Category: Fraud

Canada Somehow Ranks Ahead of Mexico in PwC’s Global Economic Crime Survey

Flag_of_Canada_jpeg.jpgThat means our neighbor to the north ranks numero uno for North America.* They rank 4th in PwC’s report behind Russia, South Africa, and Kenya with 56% of the Canadian respondents reporting incidents of fraud.
And no, it’s not all because the country is full of crooks, it’s party because Canada has more rats informants:

So does Canada have more thieves in our midst, or are we just better at ferreting out perpetrators?
The study suggests there is a bit of both. Tipoffs from internal or external sources are higher in Canada than in other countries, as is our ability to detect fraud through electronic means. Automated systems used to detect inconsistencies or suspicious transactions accounted for more than 10% of frauds detected by companies in Canada. Thanks to rats and routers, more crimes are being reported in Canada then elsewhere.
By contrast, the PwC report argues that the overall decrease since 2003 in reported crimes elsewhere in the world does not necessarily speak to their better anti-crime fighting abilities, but rather to an “overall breakdown in anti-fraud regime controls which would usually assist in the detection of economic crime.”

So wait a minute, not only does Canada have more tattletales, they also have a superior ability to detect fraud “through electronic means”? Does anyone buy this? That must be the case with the other countries that are keeping Canada company in the top 5, right?
We’re more inclined to go with the notion that Canada doesn’t do such a good job discouraging would-be Mini-Madoffs. According to one expert: ‘We don’t put anyone in jail.’
There you have it. A simple dose of PMITA prison for the Earl Jones and Gary Sorenson types should get The True North out of the top 5.
Canada a fraud nation? [Financial Post]
*We will not be splitting hairs with anyone on whether Mexico is technically part of North America or Central America so don’t even bother going there.

Tom Petters Is Not a Bentley Guy

Thumbnail image for petters_plane.jpgSwashbuckling cocker spaniel Tom Petters has managed to keep his focus the last few days, testifying in his trial for his alleged $3.5 billion Ponzi scheme.
His cross-examination by Assistant U.S. Attorney Joe Dixon included several interesting exchanges including Petters admitting that he was the ‘heart and soul’ of PCI despite his claim of being duped for fifteen years by his office manager/confidante/lover, Deanna Coleman and Robert White, his former CFO. Dixon also accused of Petters of getting drunk on the super-happy-fun times he was having as a captain of industry:

Dixon moved to a line of questioning meant to show Petters used investors’ money to support his other businesses and lifestyle.
Dixon asked about Petters’ ownership of a Bentley, his use of corporate aircraft and homes on Lake Minnetonka and in Florida.
“You wanted the life of a corporate tycoon,” Dixon said.
“No, others wanted me to have that life,” Petters said, his voice rising. “I did not want the life of a corporate tycoon. Absolutely, I didn’t want that.”
Petters said his friend Dean Vlahos, a founder of the Champps and Redstone American Grill restaurant chains, bought him a Bentley as a gift.
“I didn’t want a Bentley,” he said. “I’m not a Bentley guy.”

See? Tom Petters was thrust into this swashbuckling lifestyle by others. The man can’t finish a book if his life depended on it, he can’t possibly be this titan of capitalism. He would’ve been perfectly happy driving a late 70s Oldsmobile Cutlass around on fumes with the headliner completely torn out. In fact, he would’ve preferred that.
Prosecutor jabs, Petters takes to ropes [Minneapolis Star-Tribune]
More GC Coverage of Tom Petters:
Even as the Doors Were Being Busted Down, Tom Petters Was Sure Everything Would Be Fine
Tom Petters Was Pretty Sure He Was Going to End Up in a Dumpster Somewhere
Ernst & Young and McGladrey & Pullen Both Have a Petters Problem

Even as the Doors Were Being Busted Down, Tom Petters Was Sure Everything Would Be Fine

