In aren’t you glad these aren’t your internal controls news, former SDN Communications chief accountant Bradley Whitsell of Sioux Falls, SD pleaded guilty to mail fraud on Monday. The U.S. Attorney’s office states that 46-year-old Whitsell used his various oversight positions to embezzle more than $392,000 over a 10 year period beginning in 2000.
According to court documents, Whitsell used company accounts to pay his credit card bills and pay private school tuition. He also wrote checks to himself, redirected electronic payments to cover his expenses, created company checks on his office printer and requested reimbursement for expenses that already were paid by SDN to pay for various personal expenses, including a large landscaping project at his residence and his country club membership.
Whitsell used access to the company’s accounts payable system to change approved vendors’ names with his own, or with those of companies to which he owed money. He would then print out these checks on his office printer and change the names back to the appropriate vendor in the A/P system.
Whitsell could end up in prison for up to 20 years. He initially pleaded not guilty in June to one count each of Mail Fraud and Wire Fraud, each of which could potentially carry a 20 year sentence and a $250,000 fine. U.S. Attorney Brendan Johnson states that Whitsell has agreed to pay back the $392,111.65 and will also cover the $84,000 cost of the audit that uncovered his theft.
SDN CEO Mark Shlanta stated officials started noticing “financial irregularities” connected to Whitsell last year, at which time he was put on administrative leave so the company could conduct a forensic audit and internal investigation. Whitsell resigned before the investigation began (hint: red flag). “It’s been embarrassing for me,” Shlanta said. “I’ve been saddened by the events. Really, I felt betrayed in this past year. Brad was someone I hired and trusted.”
The interesting part of this otherwise droll and useless story is that before the house of cards came crashing down all around him, Whitsell served on the City of Sioux Falls audit committee, not only as a member but as its chair.
Back in June, Sioux Falls Councilor Vernon Brown told one SD blogger that Brad Whitsell received high marks from committee members for his work on the Audit Committee in setting up internal controls for city government. Oh the irony.
Whitsell is currently free on bond and returns to court for sentencing November 7th.
Earlier this week we shared with you the latest analysis from KPMG that listed “key fraudster traits” and some of them seemed to describe a lot of the people you have worked or are currently working for. Things like “volatile,” “unreliability,” “unhappy,” and “self-interested” describes everyone I’ve ever been in around in the corporate world to one extent or another.
Since I was skeptical of this list, I asked Sam Antar what he thought of it. If you’ve been reading us for awhile, you’re familiar with Sam. If you’re new, I’ll do a quick refresher. Sam was the CFO of Crazy Eddie’s and was one of the masterminds behind one of the biggest financial frauds of the 1980s. While you (and I) were eating cereal in front of the TV on Saturday morning, Sam and his cousin Eddie were selling electronics and home appliances to our parents for rock bottom prices, while ripping off the government and investors for untold millions of dollars. In other words, the guy is a crook and knew/knows lots of crooks and knows their hopes (read: money), their dreams (read: money) all that crap (read: more money) and what they’ll do to get them. With that, Sam told me what he thought of KPMG’s analysis:
I was both a friendly and likable crook who treated my enablers real well as I took advantage of them. I treated my victims even better than my enablers, as I emptied their pockets. Old saying, “You can steal more with a smile, than a gun.” KPMG knows nothing about the character traits of criminals. They couldn’t even catch me as Crazy Eddie’s auditors. They trusted me!
So maybe – JUST MAYBE – you should also be wary of the client or co-worker that you really like because he/she takes you to lunch every day, gets you laid, takes you for rides in a fancy car or invites you to coke-fueled weekend ragers with seemingly no strings attached. Plus any client that has a viral marketing campaign should get an extra look:
Of course not all of your bosses are crooks…or are…nah. But just to be on the safe side, make sure you’re giving the stinkeye to anybody with the following characteristics:
• Volatility and being melodramatic, arrogant and confrontational, threatening or aggressive, when challenged.
• Performance or skills of new employees in their unit do not reflect past experiences detailed on resumes.
