Category: Fraud

How Fraudsters Try to Look Legitimate

Investor.gov

The SEC is putting its new investor-focused website to good use: Investor.gov.

The first item that caught my eye was their article on how fraudsters use fake SEC registrations and bogus seals to make them look legitimate: Fake Seals and Phony Numbers: How Fraudsters Try to Look Legit.

They offer these five pieces of advice:

  • Deal Only With Real Regulators
  • Be Skeptical of Government “Approval”
  • Look Past Fancy Seals and Impressive Letterheads
  • Check Out the Broker and the Firm
  • Be Wary of “Advance Fee” or “Recovery Room” Schemes

“If you want to invest wisely and steer clear of frauds, you must get the facts. Never, ever, make an investment based solely on a promoter’s promises or what you see on the Internet”

The other thing that caught my eye as a blogger, was the SEC’s use of an out of the box WordPress blog deployment to run the Investor.gov website. Just like I use here at Compliance Building.

It’s Tough Being Green… And Charged With Fraud

mantria

Mantria Corporation is a “diversified and progressive business enterprise that seeks out emerging sectors with a passionate focus on sustainability and the commercialization of socially responsible products and services.” At least that’s what their website says.

The SEC says: “In reality, the only green these promoters seemed interested in was investors’ money.”

According to the latest SEC press release, green is the new fraud. The feds charged Wayde and Donna McKelvy and Mantria Corporation with defrauding investors to invest in green initiatives like a supposed “carbon negative” housing community in rural Tennessee and a “biochar” charcoal substitute made from organic waste.

The SEC alleges that the “green” representations were laced with bogus claims, and investors were falsely promised enormous returns on their investments ranging from 17 percent to “hundreds of percent” annually. In fact, Mantria’s environmental initiatives have not generated any significant cash, and any returns paid to investors have been funded almost exclusively from other investors’ contributions.

The SEC also charged Troy Wragg and Amanda Knorr along with a related company called Speed of Wealth. According to the website: “Speed of Wealth and Mantria have joined forces once again to save the environment while helping middle America secure its financial future!”

For me, I scratch my head wondering why they have all the symbols for a half dozen Chamber of Commerce sites on their webpage. I found it really odd that these included the American Chamber of Commerce in Shanghai and the London Chamber of Commerce and Industry.

I suppose slapping some labels on the webpage is supposed to add some credibility. Of those sites, only the Sequatchie County-Dunlap Chamber of Commerce lists them as members.

Mantria also state that they are an “Accredited Business” with the Better Business Bureau. It says so on their home page. When I searched the Better Business Bureau site (DC Eastern PA) for Mantria it still had them listed as an accredited business and gives them a rating of “A-. ” BB Accreditation only means that Mantria hass made a commitment to make a good faith effort to resolve any consumer complaints and paid a fee for accreditation, review and monitoring.

I also checked out the Speed of Wealth on the Denver Better Business Bureau. They have them listed as an “Accredited Business” with a rating of “A.”

Of course, none of the SEC claims have yet been proven. I wonder the Better Business Bureau monitors SEC claims?

SEC Press Release: SEC Charges Promoters of “Green” Investments With Operating $30 Million Ponzi Scheme Based in Denver Area

The SEC is Going After the Geeks

sec-seal

First, Bernie the boss turned himself in, saying he did it all by himself. Nobody believed that, including the SEC. So the SEC went after Madoff’s right-hand man, DiPascali, and Madoff’s accountant, Friehling. Now the SEC is going after the geeks.

The Securities and Exchange Commission charged two computer programmers for their role in helping Bernie Madoff cover up the fraud at Bernard L. Madoff Investment Securities LLC for more than 15 years. The SEC alleges that Jerome O’Hara of Malverne, N.Y., and George Perez of East Brunswick, N.J., provided the technical support necessary to produce false documents and trading records, and took hush money to help keep the scheme going.

“Without the help of O’Hara and Perez, the Madoff fraud would not have been possible.They used their special computer skills to create sophisticated, credible and entirely phony trading records that were critical to the success of Madoff’s scheme for so many years.”

O’Hara and Perez wrote programs that generated many thousands of pages of fake trade blotters, stock records, Depository Trust Corporation (DTC) reports and other phantom books and records to substantiate nonexistent trading. Bernie used a separate computer internally known as “House 17” to process advisory account data. The SEC alleges that O’Hara and Perez knew that the House 17 computer was missing a host of functioning programs necessary for actual securities trading and reporting. According to the SEC’s complaint, they recognized that the trades being entered into House 17 and the account statements and trade confirmations being sent to investors did not reflect actual trades.