PettersSmile.jpgThe trial of Cocker Spaniel/Ponzi boy Tom Petters is moving along as more and more witnesses are giving testimony that pretty much solidifies Petters’ statement that his business was “one big fucking fraud”.
Testimony on Tuesday (there were no proceedings yesterday due to the holiday) included that of James Wehmhoff, an accountant for Petters Company Inc. (“PCI”).
Wehmhoff said that Petters and Robert White — Petters’ CFO — were taking money out of a subsidiary for personal use. In addition, he also testified that Petters was panicking about an audit and was desperate to stonewall them:

In an email Petters sent to Wehmhoff and other insiders, Petters allegedly wrote, “We need to send the auditors something every day no matter what and keep them from coming to Minnesota. We must pacify them.”

Yet when the Feds were raiding his businesses last September Petters thought everything was hunky-dory, allegedly telling one investor, ‘everything would be fine’. This despite Petters’ fear of getting clipped and, you know, having to explain just where the hell $3.5 billion went.
We’ll keep you updated until they find this guy guilty.
Accountant Testifies Petters Panicked Over Audit [KSTP]
Accountant: Petters execs misused investor cash [Minneapolis Star-Tribune]
Earlier: Ernst & Young and McGladrey & Pullen Both Have a Petters Problem

Fraud Examiners Can’t See the Silver Lining

fraud.jpgThe Association of Certified Fraud Examiners (“ACFE”) is bellyaching about the Garret-Adler amendment.
This is the measure that was passed by the House Financial Services Committee that would exempt small issuers (market cap less than $75 mil) from complying with section 404 of Sarbanes Oxley.
ACFE President, James Ratley:

“At a time when the economic downturn has heightened the risk of fraud for organizations large and small, it simply does not make sense to weaken accounting rules that are in place to protect investors,” he said in a statement. “The bottom line is that internal controls are one of the best fraud prevention tools for any organization to have in place. Providing exemptions for some public companies from the SOX 404 requirements only leads to an increased risk of fraud.”

Ratley very well may be right but let’s not forget who we’re talking about. Nobody — especially accountants — is going to stop the train wreck that is the U.S. Congress. Accordingly, the ACFE should embrace this as a golden opportunity to boost their membership and shout from the rooftops about the benefits of having a CFE certification.
Nobody seems to understand that it isn’t auditors’ job to detect fraud and most companies only seem interested in detective controls, so what’s the point?
Get on this ACFE. It’s fraud awareness week after all. We shouldn’t have to explain this to you.
ACFE Warns Not to Change SOX Rules [Web CPA]

Crowe Horwath Is Amped for International Fraud Awareness Week

Crowe_Horwath_2c_lo.jpgWhat? Your firm hasn’t reminded you that November 8 – 14 is International Fraud Awareness Week? Shameful. Lucky for you, Crowe Horwath is all over this.
Crowe is offering tips to its clients “on how companies can help turn their own personnel into their best fraud preventers and fraud detectors” because they are sick and tired of being the ones finding all of it.
Here’s a taste of their ideas:
• Know who you hire &ndash Avoid guys in tracksuits and with short attention spans.
• Create an ownership environment &ndash That stapler? It’s yours.
• Keep employees informed &ndash Emails about the latest dead-end marriage in the office do not count.
• Establish sound internal controls &ndash Unless you don’t have to.
• Implement checks and balances &ndash Again, optional.
While we admire Crowe’s attempt to get proactive, we’re concerned that, inevitably, the “Army of Fraudbusters” will start using their newly acquired fraud detection skills for outing their office enemies for petty crimes such as leaving food in the fridge, ass-photo copying and the like.
Create An Army of Fraudbusters Within Your Organization [Press Release]

Tom Petters Was Pretty Sure He Was Going to End Up in a Dumpster Somewhere

Thumbnail image for PettersSmile.jpgTom Petters doesn’t buy the whole Minnesota nice routine. Can’t say we blame the guy. If we were robbing people blind we’d be suspicious of every Marge Gunderson in the Twin Cities too.
According to a tape recording from yesterday’s proceedings, the stress of ripping people off for so long was causing him to freak out a little.