• Unreliability and prone to mistakes and poor performance, with a tendency to cut corners and/or bend the rules, but makes attempts to shift blame and responsibility for errors.
• Unhappy, apparently stressed and under pressure, while bullying and intimidating colleagues.
• Being surrounded by “favorites,” or people who do not challenge the fraudster, and micromanaging some employees, while keeping others at arm’s length.
• Vendors/suppliers will only deal with this individual, who also may accept generous gestures that are excessive or contrary to corporate rules.
• Persistent rumors or indications of personal bad habits, addictions or vices, possibly with a lifestyle that seems excessive for their income, or apparently personally over-extended in their finances.
• Self-interested and concerned with their own agenda, and who has opportunities to manipulate personal pay and rewards
But as we all know, the ex-stripper wife is the clincher.
U.S. District Judge Lynn Adelman has dismissed Grant Thornton as a defendant in a class-action shareholder lawsuit against GT, Koss Corp. and CEO Michael J. Koss, filed in January 2010 on behalf of plaintiff David Puskala and other Koss shareholders.
In his ruling, Adelman stated that the plaintiffs failed to make a case for GT’s epic failure to detect former Koss executive Sue Sachdeva’s $34 million embezzlement/hoarding scheme. Reasonable, considering GT auditors scared the crap out of old Sue, even though they were sticking newbies on the gig. “Fear was one thing. I thought it was imminent,” she said in a court deposition last year. “Their auditors, every time they walked in, I’d say, ‘This is it. They’re going to catch me.’” Shareholders’ issue – we assume – is that they didn’t. Year after year after year after year until 2009 rolled around and the whole house of cards came tumbling down.
The judge also dismissed claims of willful or reckless behavior against Michael Koss, saying “I conclude that the innocent explanations are more compelling than the inference of recklessness.” Meaning Mike couldn’t possibly have known Sue had been siphoning off millions in company money over a six year period, absent hanging out at her house and noticing all the fancy new shit she had strewn everywhere. And stashed in closets. And bursting out of her garage.
As for Grant Thornton, the judge wrote that the occurrence of fraud and failure to detect it doesn’t imply recklessness on the part of the accounting firm, but rather that the firm was negligent. While it is clear that Sachdeva used her position with Koss to bypass the company’s not-rock-solid internal controls, it is also believed that the controls were sufficient so as not to be obviously unreliable to a reasonable person (or auditor fresh out of accounting school). We’re looking forward to hearing how audit professors use this decision to emphasize the cavernous depth between “negligence” and “recklessness” on the part of auditors.
Sachdeva is still a defendant in the Puskala lawsuit and is currently serving 11 years for the fraud.
Grant Thornton dismissed from Koss shareholder lawsuit [Milwaukee Journal-Sentinel]
As far as embezzlements go, Gary Williams did all right for himself. As the CFO of Marian Gardens Tree Farm, he allegedly walked away with $15 million or so before he was convicted of tax evasion and mail fraud related to said allegations. He was pretty good at disposing of the money, as the Orlando Sentinel reports, “[he] spent $1,800 at John Craig Clothiers in Winter Park, treated himself to nearly $9,000 in Prada luggage and leather goods, and indulged in $15,000 in services at an exclusive resort in Montego Bay, Jamaica.” Obviously this leaves $14 mil or so to throw around and it doesn’t appear that this was a problem:
[Prosecutor Mark] Simpson said Gary Williams, who had blamed cocaine addiction for influencing his behavior, drew a six-figure salary from his employers from 2002 through 2007 while he was embezzling millions, destroying business records and encumbering farm equipment for secret loans for personal use.
He made large withdrawals from company accounts, telling bank officials that it was for “employee bonuses.”
Simpson said Williams, who divorced his wife of 35 years and became estranged from his two children, lavished younger men with jewelry, luxury automobiles, Caribbean vacations and gifts that could not be recovered. “This was not just theft,” Simpson said. “This was financial rape.”
