC named the CEO and/or CFO for involvement in 89 percent of the fraud cases. Within two years of the completion of the SEC investigation, about 20 percent of CEOs/CFOs had been indicted. Over 60 percent of those indicted were convicted.

• Revenue frauds accounted for over 60 percent of the cases.

• Twenty-six percent of the firms engaged in fraud changed auditors during the period examined compared to a 12 percent rate for no-fraud firms.

• Initial news in the press of an alleged fraud resulted in an average 16.7 percent abnormal stock price decline for the fraud company in the two days surrounding the announcement.

• Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange, or material asset sales at rates much higher than those experienced by no-fraud firms.

Lot of takeaways: bogus revenue is still popular, switching auditors is usually not a good sign (*ahem* Overstock.com), oh and if you cook the books, investors run away from you like a band of lepers.

Further, Compliance Week reports that the 347 cases reported is an increase from the 294 reported for the 1987-1997 period as well as tripling the average size of the fraud from $4.1 million to $12.05 million. The median assets and revenues of $100 million jumped from $16 million in the ’87/’97 range.

While this suggests that frauds are getting bigger, occurring at larger companies and as a result, destroying more wealth, the successful criminal prosecution of the people in charge of the companies doesn’t appear to be keeping up.

COSO Chair David Landsittel said, “All parties involved in the financial reporting process need to continue to focus on ways to prevent, deter, and detect fraudulent financial reporting,” although if the CEO or CFO (who certify the financial statements) are involved in the fraud, this statement doesn’t mean much. Sam Antar doesn’t think so either, telling us,

[W]e needed a study to find out that financial fraud leads to bankruptcy? Where have these guys been?Until we move away from the process oriented “check the box and fill in the blanks” routine in audits and start understanding criminal behavior, there isn’t much any auditor can do to deter fraud. Former Speaker of the House of Representatives Tip O’Neill once said, “All politics is local.” Similarly, we need to learn that “All fraud is personal.”

And since the SEC names a CEO or CFO in 90% of these cases, yet only 20% of those cases actually result in indictment within two years, does this indicate that the naming of said CEO/CFO is largely a photo op for the SEC/DOJ et al? Even if 60% of those executives are convicted it appears that finding fraud is (relatively) easy part; successfully blaming someone in the court of law is something else entirely.

One of the authors of the study, Mark S. Beasley of North Carolina State University noted that there is work still be done, “We need to determine if there are certain board-related processes that strengthen the board’s oversight of risks affecting financial reporting.” This seems to indicate that there is some significant high-level processes that are still not in place that could keep tabs on the Andy Fastows of the world but for now, we still seem to be going with the honor system.

COSO Press Release [COSO]
Fraudulent Financial Reporting 1998-2007, An Analysis of U.S. Public Companies [COSO]
COSO Fraud Study Catalogs Latest Decade of Incidents [Compliance Week]