“Nobody’s paying us,” Petters said on the 30-minute recording made Sept. 22, 2008, by federal authorities with the help of Coleman. “I can’t stand lying to people every day.”
“We’re at a breaking point,” Petters said on the tape. “I can’t stand where we are. … None of us are OK. … We’ve got problems. I’m trying as hard as I can to find a way out of this. I don’t think we can all think clearly anymore.”
He said he was afraid that Robert W. Sabes, 69, formerly of Wayzata, and his son Jon R. Sabes, 43, of Wayzata, who authorities say had invested $17 million to $19 million, might kill him.
“Jon Sabes needs to calm down a bit,” Petters said, adding that he believed Sabes was connected to organized crime. “They are bad, bad people. I think he’d kill me.”

Now maybe this goes back to whole notion that TP had the attention span of a dog with above average intelligence (still a disservice to the breed in our book) but if you steal $19 mil from anyone, they’re going to want to kill you. Call it a hunch.
For the Sabes’ part, they may have had some shady connections but Tom Petters doesn’t strike us as the type of guy that attracted devout religious types. When reached for comment, Robert Sabes was quoted as saying, ‘I think he’s been watching “The Sopranos” too much.’
Yep. Pretty sure he was going to kill that guy.
Petters feared mob hit [Minneapolis Star-Tribune]

Madoff Auditor Pleads Guilty, Solidifies ‘Worst Auditor Ever’ Status

That’s not an official title but if you’ve got suggestions for someone else, please, enlighten us.


Reuters:

He told the court that he did not conduct any independent auditing or verification of financial statements or tax returns provided by Madoff and “others” at Bernard L. Madoff Investment Securities LLC in New York.

Friehling did not state who the ‘others’ were but the U.S. Attorney hinted that we’ll get to know sometime. For now, Friehling is a free man, out on $2.5 million bond until his sentencing which is tentatively set for February.

He faces up to 114 years in prison but similar to Madoff’s chief bald-faced liar, Frank DiPascali, his cooperation should result in a lighter sentence. And by lighter we’re guessing that means he’ll still leave prison horizontally.

Madoff Accountant Pleads Guilty [WSJ]

Ernst & Young and McGladrey & Pullen Both Have a Petters Problem

In last Tuesday’s Preliminary Analytics we mentioned the case of Tom Petters, the Minnesota businessman accused of running a multi-billion dollar Ponzi scheme.

The trial is in its first week and already there has been testimony from the star witness — Petters’ former office manager — that included a recording of Petters saying ‘This is one bi his own defense counsel comparing him to a cocker spaniel:

[Defense counsel, John] Hopeman countered that while Petters was an accomplished salesman, he didn’t have the corporate skills necessary to run companies.
“He has the attention span of a cocker spaniel — about 15 seconds,” the defense lawyer told the 10-woman, six-man jury. “He couldn’t read a whole book if his life depended on it.”

Okay, a couple things before we get to the crux.

• Most cocker spaniels we know have attention spans exponentially longer than fifteen seconds. It would be much more believable if defense counsel had said, “He has the attention span of a pomeranian and you can’t leave him home alone or he’s eats the furniture.”

• Petters couldn’t read a whole book if his life depended on it? Are we talking classic literature? Because if we are, then he’s got company. What about children’s books? Do magazines count? He strikes as a guy that could at least make it through the pro football season preview.

Moving on…

Now that the trial is underway we’ll be following the more interesting developments in the case but we’ll be especially interested in the litigation involving the auditors of the hedge funds that cycled funds to Petters’ businesses.
There is pending litigation in Texas that involves both Ernst & Young and McGladrey & Pullen related to the audits the two firms performed for feeder funds for Petters’ businesses.