Drugs! Phony bonuses! Hot men in hot cars in hot locations probably having hot sex! This is the stuff that straight-to-DVD movies are made of! But unfortunately the victims in this case aren’t doing as well as they have seen a dime of the money that disappeared:
The Hillary family, which owns the farm and employed Williams for two decades, has yet to receive any restitution from its portly former chief financial officer. According to court documents and interviews with prosecutors, Williams blew hundreds of thousands of dollars at lavish resorts in San Francisco, Rio de Janeiro, the Bahamas, Jamaica and the West Indies. He flew friends on chartered jets and helicopters; dined at five-star restaurants; hired a private chef; and partied at marquee nightclubs.
He explained frequent work absences by falsely claiming to have pancreatic cancer. His employers say they thought he was undergoing experimental treatments.
Williams did lose 100 pounds — but from gastric-bypass surgery, a farm executive said.
For whatever reason, the Sentinel felt it necessary to drag Williams’ big-bonededness into this story as it isn’t clear whether or not some of the loot was used to fund the surgery. At the very least, Williams, who is serving 12 years, can hopefully keep his figure in prison.
Jet-setting CFO gets dual terms for embezzling $15M at tree farm [Orlando Sentinel]
First, if you hate your inventory counts, can you only imagine what it’s like to have to keep tabs on tank after tank of frozen bull semen? Count your blessings, people.
A woman in Ohio pleaded not guilty last week to stealing a tank of bull semen valued at $110,000 from her employer. Authorities say 45 year-old Karen Saum planned to use the semen to extort money out of her employer – the rightful owner of the sperm – to start her own business. I can only imagine what kind of business she planned on starting with the seed money.
Detectives said a tip led them to Saum’s garage, where they found the stolen semen. Just a tip.
Det. James Hollopeter told WHIO TV that Saum used her knowledge of the company’s internal workings to lift only the high quality semen. “She knew where this semen would have been located,” he said. “It was actually locked in an interior closet because it was more valuable that some of the other that they had out.”
Right. Because everyone knows you don’t leave the good shit lying around where any old creepy criminal can get their paws on it.
Next week I’ll be attending the ACFE Fraud and Conference Exhibit in San Diego where many forensic and fraud sleuths will be enjoying each other’s company and one-upping each other with stories on how many criminals they’ve busted over the years. It looks like you can still register so if my presence is the dealmaker for you, then I suggest you get on this.
John Walsh, the host of America’s Most Wanted will be giving a keynote although I’m a little confused as to what he’ll share with people that comb through ledgers for a living. Anyway, if you want to get in touch with me at the conference or while I’m in San Diego, you can email me, DM or @ me on Twitter or shoot me a message on LinkedIn or Facebook. I promise I’ll respond at some point especially if you offer to drive me to the beach or buy me an old fashioned in the Gaslamp Quarter.
And if you’re not in San Diego or attending the conference, don’t worry, I’ll be on a regular posting schedule so there will be the regular dose of inflammatory nonsense coming your way.
A hospital in Winnipeg is suing Deloitte after an ATM scam went undiscovered for over ten years. Luckily some vigilant RN, janitor or cafeteria worker (it’s not clear from the article) noticed something amiss and alerted the proper authorities.
Police arrested a long-time hospital employee last year after she allegedly skimmed $1.5 million from automated teller machine (ATM) deposits between 2000 and 2010.
According to a lawsuit filed last week, the fraud was uncovered by hospital staff, not the auditor. The lawsuit accuses Deloitte & Touche of preparing financial statements not in accordance with “generally accepted accounting principles” and “materially misleading” the hospital about its financial position.
“MHC says that D & T owed it a duty in contract and owed it a duty of care not to act negligently or make negligent misrepresentations to MHC and to ensure that cash and liquid assets as reported in the financial statements were not materially misstated.”
According to the lawsuit, a former finance clerk deposited Worker’s Compensation Board cheques into the hospital operated ATM, understated the amount and pocketed the difference.
All this trouble and no one was even taken hostage. Not good, Green Dot.
