The SEC Probably Thought Madoff Victims Would Just Let the Whole Thing Slide

Posted on by Caleb Newquist

Thumbnail image for Thumbnail image for Thumbnail image for 140px-United_States_Securities_and_Exchange_Commission.pngFinally someone has had enough of the SEC’s new-sheriff-in-town act and is suing their asses for missing Bernie Madoff’s not so subtle Ponzi scheme.
Two victims are suing the House of Schape for their money that just up and disappeared, which amounts to $2.4 million. The suit also serves as a friendly reminder for the Commission that they sucked at their jobs big time for the better part of a decade.
According to the suit, the two victims, Phyllis Molchatsky and Steven Schneider, initially tried playing nice by filing administrative claims with the SEC but the Commission told them to get bent, thus allowing Molcahtsky and Schneider to sue in Federal court.
This may result in other Madoff victims filing suit as well, so our advice to M. Schape would be to call over to the Fed and to see if she can borrow that money printing machine.
Two Madoff victims file lawsuit against the SEC [Reuters]
See also: Madoff Victims Devise Hedging Strategy [DB]

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(UPDATE 2) SEC Charges Deloitte Tax Partner with Insider Trading

~ Update includes clarification of partner’s employment status and statements from accused’s attorneys via MarketWatch.

~ Update at circa 7:20 pm ET includes statement from Deloitte

If you thought all this insider trading fun was just for hedge funds you would be sorely mistaken. Deloitte seems to have another case of a partner who can’t seem to control himself when he gets some insider info. Earlier this year, former Deloitte Vice Chairman Tom Fla> shelled out $1.1 million to settle charges with the SEC.

This time around, it’s still a family affair – husband, wife, wife’s sister and brother-in-law job – and it went overseas:

The Securities and Exchange Commission today charged a former Deloitte Tax LLP partner and his wife with repeatedly leaking confidential merger and acquisition information to family members overseas in a multi-million dollar insider trading scheme.

The SEC alleges that Arnold McClellan and his wife Annabel, who live in San Francisco, provided advance notice of at least seven confidential acquisitions planned by Deloitte’s clients to Annabel’s sister and brother-in-law in London. After receiving the illegal tips, the brother-in-law took financial positions in U.S. companies that were targets of acquisitions by Arnold McClellan’s clients. His subsequent trades were closely timed with telephone calls between Annabel McClellan and her sister, and with in-person visits with the McClellans. Their insider trading reaped illegal profits of approximately $3 million in U.S. dollars, half of which was to be funneled back to Annabel McClellan.

The UK Financial Services Authority (FSA) has announced charges against the two relatives — James and Miranda Sanders of London. The FSA also charged colleagues of James Sanders whom he tipped with the nonpublic information in the course of his work at his London-based derivatives firm. Sanders’s tippees and clients made approximately $20 million in U.S. dollars by trading on the inside information.

So not a bad haul. The kicker is, Annabel was also employed at Deloitte, working in the London, San Jose and San Francisco offices. The McClellans provided information to the Sanders on several companies including Kronos, Inc., aQuantive, Inc. and Getty Images.

The SEC brass gave their standard scolding. First, Enforcement Chief, Robert Khuzami, “The McClellans might have thought that they could conceal their illegal scheme by having close relatives make illegal trades offshore. They were wrong.”

And San Fran Director Marc Fagel, “Deloitte and its clients entrusted Arnold McClellan with highly confidential information. Along with his wife, he abused that trust and used high-placed access to corporate secrets for the couple’s own benefit and their family’s enrichment.”

But the real story here is the second instance of insider trading charges against a Deloitte partner this year. The firm successfully sued Tom Flanagan back in January but you have to wonder if there isn’t some flaw with the firm’s internal oversight. Not long after the Flanagan suit, we reported on the 475 reprimands for internal noncompliance in 2009. Those reprimands did not mention insider trading specifically but over 200 of them were related to independence violations. Pattern? You can weigh in below.

Anyone with any knowledge on this story is invited to get in touch with us. as it is not clear if there has been any internal repercussions yet. Messages (including voicemail, carrier pigeon and morse code) left with Deloitte have not been returned (see statement below).

UPDATE: McClellan’s attorneys are not amused by the SEC’s little stunt:

Lawyers for Arnold McClellan denied charges Tuesday by the Securities and Exchange Commission that the former Deloitte Tax LLP partner was involved in a big insider trading scheme. “Arnold McClellan denies the SEC’s claims and will vigorously contest them,” Elliot Peters and Christopher Kearney of Keker & Van Nest LLP said in a statement on behalf of McClellan. “He did not trade on insider information, and there will be no evidence that he passed along any confidential information to anyone.” McClellan “had no financial incentive to commit the actions alleged,” the lawyers added. “He is a conscientious, law-abiding professional with a 23-year unblemished track record of client service at Deloitte to prove it. We will see the SEC in court.”