These feeder funds received purchase orders for high-end electronics from Petters’ businesses that were seemingly made by big-box retailers such as CostCo. The feeder funds then solicited money from investors, including the plaintiffs in the case, in return for promissory notes for Petters’ businesses. The merchandise on the purchase orders secured the notes. Allegedly, there was no merchandise and Petters used the money received to pay off other investors who were looking to get out and so on and so forth.

The feeder funds that are the defendants in this case are Arrowhead Capital Partners II, L.P. of Minnetonka, Minnesota, Palm Beach Finance Partners, L.P. and Palm Beach Finance Partners II, L.P. of Palm Beach Gardens, Florida, and Stewardship Credit Arbitrage Fund, LLC of Greenwich, Connecticut. The general partners and investment managers of these funds are also listed as defendants.

E&Y served as auditors for Stewardship while M&P served as the auditors of Arrowhead. A small Florida firm, Kaufman, Rossin, & Co., P.A. served as the auditors for the two Palm Beach funds. The firms are being sued, naturally, for not detecting the alleged fraud. In this case, however, the firms may have it coming since the fraud was run by someone with the alleged attention span of a canine.

We spoke with Guy Hohmann, who is representing the plaintiffs in this case, and according to Mr. Hohmann, M&P has the most significant exposure in the Petters case as they also served as the auditor for Lancelot Investors Fund and Colossus Capital Fund, L.P. both Oak Brook, Illinois based hedge funds. M&P also faces litigation from the investors of those funds in Illinois.

Lancelot’s Vice President of Finance was Harold Katz, who just pleaded guilty last month to one count of conspiracy to commit wire fraud. Mr. Hohmann was recently informed that before taking the job at Lancelot, Katz was a senior manager at M&P that worked on the Lancelot audit. M&P would not comment. It has been speculated now that Katz — who pleaded guilty September 2nd — is cooperating with authorities in the cases against Petters and Lancelot founder, Gregory Bell.

In another strange twist, Mr. Hohmann told GC that Lewis Freeman — the forensic accountant that is under federal investigation that we told you about last week — was appointed as the Chief Restructuring Officer of the Palm Beach funds. The Palm Beach funds are not currently listed as an active case on the forensic firm’s website.

We reached out to all the firms named in the lawsuit, McGladrey & Pullen declined to comment while calls to E&Y, Kaufman Rossin & Co., and Kenneth A. Welt, the current receiver listed on the Lewis Freeman website, were not returned.

According to the complaint, the amount lost by the plaintiffs was $24 million dollars, however, according to a October 6, 2008 Bloomberg article, the two Palm Beach Funds were responsible for approximately $1.1 billion of the alleged $3 billion the scheme while the Lancelot funds held approximately $1.0 billion with Petters. Mr. Hohmann’s understanding was that the Palm Beach funds had provided approximately $1.0 and that Lancelot held approximately $1.6 billion. Because of the complex web of companies in this case, the final dollar amounts may not ever be known.

So regardless of the fact that the case in Texas is in its early stages, future lawsuits from other investors could arise, and all three firms could continue to face significant litigation.

We’ll continue to keep you updated on any developments in the cases involving these accounting firms and will be following any noteworthy developments involving the Petters trial.

The case is SSR v. Arrowhead et al., District Court of Dallas County.
SSRvArrowhead.pdf

Judge, Possibly Fearing a TP’d House, Denies Bail for Madoff CFO

Thumbnail image for TP.jpgPoor Frank DiPascali. The man’s name will be forever connected to largest Ponzi schemer (with, allegedly, the smallest penis) in history and he feels terrible about that.
Looks like DiPascali, who was a “CFO” in Ponzi World but in reality was probably just the best liar, will remain eating his meals with a spork until the end of his days.
His attorneys were trying bust the guy out so he can help investigators find a new Madoff cohort to put front and center but a judge denied bail yesterday despite a boatload of conditions:

Mr. DiPascali’s failed bail attempt came despite a new proposal presented by defense lawyers and prosecutors that included a $10 million bond, co-signed by nine people, including members of the DiPascali family, and the pledge of about $2 million in personal property. The new proposal required Mr. DiPascali to wear an electronic device that would plot his location by satellite. It also barred him from leaving home without an escort from the Federal Bureau of Investigation, except in a medical emergency.