Misericordia Health Centre files suit against auditor [Winnipeg Sun]
In what might be a lagging indicator of recession-spawned misdeeds, the percentage of reported corporate frauds compared with all other reported incidents increased to 20.3% in the first quarter of 2011, a rise of more than 60 basis points from the previous quarter, according to data from 1,000 organizations worldwide. Of the 30,000 ethics- and compliance-related reports from people at those organizations in the first quarter, more than 6,100 concerned accounting or auditing irregularities, embezzlement, kickbacks, and other forms of fraud. [CFO]
Stephen Siddell’s dishonesty led to 16 people losing their jobs while he and his wife, Louise Siddell, took luxury foreign holidays. They even posted photographs of their stay in a six bedroom villa in Cyprus on Facebook boasting, “because we’re worth it”. Liverpool Crown Court heard the couple had lock-up garage in Bromborough, which was an “Aladdin’s cave” full of their expensive furniture and designer goods. 24-year-old Louise Siddell had also used their ill-gotten gains to pay for jewellery and breast enhancement. [Wirral Globe]
Deroy Murdock seems to feel that the government should revisit its accounting practices since it appears government accounting is little more than legal fraud. Obviously he has absolutely no idea how accounting really works or he’d call the entire thing fraudulent (I mean, let’s be real, it is and everyone knows it), so let’s humor his opinion for a moment and consider government accounting.
Rep. John Shimkus (R., Ill.) grilled Health and Human Services secretary Kathleen Sebelius about this before the House Energy and Commerce Subcommittee on Health. He wondered how, in essence, the Obama administration could move $500 billion from its left pocket (Medicare) to its far-left pocket (Obamacare) and somehow finance $1 trillion worth of Medicare and Obamacare.
“Your law cuts $500 billion in Medicare,” Shimkus reminded Sebelius at a March 3 hearing. “Then you’re also using the same $500 billion to say you’re funding health-care [reform]. Your own actuary says you can’t do both.”
“So,” the eight-term congressman continued, “are you using it [the $500 billion] to save Medicare, or are you using it to fund health-care reform? Which one?”
Secretary Sebelius confessed: “Both.”
“So, you’re double-counting,” Shimkus replied.
“The same dollar can’t be used twice,” observed Health Subcommittee chairman Rep. Joe Pitts (R., Pa.). “This is the largest of the many budget gimmicks Democrats used to claim Obamacare would reduce the deficit.”
As any college business major knows, such double counting would earn a big, fat F on an accounting final. Far worse, this is illegal.
Obviously Joe Pitts is not at all familiar with how accounting works. The funny part, as Murdock points out, is that the SEC does not consider non-GAAP financial statements to be anything but misleading and inaccurate. It’s a good thing the federal government won’t be trying to file an IPO any time soon.
Financial statements filed with the Commission which are not prepared in accordance with generally accepted accounting principles will be presumed to be misleading or inaccurate.
Question: is there a particular reason “generally accepted accounting principles” is not capitalized? Because GAAP and gaap are two different things, one of which is a set of rules (not principles, no matter what James Kroeker may believe) while the other is basically a bunch of bullshit that we call “accounting” and agree is OK. Sort of like Don’t Ask Don’t Tell for financial statements.
Maybe! David Friehling was supposed to be sentenced last week but apparently it got pushed back again.
On November 3, 2009 Friehling pleaded guilty to various charges ranging from securities fraud to filing false reports to the SEC. He was to be sentenced for these crimes in February 2010 but because of his cooperation with the government, that was postponed until September 2010….that was then postponed until March 15, 2011….now that has been postponed until September 16, 2011. […] So what does a guy know who claims he did not know a lot? Is Friehling working with the Feds and Irving Picard (Madoff Trustee) on strong-arming Mets’ owners Saul Katz and Fred Wilpon? I doubt it. Can Friehling put a finger on one of the Bernard Madoff family members, who have yet to be charged criminally? Maybe.