According to the complaint, the two geeks tried to escape from Bernie’s clutches. Apparently a salary increase of 25% and a $60,000 bonus was enough to buy their silence.

References:

The Dark Side of Aggressive Goal Setting in the Workplace: A Shortcut to Unethical Behavior

ordonez

EthicsPoint sponsored a webinar by Dr. Lisa Ordóñez, University of Arizona, Professor of Management and Organizations in the Eller College of Management at The University of Arizona

“Applied managerial experience and hundreds of academic research studies have catalogued the positive impacts of goal setting on performance. Challenging, specific goals compared to instructions to “do your best” have been shown to increase effort, persistence, and performance. Goal setting theory has led to consultants training managers on how to use SMART (Specific, measurable, attainable, realistic, and timely) goals in their organizations. However, as Ordóñez, Schweitzer, Galinsky, & Bazerman (2009a, 2009b) point out, goals can have systematic, negative effects and can focus attention too narrowly, increase risk taking, and lead to unethical behavior.”ethicspoint-logo

These are my notes from the webinar.

Dr. Ordóñez discussed some of the findings from her research where she found that goal-setting can lead to bad results and bad outcomes.

She started with some examples of how goal-setting ended up with bad results.

Why is hard to find a cab on rainy days in New York? The cabdrivers go home early. Their goal each day is to reach 2X their cost. They reach the goal faster on rainy days, so they go home earlier. they could have made money if they worked a full day.

General Motors focused on reaching 29% of the US Market. Executives even wore lapel pins with “29” on them. They focused on hitting the number (for example offering short term incentives) and not the long term goals of the company.

Fannie Mae was looking to expand the home ownership by low-income people. That resulted in them underwriting riskier loans.

Billable hours and ethics. If management sets utilization goals, people are more likely to pad their hours.

They ran a lab experiment in 2004 that tested people on test-taking. participants checked their own work. When the goal was to “do their best” their was less cheating than when their was a specific goal for correct answers.

She raised some questions to ask before setting goals:

  • Are the goals too specific? Narrow goals can blind people to important aspects of a problem.
  • Are the goals too challenging?
  • Who sets the goal? People are more committed to goals they help to set.
  • Is the time horizon appropriate? Short term goals can hurt long term performance.
  • How might the goals influence risk taking? Unmet goals may induce risk taking.
  • How might goals motivate unethical behavior?
  • Can the goals be tailored for individual abilities while preserving fairness?
  • How will the goals influence organizational behavior?
  • Are individual intrinsically motivated? People may not like the activity anymore when their a goal tied to the activity.
  • What type of goal is most appropriate given the ultimate objective? By focusing on the goal, employees may fail to search for better strategies.

So how do you motivate employees without goals?

You don’t. You can only link to what the employee wants to the desired performance.

Goals can be effective for direct effort, they can communicate the values of the organization and are very useful for menial tasks that simply need to be completed.

She ends with a warning:

goals warning

Thanks to EthicsPoint (my company’s hotline provider) for putting on this great webinar.

References:

International Fraud Awareness Week

International Fraud Awareness Week

November 8-14, 2009 is International Fraud Awareness Week. This weeklong campaign, sponsored by the Association of Certified Fraud Examiners, encourages business leaders and employees to proactively take steps to minimize the impact of fraud by promoting anti-fraud awareness and education.

Test your knowledge about fraud with this Fraud IQ Test, which includes 20 actual questions from the CFE Exam

Fraud Prevention Check-uppdf-icon
How vulnerable is your company to fraud? Do you have adequate controls in place to prevent it? Find out by using the ACFE’s Fraud Prevention Check-Up, a simple yet powerful test of your company’s fraud health.

Managing the Business Risk of Fraud: A Practical Guide
This guidance paper, developed jointly by the ACFE, IIA and AICPA, provides key principles for proactively establishing an environment to effectively manage an organization’s fraud risks. It also provides tools, recommendations and real-life examples of how fraud risk management principles are applied.

How Did Madoff Go Bad?

madoff

Last Friday, the SEC published the exhibits for Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme (Report No. OIG-509). That was 536 separate exhibits tying to fill in the background on what happened with the SEC and Madoff.

The one that caught my eye was exhibit 104pdf-icon that summarized a June 17, 2009 interview of Mr. Madoff while he sat in Metropolitan Correctional Center. Inspector General H. David Kotz and Deputy Inspector General Noelle Frangipane were the interviewers.

For me, one of the issues with Madoff was “What made him go bad?”