Maybe the judge isn’t big on satellite technology but with Halloween on Saturday, it could have been a decision made on a more personal level. Those Madoff victims are a touchy bunch.
Court Denies Madoff Aide’s Request for Bail [NYT]

Auditors, You’re Just Going to Have Start Finding Fraud, Okay?

overwhelmed.jpgBecause that’s your job, right? The PCAOB is giving consideration to new auditing standards that would presume that certain related party transactions would constitute a fraud risk.
This just serves as another example of auditors’ responsibility for discovering fraud reaching a ridiculously unrealistic level.


According to Web CPA, “Although such standards have been in the talking stage at the PCAOB for at least five years, there is fresh interest in this area now because related-party fraud has been a factor in a number of recent corporate financial scandals.”
Classic reactive measures being employed by the Board here. No sense in developing any kind of standard until after something happens. The Board hasn’t really been doing a bang-up job on much of anything but no matter, the effectiveness of a government regulator is not the issue here.
Auditors, you’re being duped. That’s unacceptable and according to some, the procedures you currently perform over related party transactions just won’t do any more:

But some officials at the PCAOB as well as members of the accounting profession have suggested that these standards may not be sufficient. At least part of the problem involves what some have described as widespread related-party transaction fraud slipping under the radar screen of auditors.

As we’ve mentioned in the past, the PCAOB simply is not satisfied with your ability to follow the current rules, auditors. Accordingly, the PCAOB will make more rules for you to follow until they are proven inadequate and then more rules will be written and on and on. You get the idea. It’ll be routine before you know it, if it isn’t already.
PCAOB Mulls New Related-Party Standards [Web CPA]
Also see: Fair Value, Audit Committes, Related Parties Highlights Of Day 2, PCAOB SAG Meeting [FEI Financial Reporting Blog]

Cynical Executives are Expecting More Bad Behavior Out of You

fraud.jpgLet’s talk about fraud, friends. We’re all sure that you’re number crunching sleuths and that no accounting hocus-pocus would ever get past you but apparently executives are still expecting more of it. This probably means one of two things: A) You’re not as smart as you think you are, or 2) You’re in on it.
Now, we should clarify that in Web CPA’s piece, these executives polled expect a rise in one of three areas: “financial reporting, asset misappropriation, or as another illegal or unethical act”. If you’re involved in the first kind, that’s boring. If you’re involved in the second kind, we suggest you retain counsel.
More, after the jump.


We’d like to focus on the “illegal and unethical act” part. Now, assuming you’ve passed the CPA, and also passed the grueling ethics exam that most states require, this shouldn’t be an issue for you.
For the rest of you, we’re assuming that your typical day is rife with unethical behavior. Some of you are probably unable to consume lunch and turn the entire work environment into a biohazard. So what we’re getting at here is that your clients and/or bosses don’t trust seem to trust you. We’re sure they’re right. We want to know why.
What kind of chicanery is going on that the bigwigs wouldn’t want to know about? Do you jimmy the vending machine on a regular basis for your lunch? Are you raiding the supply closet to build replicas of the [insert city here] skyline with staples? Let’s keep it to minor offenses though. Nothing that qualifies as misdemeanors and above will be allowed.

Bean Counter Reputations Hit a New Low

A woman who was a CFO for a charity that invested with Bernie is claiming, in a book of course, that she not only had all her personal money invested with him that went poof but that she was also bumping uglies with the Master Ponz. Supposedly there will be pictures which obviously begs several questions. Check out Dealbreaker for the debate.
Sleeping with the enemy is certainly a new low for bean counters. She could’ve done us all a favor and gotten down with Dick Cheney and it wouldn’t look nearly as bad.
Madoff Had Affair With Ex-Hadassah Finance Chief, Her Book Says [Bloomberg]