And just to clarify, McClellan is no longer with Deloitte, leaving the firm in June of this year. Deloitte spokesman Jonathan Gandal emailed us the firm statement (see below) still hasn’t returned our call (busy day, right?) but managed to give a statement to and was quoted by Reuters, saying that he was “shocked and saddened” by the allegations and “If the allegations prove to be true, they would represent serious violations of our strict and regularly communicated confidentiality policies.”

UPDATE 2: Here is the full statement from Deloitte:

“We are shocked and saddened by these allegations against our former tax partner and members of his family. If the allegations prove to be true, they would represent serious violations of our strict and regularly communicated confidentiality policies. Deloitte is committed to safeguarding non-public client information and has cooperated with the SEC throughout its investigation. The SEC does not allege any wrongdoing by Deloitte in this unfortunate matter.”

Complaint_Deloitte

St. Joe’s Accounting for Real Estate Impairment to Get the ‘Informal’ SEC Inquiry Treatment

If Greenlight Capital founder David Einhorn takes issue with your accounting policies, we don’t suggest laughing it off. We could talk about Lehman Brothers but it’s probably not necessary.

The most recent company that Einhorn has pegged for sketchy reporting is The St. Joe Company, who, after acting all amused about DE shorting the company’s stock, has now received a, what we imagine to be, very nice letter from the SEC launching an “informal inquiry” about the company’s practices concerning real estate impairment. The company shared the news with the world yesterday in this 8-K:

The Securities and Exchange Commission (the “SEC”) has notified The St. Joe Company (“St. Joe”) that it is conducting an informal inquiry into St. Joe’s policies and practices concerning impairment of investment in real estate assets. St. Joe intends to cooperate fully with the SEC in connection with the informal inquiry. The notification from the SEC does not indicate any allegations of wrongdoing, and an inquiry is not an indication of any violations of federal securities laws.

Despite St. Joe’s “nothing is fucked” position, Team Greenlight insists that things remain fishy:

“St. Joe’s valuation practices remain open to question,” Jonathan Doorley, a spokesman for Greenlight Capital, said today. “It is hard to understand how the company invested hundreds of millions of dollars during the real estate bubble and hasn’t seen fit to take a material writedown.”

Ideas welcome from those that want to line up against or with Einhorn & Co. Especially anyone that’s on the KPMG audit team.

St. Joe Reports Informal SEC Inquiry of Accounting for Land Impairments [Bloomberg]

The SEC Wants to Help the IASB Meet its ‘Arbitrary Deadline’

The SEC is interested in securing capital markets and protecting the interests of investors by putting a new level of priority on accounting standards setters… European accounting standards setters, that is.

SEC Chief Accountant James “P is For Principles” Kroeker announced today that the SEC’s new project will revolve around securing funding for the gatekeepers of IFRS, the IASB. “A stable broad based funding system with a diversity of capital market participants providing ‘no strings attached’ funding is of great importance to establishing a structurally sound international standards setter,” he said at a Baruch College accounting conference. Earlier in the week, JP was defending GAAP and calling the planned June 2011 adoption of IFRS in the US an “arbitrary” target but this leads us to believe that he’s since changed his mind and would like to see this convergence thing get rolling once and for all.


About 20 percent of the IASB’s funding is expected to come from US sources this year – the largest chunk of funding from any single source.

While Kroeker was busy cheerleading the IASB telethon this week, SEC Chair Mary Schapiro was off doing a little fundraising of her own, except hers failed miserably when the Senate rejected a request by Schapiro and several former SEC leaders to self-fund the agency. As everyone knows, the SEC has been plagued recently with accusations of regulatory laziness, not to mention problems with employees sitting around watching porn all day when they should be guarding capital markets. No increase in allowance for you, Mary!

Anyway, the main concern is – as always – independence. Without secure funding, the IASB is exposed to excessive political pressure and if you recall the fair value debate, you have already seen what happens when standards setters cave in. With secure funding, the IASB can be bought and sold as easily as some companies A/Rs so it makes sense that Kroeker would shift the SEC’s focus from begging Congress for a raise to funneling in cash to the IASB. You know, for convergence’s sake.

US seeks secure funding of global accounting board [Reuters]