Personally, I don’t think he intended to start off with a Ponzi scheme. Most Ponzi schemes start off legitimate, then something goes wrong. They fudge the returns hoping to make it up later. Those later returns are elusive and the promoter keeps the lie going.

According to the summary on page 8 of exhibit 104pdf-icon that is what happened to Madoff. The problem occurred when Madoff “made commitments for too much money” and “couldn’t put his strategy to work.” he could not get the returns he wanted. Then he thought:

“Fine, I’ll just generate these trades and then the market will come back and I’ll make it back… and it never happened. … It was my mistake not to just be out a couple hundred million dollars and get out of it.”

Unfortunately, the summary does state when this transgression happened. So we don’t know when his company began the Ponzi scheme. At least as far as Madoff is claiming

Personally, I think this may have been the biggest transgression and the one that clearly put it into the Ponzi scheme category. But that sounds like a big position for your first lie.

Hopefully, we will hear more about what really happened. Until then, here are some other takes on the Madoff information:

SEC’s Office of Compliance Inspections and Examinations Gets a Review

sec-ig

The SEC’s Division of Enforcement was not alone in getting a report from the SEC’s Inspector General: Improvements Needed Within the SEC’s Division of Enforcement. The Office of Compliance Inspections and Examinations also got a review from the Inspector General: Review and Analysis of OCIE Examinations of Bernard L. Madoff Investment Securities, LLC. pdf-icon

For this report, the Office of the Inspector General hired FTI Consulting, Inc. to help with the review. Not to be outdone by the report on the Division of Enforcement, FTI came up with 37 recommendations, topping the other report’s 21 recommendations.

So far that’s a total of three reports and 58 recommendations from the SEC’s Inspector General as a result of the Madoff incident.

References:

Improvements Needed Within the SEC’s Division of Enforcement

sec-ig

The SEC’s Inspector General, H. David Kotz, released his most recent report: Program Improvements Needed Within the SEC’s Division of Enforcement.pdf-icon

The report is sort of a follow-up to the Madoff Report. The Office of the Inspector General conducted a review “to identify systemic issues that would prevent Enforcement from accomplishing its mission to enforce the securities laws and protect investors and determine from discussions with staff and supervisors which programmatic improvements are needed.”

The Inspector General’s 21 recommendations are:

  1. Establish formal guidance for evaluating various types of complaints (e.g., Ponzi schemes) and train appropriate staff on the use of the guidance. The guidance should address the necessary steps and key information required to be collected when conducting preliminary inquiries of various types of complaints, specify what information should be documented, and list whom should be consulted in other offices within the SEC with relevant expertise in various subject matters and other pertinent data.
  2. Ensure the SEC’s tip and complaint handling system provides for data capture of relevant information relating to the vetting process to document why a complaint was or was not acted upon and who made that determination.
  3. Require tips and complaints to be reviewed by at least two individuals experienced in the subject matter prior to deciding not to take further action.
  4. Establish guidance to require that all complaints that appear on the surface to be credible and compelling be probed further by in-depth interviews with the sources to assess the complaints validity and to determine what issues need to be investigated. Such guidance should also require that staff obtain all relevant documentation related to such complaints.
  5. Provide training to staff to ensure they are aware of the guidelines contained in Section 3.2.5 of the Enforcement Manual and Title 17 of the Code of Federal Regulations, Section 202.10 for obtaining information from media sources.
  6. Annually review and test the effectiveness of its policies and procedures with regard to its new tip and complaint handling system. Enforcement should also modify these policies and procedures, where needed, to ensure adherence and adequacy.
  7. Put in place procedures to ensure that investigations are assigned to teams where at least one individual on the team has specific and sufficient knowledge of the subject matter (e.g. Ponzi schemes) and the team has access to at least one additional individual who also has such expertise or knowledge.
  8. Train staff on what resources and information is available from the national specialized units and when and how assistance from these units should be requested.
  9. Make it mandatory that planning memoranda be prepared during an investigation and that the plan includes a section identifying what type of expertise or assistance is needed from others within and outside the Commission. The plan should also be reviewed and approved by senior Enforcement personnel.
  10. Require that after the planning memorandum is drafted, it is circulated to all team members assigned to the investigation, and all team members then should meet to discuss the investigation approach, methodology and any concerns team members wish to raise.
  11. Establish procedures so that junior-level Enforcement attorneys who are having difficulty with obtaining timely assistance from outside offices are able to escalate their concerns to senior-level management within Enforcement.
  12. Conduct periodic internal reviews of any newly implemented policies and procedures related to information sharing with Divisions and Offices outside of Enforcement to ensure they are operating efficiently and effectively and necessary changes are made.
  13. Require that the planning memorandum and associated scope, methodology and timeframes be routinely reviewed by an investigator’s immediate supervisor to ensure investigations remain on track and determine whether adjustments in scope, etc. are necessary.
  14. Ensure that sufficient resources, both supervisory and support, are dedicated to investigations upfront to provide for adequate and thorough supervision of cases and effective handling of the investigations.
  15. Put in place policies and procedures or training mechanisms to ensure staff have an understanding of what types of information should be validated during investigations with independent parties such as the Financial Industry Regulatory Authority, Depository Trust Company, and Chicago Board Options Exchange.
  16. Include in its complaint handling guidance proper procedures for ensuring complaints received even if an investigation is pending closure, are properly vetted.
  17. Conduct periodic internal reviews to ensure that MUIs are opened in accordance with any newly developed Commission guidance and examine ways to streamline the case closing process. Enforcement should also ensure staff have adequate time in which to complete these types of administrative tasks.
  18. Put in place a process to periodically remind staff of their responsibilities regarding impartiality in the performance of official duties and instruct staff where they can find additional information regarding impartiality.
  19. Establish or utilize an existing working group to analyze the OIG survey information regarding staff concerns over communication of program priorities and make recommended improvements to the Director of Enforcement.
  20. Establish or utilize an existing working group to analyze the OIG survey information regarding staff concerns regarding case handling procedures within Enforcement and make recommended improvements to the Director of Enforcement.
  21. Establish or utilize an existing working group to analyze the OIG survey information regarding staff concerns over working relationships within Enforcement and make recommended improvements to the Director of Enforcement.