Of course this could mean that Friehling also knows the location Jimmy Hoffa, the true identities of the participants in the Kenneday assassination and the Coke formula. Oh wait, everyone knows that one now. ANYWAY, the investigators may just be enjoying the anecdotes and would hate to see the poor guy shipped upstate. But most likely, he’s trying to save his ass from a sentence in FPMITAP like his #1 client received.
Giving Friehling the benefit of the doubt, he is cooperating to do the right thing now but he is also trying to get his sentence reduced in the process. With a fraud so large, I do not see how the Federal Sentencing Guidelines keep this guy in prison for less than 20 years.
Madoff Accountant — Now Auditing To Save His A#$ [Forbes/Walter Pavlo]
A report in Bloomberg apparently thinks so.
From the ‘Berg:
HSBC Holdings Plc (HSBA), Europe’s biggest lender, was warned twice by auditors that entrusting as much as $8 billion in client funds to Bernard Madoff opened it up to “fraud and operational risks.”
KPMG LLP told the London-based bank about the risks in 2006 and 2008 reports. The firm was hired to review how Madoff invested and accounted for the funds, for which HSBC served as custodian. KPMG reported 25 such risks in 2006, and in 2008 found 28, according to copies of the reports obtained by Bloomberg News.
Okay l there for two before everyone gets too excited. Let’s just get one thing straight right off the bat – KPMG probably leaked these reports to Bloomberg (I only say probably because I don’t know for an absolute fact but – COME ON – who else?). Secondly, even though the report says “warned twice by auditors” this was not an audit performed by KPMG; it was “[a] review how Madoff invested and accounted for the funds.” What exactly that entails isn’t clear; possibly agreed-upon procedures? Anyway, here’s what the story says were in the two reports:
In the list of risks in KPMG’s report, number 2 was that “BLM embezzles client funds,” using the initials as shorthand for Bernard L. Madoff. To prevent it, KPMG recommended in both 2006 and 2008 that HSBC “establish a process to monitor monthly statements” and reconcile them with contributions from clients.
The 2006 report listed fraud risk number 5 as “client cash is diverted for personal gain” and risk number 18 as “trade is a sham in order to divert client cash.” It went on to say there were concerns “Madoff LLC falsely reports buy/sell trades without actually executing in order to earn commissions” and “BLM falsifies accounting records which are provided to HSBC.”
KPMG reviewed samples of trades and account statements for both its 2006 and 2008 reports to test the risks and detected no discrepancies, the reports said. Even so, the firm suggested HSBC “consider undertaking a periodic review which includes tracing a sample of client trades back to the bulk order.”
After reading that you might think that KPMG hit a home run but what if the “risk factors” listed are just standard boilerplate risks that are included in every single one of these reports? If that’s the case, then KPMG was slapping in the applicable information as it related to BLM, handed it over and collected a nice fee. Maybe KPMG was all over this but there’s no way to know because A) Bloomberg didn’t republish the reports in full; B) Other KPMG teams close to Madoff are getting their asses sued which means they either ignored the risks or couldn’t get a hold of these two reports and C) HSBC throws KPMG under the bus, essentially saying that they were duped by Berns:
HSBC confirmed hiring KPMG in 2005 and 2008 to review Madoff’s firm, adding it now believed Madoff had tricked the auditors. “It appears from U.S. government filings that Madoff and his employees foiled these reviews by, among other things, providing forged documentation to KPMG,” the bank said in an e- mailed statement.
“KPMG did not conclude in either of its reports that a fraud was being committed by Madoff,” HSBC said. “HSBC did not know that a fraud was being committed and lost $1 billion of its own assets as a victim.”
So did KPMG warn HSBC or not? This Bloomberg story seems to think so but there are is a lot of evidence that KPMG was just as clueless as as everyone else who didn’t walk – or run away screaming, arms flailing – away from Madoff.
For Michelle Lynn Shelton, who is accused of taking $760k of her employer’s money, the answer is “NOT LONG!”
Detectives launched their investigation in December after another accountant, who was filling in while Shelton was away from work, discovered the apparent transfer of a large amount of money between two personal bank accounts, police said. Police said the company conducted an audit and contacted police. Shelton started working for the company in June 2007 and the evidence suggested she began diverting funds two months later, police said.
Allegedly! Admittedly, we’re a little behind on this one but you know how it is. Anyway, your Ponzi scheme du jour comes by way of the great Northwest, where Frederick Darren Berg, who seems to have some sort of charter bus fetish, is being prosecuted for orchestrating the largest Ponzi scheme in Washington.
When he was at the University of Oregon in the 80s, Berg allegedly helped himself to his fraternity’s cash to fund a “charter bus venture” and then pleaded guilty to a check-kiting scheme with another bus company a few years later. After those nickel and dime failures, Fred was done messing and decided to really do this:
The 48-year-old founder and chief executive officer of Meridian Group is accused of defrauding hundreds of more than $100 million invested in his Seattle company’s mortgage funds between 2003 and 2010.
Prosecutors allege Berg spent tens of millions on a ritzy lifestyle, including a posh Mercer Island mansion, two yachts and two jets.
But investigators say Berg diverted a bigger chunk, estimated at $45 million, to create a luxury bus line that served tour groups and sports teams, including the Seahawks and the Oregon Ducks.
And we all know what happened to mortgage funds, don’t we? Okay, then. So your next question probably is, “how did the auditors miss this one?” Well!
Berg used some simple stratagems to mislead auditors at Moss Adams, a large Seattle-based firm, which produced audits for a trio of Meridian funds for three years.
The standard procedure is to send out confirmation letters to a random sample of mortgage borrowers and compare what they say they’ve paid with what the lender’s records say.
But Moss Adams didn’t notice most of the confirmations it sent out were going to post-office boxes and coming back with the same handwriting, said [bankruptcy trustee Mark] Calvert.
Berg had rented more than 20 P.O. boxes and had the mail forwarded to another address in Seattle. He was replying to the auditors’ queries himself, according to the indictment.
[Cringe] Oops. To be fair, auditors can’t be expected to be hand-writing experts…can they? Mr. Calvert seems to think so and told the Seattle Times that he plans on suing Moss Adams and Deloitte for their roles. Oh, right! How do they fit in? To wit:
Berg also hired Deloitte Financial Advisory Services to do a “valuation report” on funds V through VII, meant just for Meridian management. Meridian, however, used it to reassure investors, touting Deloitte’s conclusion “the sample mortgage pool appears to be of higher quality and better performance” than comparable loan portfolios.
But Calvert said Deloitte’s supposedly random sampling “was not completed as outlined” in its agreement with Meridian. He declined to be more specific.
Moss Adams and Deloitte would not comment on their work for Meridian.
Golf is probably the furthest thing from most of your minds right now because a) it’s somewhere between 0 and 20 degrees Fahrenheit outside or b) you hate golf. For the latter, you can continue reading in so you may engage in laughing and pointing. For the former, despite it being the offseason in most parts of this fair land, a report from the Manchester Evening News should cause you to temper down your love for a
good walk nice spin in a cart spoiled.
A golf fanatic accountant who stole thousands from his employers and then funnelled it into his ailing club has been jailed. David Beech, 59, showed a ‘bizarre misplaced sense of loyalty’, when he siphoned over £70,000 from his bosses into struggling Oldham Golf Club, where he was treasurer.
But Beech, of Holly Grove, Chadderton, was rumbled when a company auditor went through the books. He pleaded guilty straight away and repaid £51,262 of the cash back although £19,300 was still unaccounted for, Sheffield Crown Court heard. At court it also emerged he received an 18-month suspended sentence 23 years ago for stealing from another employer. Defending, Robert Smith said Beech had demonstrated a “bizarre, strange, misplaced sense of loyalty” to the golf club. “It had a negative impact on the club in that they were under a false impression as to their own finances,” he said
Typical reaction of the members:
About a year ago at this time, we just started learning about Sue Sachdeva, the convicted embezzler extraordinaire of headphone cobbler Koss. It took a little less than a year for everything to get sorted out including quite the inventory of