Robert Khuzami, Director of Enforcement, responded to the Inspector General’s report (The response is in Appendix IV of the report.) and concurred with all 21 recommendations.

References:

KPMG Fraud Survey 2009

kpmg-fraud

KPMG Forensic has released their Fraud Survey 2009pdf-icon.

The survey shows that many managers remain concerned about fraud. There are plenty of investigations of fraud that may have helped fuel the financial markets meltdown. Record levels of government spending may usher in record levels of fraud, waste, and abuse. In these difficult economic times, managers may face pressure to do whatever it takes to “make the numbers.” For those companies operating outside the United States, increased investigation and prosecution of anti-bribery and corruption laws mean foreign operations have increased penalties associated with their risks.

Here are some of the key findings:

Nearly 1/3 of executives expect some form of fraud or misconduct to rise in their organizations.

The majority of executives cite fraud and misconduct as posing significant risks to their industry today.  If such wrongdoing were to be experienced, the greatest concern for over two-thirds of executives is the potential for a loss of public trust when market confidence is at a premium.

Executives expect the threat of fraud to remain steady or rise in the coming year. About three out of four executives believed that fraud and misconduct risks, such as misappropriation of assets and fraudulent financial reporting, will either stay the same or increase over the next 12 months.

Inadequate internal controls or compliance programs heighten the risks of fraud and misconduct. Twothirds of executives reported that inadequate internal controls or compliance programs at their organizations enable fraud and misconduct to go unchecked.

Roughly a quarter of respondents lack effective protocols on how investigations should be conducted and at what point the board of directors should be alerted to potential concerns.

Those areas where respondents cited the most amount of improvement needed include employee communication and training, technology-driven continuous auditing and monitoring techniques, and fraud and misconduct risk assessment.

150 Years or the Firing Squad

The Third of May by Francisco Goya
The Third of May by Francisco Goya

What is the right punishment for financial fraud?

Bernie Madoff received the maximum sentence for his charges. 150 years. His lieutenant, DiPascali, was denied bail by the judge at his hearing last week, despite an agreement between his lawyer and the prosecutors. He has a maximum sentence of 120 years. They stole billions.

Marc Dreier committed securities fraud, stealing $380 million. He got 20 years.

Du Yimin, conned more than $100 million from investors. She promised them monthly returns of up to 10 percent from investments in beauty parlors, real estate and mining businesses owned by her company. She was put in front of the firing squad.

Si Chaxian conned people out of $24 million. He said they could receive interest of up to 108%.  He got the firing squad.

You can probably guess which two fraudsters are from China. The Chinese government puts to death more people than any other country. (Although Iran and Singapore have a higher per capita rate of execution.)

Though usually reserved for violent crimes, death sentences are also applied for nonviolent offenses that involve large sums of money or are seen to threaten social order.  China’s highest court said the two frauds had “seriously damaged the country’s financial regulatory order and social stability.”

I guess this is China’s way of  instituting reform in the financial markets and preventing fraud. But is it effective? Will be talented people just avoid the financial sector for fear of death?

References: