Fraud

Woman’s Absurdly Unsophisticated Tax Scheme Still Managed to Dupe The Oregon Department of Revenue

As we've witnessed, perpetrators of tax fraud oftentimes utilize very simple methods. Slapping a dead person's name, birthdate, social security number, isn't terribly difficult once the data is obtained; throw some minors on there as dependents and you've got yourself a nice little refund at the expense of some grieving family members. Not complicated. You […]

City of Dixon Sues Auditors Over…Ya Know

That money isn't going to find itself now, is it? An attorney for the city of Dixon filed a civil complaint this morning against the accounting firms that conducted the city's audit for the past 5 years. The complaint says that Samuel S. Card, CPA, P.C., and Janis Card Company, LLC, both located at 501 E. […]

Is There Any Subtle Indication of the Dixon Fraud in the Names of Rita Crundwell’s Horses?

The Associated Press reports that some property of alleged Dixon, Illinois sticky fingers Rita Crundwell will be put up for sale. The property includes her four homes in Illinois, a home in Florida, and a $2.1 million motorhome. So if you're in the market for a place in the Illinois countryside or in a state […]

Chicago-based Recruiting Firm Should Keep in Mind That the City of Dixon Would Jump at the Chance to Switch Places

Shaun Horan is no Rita Crundwell (allegedly!): A former Oak Brook accountant stole nearly $300,000 from his employer by writing checks to himself over a five-year span, prosecutors said Wednesday. Shaun Horan, 31, of the 1600 block of Blackwell Lane in Aurora, appeared in DuPage County bond court on a felony theft charge. Horan is accused of […]

California Board of Accountancy Wants to Throw the Book at Mayer Hoffman McCann for City of Bell Audit

Remember the fiasco in Bell, California? Mayer Hoffman McCann performed an audit of the city except it turned out that they didn't really perform an audit and it was later discovered that some of the city's leaders were making off with some money. The California State Board of Accountancy called MHM's audits "little more than a […]

Dixon, Illinois Finds Itself in a Bit of Pinch Since, Ya Know, $53 Million Went Missing

Accordingly, Dixon Mayor Jim Burke is putting the brakes on any investigation because "[it] would cost the city hundreds of thousands of dollars" and the woman who had the magic credit card is in a bit of trouble. Hey, someone had to apply the tourniquet after the city bled out. [WAND] 

Andrew Fastow Has Some Food for Thought

The ex-CFO of Enron, oh humbly, asks: "If the internal and external auditors and lawyers sign off on it, does that make it okay?" History has shown us that, "that all depends." However, maybe things have changed?  [via HBR]

Oh Look, the Dixon, Illinois Fraud Is Way Bigger Than Everyone Thought

How big? In the neighborhood of $53 million, according to the indictment. Earlier reports had put it closer to $30 million and change. It further alleges that Rita Crundwell stated the scheme in December of 1990 and was "[creating] fictitious invoices purported to be from the State of the Illinois to show the auditors for […]

Here’s an Ominous Statement a Former Dixon City Finance Commissioner Made About Accused Embezzler Rita Crundwell

Crundwell reported to the city's finance commissioner, a member of the City Council, but the mayor declined to comment on whether that current commissioner, David Blackburn, or former Commissioner Roy Bridgeman should have detected the alleged thefts. As Bridgeman left office last year, he praised Crundwell for being an asset to the city and said […]

Minnesota Accounting Professor’s Real World Experience Proves To Be a Double-Edged Sword

Joseph Traxler was the CFO of Centennial Mortgage and Funding Inc. in Bloomington. He helped run an $8 million fraud by misleading banks that allowed Centennial to obtain more loans. He also hid defaults and double-funded mortgages from lenders, as well as little check kiting in order to keep the business afloat (rather than enrich […]

The Dixon, Illinois Fraud Is the Latest Example of Why Reasonable Assurance Is Bullshit

As you know, the former CFO of DIxon, Illinois, Rita Crundwell, has been accused of misappropriating $30,236,503 and 51¢ from Ronald Reagan's boyhood home. It's a haul of Sue Sachdeva proportions, although it appears that obsessive shopping wasn't so much the motive as it was a My Little Pony fascination for a grown woman. ANYWAY, […]

Dixon, Illinois City Commissioners Beat a Dead Horse After CFO’s Arrest

Last week we learned that the CFO/comptroller/treasurer for the city of Dixon, Illinois, Rita Crundwell, was arrested for allegedly stealing $30,236,503 and 51¢. She also stands accused, in the court of public opinion, of having awful taste in automobiles, as federal agents seized a Ford Thunderbird upon her arrest.  Regardless, these allegations came as a surprise […]

It Sounds Like the Olympus Shareholder Meeting Went As Well As You Might Expect

If you've been following the Olympus scandal, it's made for a pretty entertaining affair. It involves $1 billion+ in accounting shenanigans, two feeble Big 4 firms, selective communication with investors, a small shifty auditor, OH! and a former CEO of the company blew the whistle on the whole thing. So of course you'd expect shareholders meeting follow suit. […]

Somehow the City of Dixon, Illinois Just Noticed That $30 Million Was Missing

Rita Crundwell has been the CFO/comptroller of Dixon, Illinois since the 1980s; a typical tenure for even an unelected Illinois official. In those 30-ish years, it appears that she performed her duties adequately enough, but she was just put on unpaid leave. You see, at some point in 2006, it is alleged that Ms. Crundwell […]

This Is Your Last Chance to Own (or Gift!) a Piece of Koss Embezzlement History

As you know, convicted embezzling-mother-of-all-hoarders, Sue Sachdeva, had a bit of a shopping problem. She did her damnedest to spend all of $30+ million that she stole from headphone cobbler Koss, but now that she's resting comfortably in Danbury, all that loot needs a home. Back in December, we were tipped to an auction that […]

Ex-CFO of Taylor, Bean, & Whitaker Faces Up to Ten Years Without PeiWei

The Department of Justice trumpeted the guilty plea of Delton de Armas, the former CFO of Taylor, Bean, & Whitaker Mortgage Corp. today, marking the 8th conviction in the TBW fraud case. Assistant Attorney General Lanny Breuer seemed pleased in the DOJ press release: “As TBW’s chief financial officer, Mr. de Armas concealed a massive […]

Koss (Man and Company) Settles with SEC for Four Years Worth of Trainwreck Financial Statements

One-man C-suite Michael Koss and the company that bears his name settled with the SEC today, according to a Commission litigation release. This all stems from the dodgy financial statements the company put out from 2005 to 2009 that were carefully orchestrated by shopper-'til-you-stopped-her Sue Sachdeva. As for the punishment, well, it's kinda meh: The […]

Auditor Denies That an Auditor Was Paid Too Much Money to Audit

Yes, even if it was Allen Stanford's auditor: CAS Hewlett, an accountant in the Caribbean nation of Antigua where Stanford operated a bank and numerous other business interests, received $4.6 million for auditing services, said Morris Hollander, a certified public accountant who testified as an expert witness. “Are amounts paid for auditing these companies in any way […]

Imagine, If You Can, Someone Taking Advantage of a Lack of Oversight at a Roman Catholic Archdiocese

Hard to believe, right?! Well, a "quiet unassuming woman" named Anita Collins spent the last eight years stealing $1 million from the Archdiocese of New York. Funny story! Ms. Collins has been known to have sticky fingers in the past, pleading guilty to grand larceny in 1999 and a misdemeanor charge in 1986. How did […]

Vermont Is a Hotbed of Embezzling Embezzlers

Ahh, Vermont. Foliage, second-rated skiing, and, of course, hippies. But apparently, the Green Mountain should be known for something else – stealing from your employer! According to Marquet International Ltd., Vermont "Vermont topped the list of states with highest risk for loss due to embezzlement in 2011." What's the reason for this? Well, it's not […]

Maybe It’s Just a Giant Coincidence That the Four Companies at the Center of the Olympus Scandal All Share the Same Small Auditor

The Journal reports that four companies that were integral in hiding all the losses at creative accounting camera company Olympus all shared the same obscure auditor. Minoru Tanaka is still the auditor for three of the four companies although, for some strange reason, he was MIA in the report prepared by the panel that investigated the […]

Get Yourself a Piece of Koss Embezzlement History

Remember the good ol' Koss fraud? It's been quite some time since we were on the Milwaukee beat but this morning we received an email informing us that a little auction is being held by Gaston & Sheehan that has several lots (97 to be exact) under "US Marshal Service Assets." Our tipster informed us […]

Has an Auditor Ever Been Whacked For Snitching on Fraudsters?

I’ve gotten some crazy questions over the years but this one pretty much takes the cake. I’m not saying it’s stupid, nor am I saying it’s all that crazy, it’s just… well… out there, is all. Read on.

Dear Adrienne,

I’m a college student at the University of North Texas. Fraud has been a hot topic in my courses this month. We covered many scandals including Crazy Eddie, Barry Minkow, NextCard, Enron, and Bernie Madoff. This has got me thinking a lot about how I would react if I was in the shoes of the auditor. The students in my class always say to just report the fraud, however they never put themselves in the shoes of the fraudster to determine how the fraudster would act nor do they think about protecting the reputation o watched enough movies to know that if a fraudster finds out that somebody knows “too much,” then that person probably won’t make it home alive that night, unless they cooperate. I remember in that movie, “The Other Guys,” the auditing partner got killed because the fraudsters didn’t want him snitching out any information to authorities.

Another thing is that if it is found out that a partner is involved in fraud, this will ruin the firm’s reputation if this gets reported to the SEC. However, if the firm handles this internally, fire the partner, admit mistake, and let the public know that it doesn’t want anything to do with the partner, then perhaps only the partner would get in trouble and not the firm.

So exactly how are you suppose to act in situations of fraud? Of course AICPA tells us to first report it to your supervisor, then to the audit committee, and then the SEC. But still though, you got to get this out before someone kills you and you’ve got to handle it in a manner that best protects the reputation of the firm. Am I right? Also, have you ever heard of any auditors that were murdered because they knew too much? When you read about Enron or the Bernie Madoff scandal, there are talks about death threats, but you don’t necessarily hear about any murders involved. So it may be something that only happens in the movies.

Well, since you brought up Crazy Eddie, my first instinct was to pose this question to Crazy Eddie’s corrupt CPA, Sam Antar. Thankfully Sam obviously checks his Twitter account every five minutes and had some thoughts for me almost immediately.

“Yes, the potential is there. Depends on the client. Have that person contact me if worried,” he tweeted. Now isn’t that sweet? If anyone out there is feeling the heat, you know who to hit up.

His thought? It’s rare, if not impossible. Why would a fraudster whack the auditor? By the time the fraud is uncovered, it’s too late. The workpapers would likely document said fraud, so the fraudster would then be forced to whack the entire chain on up to the partner and who has time to do all that killing? “No logic in whacking outside auditor unless part of conspiracy,” Sam said.

That being said, does anyone remember Allen Stanford’s sketchy auditor C.A.S. Hewlett (“C.A.S.H.” get it?!)? He apparently kicked the bucket on January 1st (a real accountant would have kicked the bucket on December 31st, pfft), just a month before Stanford was charged with fraud (though he didn’t get arrested until June of that year). The circumstances surrounding his death were, uh, weird to say the least but I don’t think anyone is going to go so far as to say he got whacked.

Or how about Ken Lay? I mean, does anyone really believe he had a heart attack? There is even an entire website dedicated to exposing Ken Lay’s post-mortem life.

Now, here’s where it gets tricky, and I don’t expect you to know this since you haven’t made it out into the real world yet. What is an auditor’s job? Is it to uncover fraud? Or is it to verify with a minimum of certainty (a.k.a. “reasonable assurance”) that the financial information presented by a company is probably legit? If you answered the latter, you win. Forensic accountants dissect fraud, auditors simply check boxes. I’m sorry if this offends any of you hardcore auditors out there but in your hearts, even you guys know I’m right. Auditing is a joke, an intricate dance (read: performance) that exists more for entertainment than functionality. If you don’t agree with me, I’d be happy to name any number of companies that prove my point for me (let’s see… Enron, Worldcom, Overstock, Satyam, Olympus…).

What do you think the odds are that a first or second year auditor would even be able to detect fraud? Don’t you think the criminals behind it are at least clever enough to hide their wrongdoing from a bunch of fresh-faced kids with their SALY checklists? Look at the lengths Crazy Eddie went to – to success until their greed got the best of them and a chick ruined the whole scam. And that’s the thing, the auditors rarely uncover fraud, it’s usually the fraudsters themselves who end up exposing themselves though greed or just plain stupidity.

Whistleblowers don’t make friends but they don’t have to hire armed guards either. Like I said, by the time the fraud is exposed, it’s too late to start killing people to hide the truth.

And thanks to SOX, it is illegal to “discharge, demote, suspend, threaten, harass or in any manner discriminate against” whistleblowers, so a more likely scenario is that revelations of fraud will come from within the firm, not from the outside auditors who are pissed off to be doing inventory counts on New Year’s Day.

You watch too many movies, kiddo. Just check the list, collect the bank recs and call it a day.

It Turns Out Olympus Could Have (Allegedly) Hidden One of the Largest Accounting Frauds EVER

Just a few days ago, Caleb asked why anyone would care if Olympus fired KPMG after a dispute over an accounting matter, but early this morning we learned the answer to that seemingly obvious question.

The question now is, why did KPMG wait around to get fired and not run the hell out of there? Well, because the issue at hand at that point was “goodwill impairment,” which ended up being a series of $1 billion transactions that added up to possible fraud. We won’t say Japanese regulators haven’t had the chance to dissect the evidence yet. We can only assume KPMG did not notice that glaring $1 billion error or surely they would have alerted the financial authorities. No, dismissed “quietly,” swapped out for Ernst & Young. Like Uncle Ernie needs this heat right now.

Fine. Now we’re at tonight (here, at least) and WSJ is live-blogging the press conference at which Olympus’s new president suffered a media grilling over revelations that the company used phony mergers to hide investment losses from shareholders.

“I was absolutely unaware of the facts I am now explaining to you,” new CEO Shuichi Takayama told the press conference. “The previous presentations were mistaken.” Right. First thing you do in this situation is CY-MFing-A, bro.

The Japanese medical equipment and digital camera maker admitted to using acquisitions to cover its securities losses going back to the 1990s. Think about that for a moment. Many of you weren’t even aware of the world around you in the 90s, that was a long fucking time ago. So much for confidence in fragile financial markets.

It wasn’t that long ago that Olympus fired its British CEO Michael Woodford. Takayama had to answer more than a few questions about Woodford at his press conference:

There is a question about Mr. Woodford. “There are no plans for him to return,” Mr. Takayama said.

A reporter asking why the company is not thinking about revoking Mr. Woodford’s dismissal.

Mr. Takayama said Mr. Woodford was dismissed for his management style and therefore, there is no thought of revoking that dismissal.

A reporter asks Mr. Takayama if his impression of Mr. Woodford has changed in light of the revelations, his response: “No, it has not.”

It’s very interesting how they are holding the line against Mr. Woodford. It almost seems personal.

It couldn’t possibly stem from a feeling of betrayal and anger! A 20-year-old (alleged) fraud is suddenly trotted out into the 24-hour Internet news cycle (they didn’t have that in the 90s when they started this scam) and these guys have to apologize to shareholders because this asshole went sniffing around their completely obviously fake M&As.

“It is truly extraordinary and frankly unbelievable that Olympus, a major Nikkei listed public company, made a series of payments approaching USD 700 million in fees to a company in the Cayman Islands whose ultimate ownership is still unknown to us, preventing the auditors from verifying that no related parties were involved,” Woodford wrote in an Oct. 11 letter. “In putting the company first, the honorable way forward would be for you and Mori-san to face the consequences of what has taken place, which is a shameful saga by any stretch of the imagination.”

Woodford hired PwC, who wrote a damning report exposing Olympus’s shady M&A activities. PwC spokesman Derek Nash said he “could neither confirm or deny” that the firm had done any work for Olympus.

Fuck! When will these whistleblowers stop?

The good news: plenty of work coming up for you, GC faithful.

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]

Note: The IRS Does Not Appreciate You Not Reporting Your Embezzlement Gains

Let this serve as a warning to any would-be embezzlers out there, if you steal, you better report it to the IRS.


42-year-old Collette Snyder of Timonium, MD pleaded guilty earlier this month to filing false tax returns in 2007 and 2008 after she neglected to claim over $382,000 embezzled from her former employer, Towson, MD-based Maple Leaf Title.

As part of her duties at the title company, Snyder had signature authority over the company’s operating, settlement and recording accounts, which allowed her to begin embezzling money from MLT accounts starting in 2007. She deposited company checks directly into her personal bank account, as well as made checks payable to her husband without his knowledge, forging his signature to deposit those checks in an account he was not aware of. At that point, Snyder had been an employee of MLT for two years.

Snyder took around $149,560 in 2007 and $232,968 in 2008. These embezzled funds were used to purchase jewelry, a BMW, trips, home improvements and private school tuition.

Because reporting this money to the IRS without it clearly declared on her W-2 (despite her writing “payroll” in the memo section of company checks she wrote out to herself) would have alerted authorities to the fraud, Snyder neglected to mention the ill-gotten gains. This resulted in an estimated tax loss of $115,529.37 for her 2007 and 2008 returns.

Due to the embezzlement by Snyder and MLT President Anthony Weis, MLT was unable to perform its duties as a provider of settlement services. With MLT’s escrow account drained, existing mortgage notes could not be paid off by MLT, meaning clear and free title could not be passed to the new lender and borrower of those notes. An insurance company that had issued title insurance policies to the borrowers guaranteeing clear title ultimately paid out $3.9 million to financial institutions that held mortgage notes.

Weis pleaded guilty to wire fraud, was sentenced to 78 months in prison and was ordered to pay restitution of $4,007,705, which includes the loss to the title insurance company and the expenses of the individual victims. He began his sentence in May of this year. The interesting part of this story is that Weis stole money intended for his clients’ real estate closings. And then Snyder stole from the company. Birds of a feather…

Snyder faces a maximum sentence of three years in prison and a fine of $250,000. U.S. District Judge Catherine C. Blake has scheduled her sentencing for February 3 , 2012 at 11:00 am.

“Mortgage fraud adds to the underground economy that erodes the integrity of our tax system and threatens the financial health of our communities. IRS Criminal Investigation is committed to ‘following the money trail’ to ensure that those who engage in these illegal activities are vigorously investigated and brought to justice,” said IRS – Criminal Investigation Special Agent in Charge Jeannine A. Hammett.

Terrible Auditor Really Good at Staying Out of Jail

Bernie Madoff’s auditor – and thereby, the worst auditor everDavid Friehling has had his sentencing delayed for the fourth time.

Apparently he is still “cooperating with federal investigators” which leads some to believe that he might be giving them the lowdown on the Madoffs’ tax returns but really he probably is just trying to convince someone – ANYONE – to give back his beloved CPA. [Lohud via Forbes]

Former Payroll Manager for San Francisco Giants Suspected of Embezzlement After Taking a Little Too Much Credit for Team’s Success

A lot of work goes into building a championship baseball team. Good pitching, solid defense and, contrary to some people’s opinion, pinstripes seem to help. What many people easily forget is that there is more to it than just talent on the field. There’s the business aspect of baseball that is essential to every successful team. You can’t just throw a bunch of money around and hope for the best, Steinbrenners. There has to be a plan. The San Francisco Giants, the reigning champs, are one of those teams. Unfortunately for the Giants, they are not impervious to bad luck. Case in point – Robin O’Connor, a former payroll manager for the team, has recently been accused of embezzling more than $1.5 million from the organization. The team was not aware that this misappropriation was happening until someone at Bank of America (Yes.) rang them up with news of a letter they received from Ms. O’Connor, who had recently applied for a home loan and had written a letter explaining two very large deposits into her bank account. Apparently, someone at BofA found the following a little bit out of the ordinary:

“Because of her outstanding contributions to our Major League Baseball team and front office during the 2010 season that assisted us in accomplishing our goal of winning the 2010 World Series, she was given two additional payments of compensation in May 2011,” the letter, quoted in the affidavit, states.

Yes, the correct calculation of federal, state, social security, medicare and other miscellaneous deductions were of such magnitude that it warranted not one but TWO bonuses for Ms. O’Connor. Because if no one gets paid, no one is happy. And unhappy players don’t perform.

Ex-employee may have taken $1.5M [ESPN]

When Booking Bogus Revenue, Ideally Your CFO Is the Type to Not Give a Rat’s Ass

James Li and David Chow used to run a shop called Syntax-Brillian Company as the CEO and Chief Procurement Officer respectively. They sold high-def, LCD TVs under the Olevia brand in China. Problem was, they didn’t really sell TVs under the Olevia brand in China. According to the SEC:

[F]rom at least June 2006 through April 2008, Li and Chow engaged in a complex scheme to overstate Syntax’s financial results by publicly reporting significant sales of LCD televisions in China, when in fact the vast majority of these sales never occurred. Li and Chow initially concealed the scheme through the use of fake shipping and sales documents.

Of course, they couldn’t do it alone. They needed a CFO. A CFO who would backdate things when asked and ignore obvious signs of bogus revenue. That man was Wayne Pratt who, from the sounds of it, wasn’t too concerned about ANYTHING:

The SEC alleges that Wayne Pratt, Syntax’s Chief Financial Officer, ignored red flags of improper revenue recognition and participated in preparing backdated documentation that was provided to Syntax’s auditors to support fictitious fiscal 2006 year-end sales. Pratt also ignored indications of impaired assets, agency sales, and potential collectability issues.

So, budding criminals, get on the look out for a guy/gal who is accustomed to shrugging their shoulders and responding “Meh. Whatever.” to your demands. Should work out well for you.

Litigation Release [SEC]
Complaint [SEC]

Crooked CFO: “KPMG knows nothing about the character traits of criminals.”

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:

KPMG Analysis Finds That a Fraudster’s Traits Mirror Those of Pretty Much Every Boss You’ve Ever Worked For

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.

[via KPMG]

Former BDO Partner Gets Probation For Cheating on His Taxes

Poor BDO, they never get in the news. But hey, they do today!

Former BDO partner George Mark got off easy this week when U.S. District Judge Nora Barry Fischer said he didn’t deserve to go to jail thanks to his “extraordinary” charitable efforts and remorse for his actions. Mark’s tax evasion was uncovered during an investigation into Pennsylvania beverage company Le-Nature’s, who apparently specialized in nepotism, ass water and fraud.

Mark will instead serve two years of probation and pay a fine of $30,000.

A federal jury recently found Le-Nature’s former president Robert B. Lynn guilty of 10 counts of bank fraud, wire fraud and conspiracy. The jury found him not guilty on 10 additional fraud counts and deadlocked on five others, which left Senior U.S. District Judge Alan Bloch Jr. no other choice than to declare a mistrial on the remaining charges. The company’s CEO Gregory Podlucky and other company officers are facing prison for their part of a $37 million fraud.

While investigating Le-Nature’s ugly mess, the IRS found out that Mark declared fake travel expenses on his 2004, 2005 and 2006 tax returns for about $90,000. The IRS determined that Mark was living the gangsta lifestyle out in the Philly ‘burbs, rented an apartment in NYC, traveled a lot and owned a few luxury cars.

The U.S. attorney’s office had hoped the judge would come down with jail time in order to convince would-be tax cheats that this is serious business but the judge felt Mark’s volunteer efforts for Hope International and other charities was sufficient proof that he wasn’t all that bad of a guy, perhaps just a little misguided.

Back in 2008, 74 investors alleged fraud and negligent misrepresentation against Wachovia Capital Markets, Wachovia Securities and two accounting firms, Ernst & Young and BDO Seidman for their respective parts in the Le-Nature’s scam, in which company officers (mostly CEO Podlucky and his kin) would secure loans for business equipment only to turn around and use that money for things like, oh, sapphires and overpriced watches.

E&Y audited Le-Nature’s until BDO took over. “E&Y was aware that Podlucky could single-handedly influence or manipulate the company’s financial results …” charged the lawsuit. The company basically made up $240 million in revenue and BDO auditors declared the company’s financials were free of material misstatements. FAIL.

Anyway, congratulations to the former partner for, uh, being such a model human being. Or something.

Portly CFO’s ‘Financial Rape’ of Tree Farm Business May Have Funded Dramatic Weight Loss

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]

Freaky Fraud: The Woman Who Stole $110,000 in Bull Semen From Her Employer

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.

Fraudbusters Get a Lesson in Internet Stalking

Yesterday I sat in a session at the ACFE Fraud Conference and Exhibit entitled “Effectively Using Social Networks and Social Media in Fraud Examinations” with a few hundred [?] fraudbusters and I got the impression that few people in the room were social media savvy (in the stalk-y sense, anyway). I came to this conclusion after watching most of the hands in the room go up when asked “who thinks social media is a waste of time?” and saw nearly same amount of hands raised when asked “do you have some sort of social network presence?”

Cynthia Hetherington, President of Hetherington Group, described herself as “[A] librarian, a technologist and licensed private investigator. So, I’m a nerd, I’m a geek and I’m a dick,” was the speaker for this particular session and a lot of her talk introduced the crowd to the idea of stalking people on the Internet. She knew her crowd well, as a joke about Laverne & Shirley’s apartment got plenty of laughs, while a quip about Snooki got crickets. This reinforced my suspicion that the idea that of curating information about financial crooks using Facebook and Twitter was new to many in the room.

Now, the majority of people listening may have known it was possible to find partially-nude pics on someone’s Facebook profile or Twitter account (which she demonstrated in one non-Anthony Weiner example) but maybe they hadn’t considered that they could learn a lot of other useful information about someone they were investigating.

In short, Ms. Herrington explained to the biz casual crowd that you can find out a lot of information about a person just by poking around their social media accounts. Whether it’s Facebook, Twitter, or LinkedIn, you can learn someone’s likes, dislikes, their political leanings, where they’ve lived, who their friends are, etc. and use that information to build a profile, analyze behavior or in some cases, find out where someone maybe hiding.

What does all this mean? Opportunity my friends. If you fancy yourself social media and Internet savvy, you probably have a leg up on many of the vets in the fraud and forensics business when it comes to poking around the Web and finding information on people of interest to you. Sure you may not have their years of investigative expertise, extensive contacts or an aging wardrobe but you may have successfully Web-stalked ex-significant others, crushes and completely random people to learn things that they’ve volunteered into cyberspace. And here you thought your creepy behavior was completely worthless.

Don’t Worry, There’s Still Plenty of Accounting Fraud Out There

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]

Tony Little, Gazelle™ and Ponytail Enthusiast, Duped by Former Accountant (Allegedly!)

Mark Schreiber, a former controller of fitness guru Tony Little’s business empire, has been accused of embezzling nearly $600k by forging Little’s signature. Apparently Schreiber was involved in some “online horse wagering” which must not have gone too well since he ended up…stealing money (allegedly).

According to T. Little’s lawyer, Latour “L.T.” Lafferty, the $600k is pocket change to his client but he’ll be damned if they aren’t going to pursue every means necessary to get every cent back:

“We’re certainly going to pursue any legal avenues to recover every cent that was taken from Mr. Little,” said his attorney, Latour “L.T.” Lafferty. “It doesn’t impact the financial well-being of Mr. Little. But certainly it’s a significant blow and a serious breach of Mr. Schreiber’s place as controller of his business operations.”

Since TL is a man of health and fitness and not of numbers, it’s not surprising that he’s found himself in this conundrum but he did have his suspicions:

Little realized something was amiss last year, according to court records, when he moved to fire Schreiber as a controller overseeing his Pinellas Park companies’ finances. He was dissatisfied with Schreiber, records show. He set up a July 27, 2010, meeting.

But before they could meet, Schreiber sent an e-mail: “I quit.”

After Little’s new accountant had been poking around for awhile, it was pretty obvious things weren’t kosher. They called in a forensic expert who discovered that 152 checks were drawn over 11 months to the sum of $583,379.

Right now the “degenerate gambler” motive seems to be the most plausible scenario, although it’s entirely possible that Mr Schreiber was sick with jealousy over the sexual tension between Little and his infomercial leading lady, Darla Haun. We’ve presented some footage that will likely be introduced into evidence during Schreiber’s trial:

PwC India Affiliates Settle with SEC, PCAOB Over Satyam Audit Failures

The affiliates – Lovelock & Lewes, Price Waterhouse Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse Calcutta, and Price Waterhouse & Co. Calcutta – must pay $6 million to the SEC, $1.5 million to the PCAOB and are barred from accepting U.S.-based clients for six months. The SEC fine is the largest ever levied against a foreign-based accounting firm in an SEC Enforcement Action and the PCAOB fine is the largest in the regulator’s history. PW India must also “establish training programs for its officers and employees on securities laws and accounting principles; institute new pre-opinion review controls; revise its audit policies and procedures; and appoint an independent monitor to ensure these measures are implemented.” The SEC’s press releasilures “were not limited to Satyam, but rather indicative of a much larger quality control failure throughout PW India.”

More from Bob Khuzami & Co.:

“PW India violated its most fundamental duty as a public watchdog by failing to comply with some of the most elementary auditing standards and procedures in conducting the Sataym audits. The result of this failure was very harmful to Satyam shareholders, employees and vendors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Cheryl Scarboro, Chief of the SEC’s Foreign Corrupt Practices Act Unit, added, “PW India failed to conduct even the most fundamental audit procedures. Audit firms worldwide must take seriously their critical gate-keeping duties whenever they perform audit engagements for SEC-registered issuers and their affiliates, and conduct proper audits that exercise professional skepticism and care.”

For the PCAOB, Chairman James Doty:

“The reliability of global capital markets depends on auditors fulfilling their obligation to investors to perform robust audits, resulting in well-founded audit reports. Two of the PW India firms, PW Bangalore and Lovelock, repeatedly violated PCAOB rules and standards in conducting the Satyam audits. These confirmation deficiencies contributed directly to the auditors’ failure to uncover the Satyam fraud.”

And Claudisu Modesti, the Director of Enforcement:

“Accounting firms that audit U.S. issuers, including affiliates of international accounting networks, provide an essential bulwark for investors against issuer clients that are committing fraud. PW Bangalore and Lovelock repeatedly failed to meet their obligation to comply with PCAOB standards, and these failures contributed to PW Bangalore and Lovelock failing to detect the fraud committed by Satyam management.”

You can see both the enforcement actions on the following pages. As for the firm, here’s a portion from PW India’s statement:

The SEC and PCAOB orders found that PW India’s audits of Satyam did not meet US professional standards and, as a result, did not discover the fraud underlying Satyam’s 2005-2008 financial statements. The orders make clear that Satyam management engaged in a years-long fraud, going so far as to create scores of fictitious documents for the purpose of misleading the auditors.

These settlements, in which PW India neither admits nor denies the U.S. regulators’ findings, apply only to the U.S. regulatory enquiries into Satyam. Neither of the orders found that PW India or any of its professionals engaged in any intentional wrongdoing or was otherwise involved in the fraud perpetrated by Satyam management. The settlements mark the end of the Satyam-related U.S. regulatory enquiries concerning PW India and are a positive step and important milestone in putting the Satyam issue behind PW India. PW India remains hopeful of resolving the outstanding enquiry with the Indian market regulator.

Sounds a little defensive, doesn’t it? Here’s what PwC International Ltd. had to say:

PricewaterhouseCoopers International fully supports PW India’s decision to resolve these issues with the US regulators and is hopeful that an agreed resolution will also be reached with the Indian market regulator. The PwC network will continue to work closely with PW India as it fulfils its commitments to its regulators, its clients, and to the Indian and global marketplaces.

PricewaterhouseCoopers International is committed to a PwC presence in the vibrant and fast growing Indian marketplace.

“India is a key market for PwC and we are committed to working with our colleagues in India to build on a successful practice with quality at the centre of everything it does,” said Dennis Nally, Chairman of PricewaterhouseCoopers International. “The last two years have been challenging for PW India but I believe that PW India has learned the lessons of Satyam, made the right changes and is on a sound footing to move forward, dedicated to quality work.”

This may be a foreign firm but it makes us wonder if the SEC and PCAOB are just getting warmed up. Mr Doty and SEC Chief Accountant James Kroeker will be on the tomorrow’s panel that we will be live-blogging and it will be interesting to hear what they have to say.

SEC_PW India

PW_India

Did KPMG Really Warn HSBC About Madoff Fraud Risks?

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.

HSBC Was Told About Madoff ‘Fraud Risks’ in Two KPMG Reports [Bloomberg]

How Long Should an Accountant Wait to Start an Embezzlement Scheme After Landing a New Job?

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.

Man with a ‘Passion’ for Charter Buses Managed to Dupe Moss Adams, Deloitte in Washington’s Largest Ponzi Scheme

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.

Financial empire, luxurious lifestyle were built on a mirage [ST]

Proof That an Accountant Can Love Golf Too Much

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:

CPA Who Allegedly Embezzled Funds from Client May Have Been Desperate to Get Rid of Shag Carpeting

From John Veihmeyer’s favorite local broadsheet, the South Bend Tribune:

A local certified public accountant has been arraigned in Berrien County Trial Court in St. Joseph in connection with the alleged embezzlement of nearly $100,000 from a trust fund.


As for the how and the why:

Officers said the funds allegedly were taken from the trust fund account of Winifred Lentz around the time of Lentz’s death in 2005. Falsified documents were used to disguise where the money actually went, police said

They said Barnes used the money to carpet his home and purchase Euros during a period when he took a cruise. He also allegedly took more than $45,000 to pay off a personal loan.

Fraud Experts: Calls for Criminal Charges Against Ernst & Young Are ‘Absurd’

Since Andrew Cuomo decided to make our lives insanely busy this week, we’ve been talking to lots of different people about what will happen next in the Ernst & Young saga. We stumbled across a couple of experts, Dr. Mark Zimbelman an Accounting Professor who specializes in fraud, forensic accounting and auditors’ detection of fraud at BYU’s Marriott School of Business, along with his son, Aaron Zimbelman, a doctoral student at the University of Illinois at Urbana-Champaign whose research interests include auditing, financial statement fraud and corporate governance.

The father and son team have a blog, Fraudbytes, that discusses, well<arious forms including a post from yesterday about this week’s developments.


We corresponded with the Zimbelmans by email for this interview. They have combined their positions to provide us with the answers to our questions.

Going Concern: Does E&Y risk losing creditability with the market at large (á la Andersen) because of these civil fraud charges?

Zimbelmans: We don’t think this case will hurt E&Y’s credibility, based on what we know at this point. Lehman’s accounting for Repo 105 transactions was in accordance with GAAP and appears to have been a common practice for similar transactions in the industry. In other words, E&Y was probably following the letter of the law in signing the audit opinion. In Andersen’s case, the firm had shredded documents and faced criminal charges. Until we see a clearer act of wrongdoing (e.g. a clear departure from auditing standards), we don’t see E&Y individually facing a significant loss of credibility. More likely, the auditing and accounting profession as a whole will take a credibility hit as individuals question the standards and industry norms adhered to by E&Y in auditing Lehman.

GC: Reports say that E&Y is in talks to settle – how do you interpret their willingness to settle rather than litigate in this matter?

MZ/AZ: We think a willingness to settle speaks mostly to the great deal of uncertainty associated with the litigation process in auditing cases. Jury trials in cases like these can be very unpredictable and may not be strongly related to whether or not E&Y actually did anything wrong. Juries tend to have a poor understanding of auditing and accounting issues and also tend to side with victims and against deep pockets. In this case in particular, were the case to go to trial, E&Y has a good chance to become a scapegoat for the collapse of Lehman and perhaps even the economic crisis as a whole. Even if the probability of a verdict against E&Y were fairly low, the damages assigned by a runaway jury could be devastating. This gives E&Y a strong incentive to settle, regardless of whether or not they did anything wrong.

GC: Is there any advantage to litigating?

MZ/AZ: If the requested settlement amount would be devastating to E&Y, the firm is better off litigating. The firm may also be better off litigating if the requested settlement amount is high and E&Y feels they have a very solid case that has a good chance at overcoming the common jury biases we discussed in the previous question.

GC: How would you react to those who feel that are calling for criminal charges against the firm?

MZ/AZ: We don’t really see any criminal behavior here–E&Y allowed Lehman to account for Repo 105 in accordance with GAAP and in accordance with what was fairly standard in the industry. Until we see evidence of potentially criminal behavior, calls for criminal charges seem absurd.

GC: Prediction time: what happens next? Fine of $X and….?

MZ/AZ: We doubt there are any criminal issues here. E&Y will likely try to settle as quickly as possible to get this behind them. Cuomo is likely to want a huge settlement because of the magnitude of the bankruptcy and because of the potential for a runaway jury. Given that Lehman’s bankruptcy was $691 billion, this settlement could easily exceed E&Y’s Cendant settlements which were over $600 million.

Nun-cum-former CFO, Who May Have a Gambling Problem, Allegedly Made Off with Some Iona College Cash

We’re a few days late to this story so save the indignation, it’s still worth mentioning.

Sister Marie E. Thornton (aka Sister Susie) was doing the Lord’s work as the CFO at Iona College in New Rochelle, NY and it appears that she was embezzling around $80k a year for nearly 10 years to fund a wee bit of a gambling problem. She surrendered to authorities last week over said embezzlement of ‘more than $850,000,’ according to Talk of the Sound, a New Rochelle blog, that quotes a DOJ press release.


The school fired Sister Suz last year, along with another employee, in relation to the embezzlement and the DOJ got around to charging her last week.

The story got picked up by several outlets, including Fox News who reported that Sister Suz had been blowing the money on trips to Atlantic City:

As chief financial officer at Iona College in New Rochelle, N.Y. from 1999 to 2009, Sister Marie Thornton, 62, bet her six-figure income and school money away during frequent trips to Atlantic City, federal prosecutors said.

Thornton was arrested Thursday and pleaded not guilty in federal court in Manhattan. She was released without posting bail. Sources confirmed to MyFoxNY that a former Iona basketball coach has said that Sister Marie definitely had a gambling problem.

Now why the former coach, Jeff Ruland (who was fired from his job, according to the Post), felt obligated to dish on the gambling issue is not clear, although it does provide a motive for Sister Susie’s (alleged!) stealing, which would have probably come out of the investigation. Odd revenge theories aside, the good news is that Sister Suz had seen the error of her ways and has been “cloistered at the Sisters for St. Joseph Order, near Philadelphia,” according to the Fox News report.

However, that is a lot closer to AC, so maybe we’re jumping the gun on repentance.

BREAKING: Sister Susie Arrested, U.S. Attorney Charges Former Iona College VP of Finance in $1.2 Million Embezzlement [Talk of the Sound]
Nun Accused of Embezzling $850,000 From College, Then Gambling It Away in Atlantic City [Fox News]
Nun charged with embezzling $1.2M from Iona [NYP]

(UPDATE) Sachdeva Defense Team Throws a Hail Mary

With a sentence coming down circa any minute, the Koss embezzlement queen is probably starting to freak just a tad.

Accordingly, her attorneys are pulling out all the stops. The defense is now claiming that Sue’s assistant, Julie Mulvaney was “an enabler” and kept SS from having a nervous breakdown when things got dicey around the scam:

•In May of each year — a few weeks prior to scheduled visits from Koss outside auditors — Sachdeva would review the cash in the company’s ledgers, compare it with the cash in the company’s bank accounts and then determine the difference between the two. Sachdeva would presume the shortfall was equal to her theft of company funds.

“She would then call Julie Mulvaney into her office in a panic, and tell Mulvaney that cash was ‘off’ by a certain amount,” the memo states. “Mulvaney would respond by saying ‘let me look at everything and get back to you and don’t worry.’”

Mulvaney would then alter figures in the ledgers, the memo states.

•Sachdeva’s attorneys contend Mulvaney worked independently and without direct supervision “and only minimally shared her methods with Sachdeva.”

“Sachdeva, who was preoccupied with the fear of being discovered and too emotionally distraught to manage the fraudulent entries, would constantly ask Mulvaney at work if everything had been ‘fixed,’ and would frantically call Mulvaney at home, sometimes late at night, to see if the cash had been reconciled,” the memo states.

Sue was so emotionally distraught throughout the ordeal that she wandered into Valentina Boutique on a number of occasions and spent $1.4 million. Yeah, that makes sense.

UPDATE, circa 5:30 pm: From Milwaukee public radio, Suz gets 11 years.

Sue Sachdeva’s Defense Team Provides Hysterical Argument for a Lighter Prison Sentence

Koss embezzlement mastermind Sue Sachdeva will receive her prison sentence tomorrow for ripping the headphone cobbler off to the tune of $34 million. Yesterday, the government’s sentencing memorandum (full document after the jump) was released and the prosecution and defense each made their arguments for a heavier/lighter prison sentence.

Naturally, the prosecution is seeking the maximum sentence, as is Koss CEO Michael Koss, who wrote a letter to the court with his thoughts:

“She stole from the hardworking employees of the company and their families, and ultimately the stockholders of the company,” Koss wrote. “They are the true victims of her crimes.”

Yes! The shareholders! Including the Koss family members who 67% owned of the stock ! Especially the ones who held five executive positions at once!

But never mind that for two. Tracy Coenen breaks down the defense’s argument for S-squared to receive a lighter sentence and it’s a hoot:

They argued that Sue Sachdeva should get a lighter sentence because:

a. she’s been a law-abiding citizen until now

b. the fraud was “simple”

c. and poor, poor Sue has a “compulsive shopping disorder”

Jump over to Tracy’s post for more analysis but our take on these three reasons are as follows:

A. “Until now,” as in “right up to the moment she pleaded guilty”? If so, that sorta ignores a scam that went on for over a decade.

B. Again, so simple that it went on for over ten years? You’re really making the Koss management look like a bunch of idiots…Wait, maybe they’re on to something here.

C. Please. Show us someone who wasn’t addicted to shopping in the 90s and 00s.

Sentencing Memo

Ernst & Young Employee Shared Sue Sachdeva’s Taste in Loot, Lacked Her Fraudulent Self-control

If you work for a partner who likes shamelessly showing off their money, it’s likely that you will think to yourself one of two things: 1) “What a flashy douchebag.” OR 2) “How do I get to be that flashy douchebag?”

For Lily Aspillera, her thinking was more along the lines of the latter, as she made off with $1.7 million from 2002 to 2008 by writing checks to herself that drew on an account of an E&Y client. She used the cash to buy your run-of-the-mill embezzler items: German cars, jewels, vacations, a nice home, etc.

An executive assistant at the giant accounting firm Ernst & Young has been sentenced to more than two years in federal prison for a $1.7 million embezzlement scheme that helped finance a posh San Francisco home, two BMWs, jewelry and stays at luxury resorts, authorities said Wednesday.

Lily Aspillera, 65, of San Francisco was ordered Tuesday by U.S. District Judge Susan Illston to serve 30 months behind bars for mail fraud and tax evasion.

Impressive. Not necessarily by Sue Sachdeva’s standards but impressive nonetheless. However, Lil’s little scam only last a measly 6 years compared to Sachdeva’s twelve year scam because yes, her own greed got the best of her:

“Like so many who commit fraud, over time she increased the amount of money she embezzled, apparently emboldened by not getting caught,” Assistant U.S. Attorney Doug Sprague wrote in a sentencing memorandum.

Defense attorney Donald Bergerson wrote in court papers that his client “has been punished by her own conscience as much as she can be punished by any term of imprisonment.”

The personal guilt over getting caught – after managing to steal money for only six years – would be pretty overwhelming.

Ernst & Young employee gets prison in embezzlement [SFC]

Tree Huggers Are Indirectly Responsible for Undetected Fraud

“How about going online and printing [the statement or report] every month as if it were mailed to you — and actually looking at it?”

~ Stephen Pedneault, a veteran forensic accountant, isn’t crazy about all the benefits of technology.

Area Man Sentenced to Serve Pizzas in Lieu of Jail for Sales Tax Fraud

Buffalo. City Mission. Tuesdays. For a year. Unless you’re really hard up for some nourishment, we would avoid with extreme prejudice. This will make the Denny’s freebies look like a mess hall at Fort Bragg.

Joseph J. Jacobbi, 57, operator of Casa-Di-Pizza, a popular Elmwood Avenue restaurant, was spared a jail term on his massive sales tax fraud case, but the judge Monday ordered him to deliver 12 sheet pizzas to the City Mission once a week on Tuesdays for the next 52 weeks, beginning [yesterday].

After Jacobbi turned over a check for $25,000 — part of the $104,295.31 court officials said he withheld from the state between March 2004 and the end of May 2008 — the judge ordered the weekly pizza deliveries as a form of community service.

“I will leave the choice of toppings up to you,” he told the nonplussed restaurant owner.

Not that we don’t appreciate the judge’s creative sentence but shouldn’t the people at the mission get to choose the toppings?

Oh, wait…

Tax cheat sentenced to serve … pizzas [Buffalo News via TaxProf]

Other Than a Small Matter of Evading $20 Million in Taxes, That Petters Accountant Is a Stand-up Guy

Wehmhoff “did not set out to commit tax fraud for Tom Petters, but slowly became aware of it, then did nothing to halt it, and eventually was right in the middle of it, preparing and filing returns he knew to be false,” the government attorneys wrote. Prosecutors also called attention to Wehmhoff’s otherwise “unblemished” professional history and “striking” remorse. [MSPBJ]

Angelo Mozilo Wishes He Had John Elway’s Problems

Neither man is having a very good week but Moz got especially bad news today that might cause him to cut back on luxury items including 86ing the private jets with tanning beds and the two-tone shirt collection:

The Securities and Exchange Commission today announced that former Countrywide Financial CEO Angelo Mozilo will pay a record $22.5 million penalty to settle SEC charges that he and two other former Countrywide executives misled investors as the subprime mortgage crisis emerged. The settlement also permanently bars Mozilo from ever again serving as an officer or director of a publicly traded company.

Mozilo’s financial penalty is the largest ever paid by a public company’s senior executive in an SEC settlement. Mozilo also agreed to $45 million in disgorgement of ill-gotten gains to settle the SEC’s disclosure violation and insider trading charges against him, for a total financial settlement of $67.5 million that will be returned to harmed investors.

Former Countrywide CEO Angelo Mozilo to Pay SEC’s Largest-Ever Financial Penalty Against a Public Company’s Senior Executive [SEC]

Facebook and Twitter Get Used in a Penny Stock Scam

Before we can get into this particular penny stock scam, it would be wise to define the penny stock scam for the uninitiated. It’s a pile-in, financial porn pump and dump. These particular crooks decided to take to Twitter and Facebook to get new fish to buy into their easy to fill 2×1 matrix. Since Twitter is inundated with all level of bizarre MLM bots and pyramid scheme tweet spam, it’s easy to see how an effective a tool it can be in perpetuating financial fraud.


The Manhattan DA’s office says 11 of the 22 participants used Twitter feeds and websites to lure “investors” (read the fine print, people) to buy a bunch of cheap stocks they’d artificially inflated. They made off with $3 million and “investors” lost $7 million.

I use the word “investor” loosely. If you’re getting your stock picks from some spammy Twitterfeed that isn’t even run by a human being (or solely from one who is, so far you aren’t required to register with the SEC to talk about stocks on Twitter) maybe you had it coming. So far we haven’t seen the offending tweets, if you know where to find them let me know.

Penny stock scams are not limited to Twitter and even former SEC lawyers have been convicted of using them to take advantage of gullible “investors.” Like this guy, who brought civil cases against white collar criminals for 15 years in Fort Worth and ended up getting 8 years in federal prison for his pump and dump activities. It’s unclear if he used social media in his crimes but if he came from the SEC, chances are he’s more into porn than Twitter.

Filed under: doing it wrong

Facebook & Twitter used in stock fraud: U.S. prosecutor [Reuters]

Koss Demands Sue Sachdeva’s Help Winning Their Civil Case Against Sue Sachdeva

The least convicted embezzler-cum-recovering shopaholic Sue Sachdeva could do is help out the company that she ripped off to the tune of $34 million.

Despite how Suz feels about it, her lawyers do not want her to be deposed in Koss’s civil case against her and Grant Thornton until after she is sentenced to prison for the rest of her worthwhile shopping days. Doing so would jeopardize putting her back at Nordstrom’s sooner than they would like:

Sachdeva anticipates receiving a two-level decrease in the federal court sentencing guidelines by accepting responsibility for her actions, her Madison attorney Jack Williams said in court documents filed last month. She reached a plea agreement on the charges in July.

“Submitting to a deposition could jeopardize Mrs. Sachdeva’s opportunity to receive that decrease,” Williams argued.

Koss Corp. vehemently opposes Sachdeva’s motion on the grounds that she needs to cooperate not only with prosecutors in her criminal case, but also with her former employer in its efforts to win a civil judgment against her and former Koss auditor Grant Thornton LLP.

Sachdeva tries to delay her deposition in Koss suit [The Business Journal of Milwaukee (partial subscription required)]

Which SpongeTech Founder Celebrated Suing Reporters and Critics with a Zurich Hooker?

Back in May, we briefly mentioned the alleged fraud at SpongeTech, a company that specialized in sponges that “can be pre-loaded with detergents and waxes, which are absorbed in the core of the product thd during use.” How this is different from using regular sponge isn’t quite clear (dry sponge + soap + water = sponge ready for use). Maybe it’s the “gradual release”?

But that’s neither here nor there. As you may recall, the allegations brought against founders Michael Metter and Steven Moscowitz include making up five customers that accounted for 99% of SpongeTech’s revenues.

But what’s extra-important today is that investigative journalist Roddy Boyd has some interesting details over at his blog, The Financial Investigator that indicate that either Metter or Moscowitz (not exactly clear which) was looking for a little release themselves:

Dicon Technologies LLC, a company that SpongeTech managed to acquire and run into the ground in about one year’s time, was put into bankruptcy in June. As part of that, its schedule of assets and liabilities (which contains line item details of cash outflows) suggests that one of the two at least got something more out of fleecing their investors than money. On April 22 and then again on April 23, two charges were made using a Dicon-issued debit card for $609.55 and $606.14, respectively, to a Zurich-based escort service. [Ed. note: NSFW but hey, you make your own decisions]

If you’re not willing to check out the site for yourself, we’ll share some of the particulars (this is translated from German):

Super horny girls are looking forward to meeting you. Whether at your home, your office, hotel or some other place. As an escort agency, we offer the full service, and round the clock. Looking for a sexy companion for a fancy party, a dinner or the absolutely thrilling adventure of your sexual performance? Then you are at [the] absolutely right [place]! [Ed. note: we took a stab there] We offer for every taste and every occasion the right girl. We are sure, with us you find your dream girl, who suits you! Wherever you are, in Zurich, Bern, Lucerne, Winterthur and Basel, Aarau and Olten – we come to you and visit – no charge, no hidden costs!

Call us and arrange an appointment with the model of your choice. How fancy your needs may be, our taboos and attractive models are open to many hot games and are looking forward to meeting you.

Ladama Escort has been known for some years on the market and knows the needs of customers. We take the time to advise you on important issues and offer you the opportunity to support the idea to take your request accordingly. Experience unforgettable moments and the absolute kick!

Really the best part of this is when Boyd points out that one of the dates where an unforgettable moment may have taken place – April 23rd – was the same day “[T]he company sued several reporters and critics for a host of now entirely preposterous charges centering around defamation and conspiracy (I am referenced in the suit, but not named.)”

So you’re in Zurich, erroneously sue some reporters and critics of your company’s trumped up numbers and you want some company that can provide an erotic massage, leather or latex, a dildo show that may or may not speak a lick of English.

Who wouldn’t, amiright? After a long day of cooking the books you probably figure you deserve some your choice of [insert]job and since the company you just purchased is passing out debit cards, you best make the most of it.

Update: The Dirty Sponge Men Redefine the Concept of Working Capital [The Financial Investigator]

As to Whether Allen Stanford Knew His CDs Were Worthless

“I think it’s obviously obvious.”

~ Forensic accountant Mark Berenblut, responding in the affirmative that R. Allen Stanford knew he was “misrepresent[ing] the liquidity and soundness of the CDs.”

Sue Sachdeva Guarantees That She’ll Be Able to Watch It’s the Great Pumpkin, Charlie Brown a Free Woman

And the World Series too!

Maybe we’re unfairly assuming that Suze is a fan of the Peanuts gang or baseball but what else is going on in between October and November 18th? A few Badger football games?

Koss Corp. embezzler Sujata “Sue” Sachdeva will get a one-month reprieve on her sentencing after requesting, and receiving, an order from U.S. District Court Judge Lynn Adelman.

Adelman said in a brief order that federal prosecutors did not oppose Sachdeva’s request to adjourn the sentencing to Nov. 18 from the previously scheduled Oct. 18.

Koss’ Sachdeva gets sentencing reprieve [Business Journal of Milwaukee]

Release of Satyam Founder Ensures That No Progress Will Be Made in the Investigation for the Foreseeable Future

We’re getting used to this.

Chances of a speedy resolution to l’affaire Satyam receded on Wednesday with the Andhra Pradesh high court granting bail to the company’s founder and former chairman, B. Ramalinga Raju, freeing, albeit temporarily, the last of the accused in a corporate fraud that came to light in early 2009 with Raju’s confession and whose magnitude has since doubled to a claimed `14,000 crore.

Raju’s release is a setback for India’s federal investigating agency, the Central Bureau of Investigation (CBI), which is yet to produce him in court in person. Arrested on 9 January 2009, Raju has been undergoing treatment for Hepatitis C at Nizam’s Institute of Medical Sciences, Hyderabad.

On 16 August, he retracted his confession in the trial court by responding in the negative to questions posed by the court about the fraud. The burden of proof for Raju’s fraud now rests with CBI. And now, he is out on bail—for two sureties of `20 lakh each.

India’s minister for corporate affairs Salman Khursheed insisted that Raju’s release would not “hamper the ongoing investigation”.

Satyam case weakens with Raju’s release [Live Mint]

Bernie Madoff’s Former CPA Is No Longer a CPA

In a formality that serves as the proverbial cherry to achieving his “Worst Auditor Ever” status, David Friehling was officially stripped of his CPA by the New York Department of Education.

The Office of Professional Discipline voted on July 19th to take away the most coveted letters in the accounting profession from the convicted “auditor.” LoHud quotes part of the decision issued by the state, “When each opinion was issued (Friehling) knew that no audit or any examination had been conducted of said financial statements.”


Obviously the OPD made the right decision here but it begs the question: what the hell took so long? Call us impatient or simply devoid of tolerance for a slow moving bureaucracy but it’s not like this one was a toss-up. Do these Professional Discipline folks only meet semi-annually? Were the waiting out the possibility of SCOTUS overruling the conviction a la Andersen?

But never mind that. Friehling has to be devastated with this latest setback. All that studying for nothing! He took the written CPA exam, people. Some of you are familiar with that particular bit of torture but for you younger CPAs, believe us when we tell you that it’s no picnic.

Plus, that CPA jail-tattoo he was looking forward to getting on his neck simply won’t have the same meaning.

Bernard Madoff’s New City accountant loses CPA license [LoHud]

The Restatement That Never Ends: KPMG Hasn’t Received Necessary Docs for Satyam

Back in June we told you about Satyam requesting just a wee bit more time to nail down their restatement of their financial statements. It wasn’t because KPMG and Deloitte weren’t working their asses off, it was more of commitment to get things right. Putting good numbers out there, repairing broken trust, so on and so forth.

Well! The three month extension ends next month but as you might expect, there’s a bit of a problem. More specifically, KPMG is now saying that they haven’t received the documentation necessary to finish the job. Unless everyone is okay with some wild-ass guesses, in which case they can proceed.

[F]or all its documents, KPMG had to depend on the [Central Bureau of Investigation (“CBI”), which is investigating the scam.

NDTV has learnt that KPMG’s analysis of the documents don’t match with the CBI’s. There is a discrepancy between the two which amounts to over [$200 million].

CBI has based its calculations on estimates of Satyam’s assets and liabilities while KPMG says they need documentation to base their estimates.

KPMG says that they didn’t get all the documents needed to make a clear assessment which is why the accounts are likely to be re-stated full of riders.

But again, if you’re cool with some double-entry hocus-pocus, that can be arranged. There’s a merger at stake after all, “This confusion in the numbers could hold up Satyam’s merger with Tech Mahindra, which needs the go ahead from market regulators in India and the US, since Satyam is also listed in the US.”

Good luck getting that U.S. approval.

Satyam accounts restatement: KPMG’s analysis differs with CBI’s [NDTV]

If Your Accountant Marries a Stripper, Should You Assume There’s a Ponzi Scheme Behind It?

Not that it’s impossible for an accountant to score a trophy wife – a former Scores Dancer, no less – but observers of accountant/business manager-cum-Ponzi Schemer du jour (allegedly!), Kenneth I. Starr are pretty confident that it was a decent sign of things going in the wrong direction.

Vanity Fair’s article on “not that Ken Starr” gets a lot of perspective from people that knew Starr, including Blackstone co-founder, Pete Peterson, ” Did something in the way of a profound midlife crisis trigger this behavior?”

But of course, there are people that are more forthright:

Like a Greek chorus, his shocked clients pointed as one to the lavishly endowed Diane, for whom, the indictment notes, Starr purchased more than $400,000 of jewelry from bling jeweler to the rap world Jacob Arabo. “When your business manager marries a stripper,” says one rueful client, “that’s a tell.”

All The Best Victims [Vanity Fair]

Sue Sachdeva Pleads Guilty, Shopaholism Still a Possible Motive

Well gang, the Sue Sachdeva circus has come to an unspectacular end. S-squared pleaded guilty yesterday to the $30-odd million embezzlement at headphone factory Koss. No trial, no media circus (the type we envisioned anyway) and no spectacular cross-examination that could have resulted in a great Law & Order Brewtown spinoff.

Nope. Just a guilty plea, some regret from Suz and the distinct possibility that something might not be right upstairs. Although the MJS reports, “when asked whether she had any mental health issues. [Her attorney, Michael] Hart answered for her, saying there were no issues of mental health that prevented her from understanding the government’s case or the plea agreement,” her statement alludes to some “issues” that led to the thieving:


Sachdeva Release

So while the Sachdeva portion of this program is more or less over (sentencing is October 22), we still have the Koss v. Grant Thornton blamestorming to look forward to. Which will be a for more nerdy exchange but could result in some fun finger-pointing, nonetheless.

Sachdeva pleads guilty, says she regrets fraud [Milwaukee Journal Sentinel]

Convicted Forensic Accountant Lew Freeman Will Be Damned if You Think You’re Getting His Suits

Miami’s go-to forensic accountant-turned Ponzi Schemer Lewis Freeman was sentenced to eight years in prison earlier today. While that’s clearly an embarrassment for him and his family (he reportedly told his kids, “I know you’re smart enough not to follow … the horrible example I set for you.”) the man does have a shred of dignity left.

He still has plenty of friends who think that his charity work should have been enough to keep him out of the slammer altogether. Sam Antar – who did the exact opposite metamorphosis – isn’t impressed by this:

It’s hilarious how many people are supporting this guy. As the criminal CFO of Crazy Eddie, I used to do good deeds such as walking old ladies across the street, too. However, my so-called good deeds never made me any less of a cold-blooded criminal.

Good deeds are used by criminals to build walls of false integrity around themselves to increase the comfort level of their victims and to gain an outpouring of support, if they ever get caught.

But on a more superficial level, Lew Freeman was a dapper fellow. So don’t even begin to think that you’ll be getting your filthy mitts on the man’s fine threads.

[Freeman] spent his final moments of freedom Friday saying goodbye to family and stripping down to his jogging shorts before dozens of people in a Miami federal courtroom….“He didn’t want to give his suit to the authorities,” said Freeman’s attorney, Joseph DeMaria. “It was his idea.”

Freeman sentenced to eight years [South Florida Business Journal]

Koss Files Restated Financial Statements, Just in the Nick of Time

As you may recall, restated financial statements for headphonesmith company Koss were due yesterday and they used all the time they were allowed.

According to our friends aty filed its restated 10-K for June 30, 2009, and 10-Qs for September 30, 2009, December 31, 2009 and March 31, 2010 5 pm, 5:06, 5:11, 5:16 and 5:17 respectively.

Oh and they topped everything off with an 8-K at 5:27 that explains the barrage (not that we need it but, you know, securities law and stuff):

On June 30, 2010, Koss Corporation (“Koss”) released restated consolidated financial statements for the fiscal years ended June 30, 2009 and 2008, and the quarter ended September 30, 2009. Koss filed amendments to its Annual Report on Form 10-K for the fiscal year ended June 30, 2009 and its Quarterly Report for the three months ended September 30, 2009 containing the restated consolidated financial statements for the applicable periods. The restatements were required as a result of previously disclosed unauthorized transactions by Sujata Sachdeva, Koss’s former Vice President of Finance and Principal Accounting Officer.

Koss also amended its Quarterly Reports on Form 10-Q for the three months ended December 31, 2009 and March 31, 2010 to include financial statements, which were omitted from the Company’s reports when previously filed. The release of these financial statements was delayed due to the restatement of Koss’s financials statements required by the unauthorized transactions. With the filings of these amended Quarterly Reports on Form 10-Q, Koss understands that it will regain compliance with Nasdaq Listing Rule 5250(c)(1), which requires the timely filing of periodic financial statements.

That about covers it, doesn’t it? Oh right, the actual numbers. We checked in with forensic sleuth and GC friend Tracy Coenen on these and she gave us some perspective on the restated numbers:

So I’ve taken a run through the restated numbers for 6/30/09 and 6/30/08. Very interesting.

2009 – Revenue was understated by $3.5 million to conceal the fraud, while COGS was overstated by $1.7 million. Overall there is now a loss for 2009, thanks to $8.5 million of theft, but without that, the company would have had profits of $8.2 million, or 19.6% on net sales. Wow!

2008 – Revenue was understated by $2.1 million to conceal the fraud, while COGS was overstated by $1 million. Overall there is now a loss of 2008 of $1.3 million thanks to $5.1 million of theft, but without that, the company would have had profits of $10.7 million or 21.9% of sales.

Pretty impressive stuff. Maybe the company was right when they said everything would be hunky-dory once they got this little mishap out of the way. Chief headphone inheritor Michael Koss explains in the company’s press release, “Given that certain unauthorized transactions were concealed in the Company’s sales and cost of sales accounts, our sales were higher and our cost of sales was lower than previously reported in both 2009 and 2008. This correction has revealed an increase in gross margins for our Company. From this perspective, the Company’s performance was actually stronger than originally reported.”

Tracy continues:

What you see is that 65%-75% of the theft on an annual basis was concealed on the P&L, and the remainder was dumped into the balance sheet, via inflated A/R, Inventory, and fixed assets, and understated liabilities. The adjustments on the balance sheet are large by 2009 because those irregularities were cumulative.

So the bottom line is that the company is very profitable, if shareholders could actually count on them to watch over the money and see to it that the profits aren’t all being stolen. My original theory was that Sachdeva was expensing her theft, and that’s true to some extent, but failure to record sales was presented to me later as part of her her scheme, and she also involved the balance sheet which created a cumulative (and messy) problem.

Oh right! Watching the money. Should probably write that one down. Hopefully we’ve all learned a valuable lesson.

Toys R Us Accountant Will Probably Not Have Much Success Asking Hookers to Return Stolen Money

Back in fall we mentioned a run-of-the-mill whore-supporting accountant that pleaded guilty to ripping off Toys R Us to the tune £3.7 million. Paul Hopes is described as a ‘Walter Mitty character’ by the Telegraph who can now fantasize about what Oz character he is, now that he’s spending 7 years in prison.

Hopes got more bad news recently as he learned that he has to repay £3.36 million of the £3.68 million from Geoffrey.

If he fails to repay the money, he see his sentence more than doubled with an extra 10 years in prison.

The court heard that Hopes, an “accounts payable manager” at the retailer, diverted regular instalments of £300,000 to an account of a fictitious toy manufacturer which he controlled.

He named the fund Dunbar Associates after a prostitute with whom he had become besotted and to whom he eventually handed a total of more than £1.5 million pounds.

He spent at least £2.4 million of the money he stole on five female escorts in all.

That’s a bitch about the additional 10 years if doesn’t repay. But we’re sure that he placed the remaining £900k into a safe, no-load mutual fund so he’ll be able to at start paying at least part of it back ASAP. The sensible accountant in him had to have made one decision with stolen money.

As for the rest of it, we don’t know how successful Johns are at getting refunds in circumstances such as these but if those girls were 100% satisfaction guaranteed, he’ll have to explore other options.

Toys R Us accountant ordered to pay back £3.4m after escort girl fraud [Telegraph]

A Lifetime Prison Sentence Won’t Prevent You from Qualifying for the Homebuyer Tax Credit

Oh the glorious first-time homebuyer tax credit. Championed by Congressional Leaders, popular with Americans and ripe with fraud.

No legislation is perfect though, amiright? You’ve got to take the good with the bad. The latest of the bad comes courtesy of everyone’s favorite bureaucratic nagging mother-in-law, the Treasury Inspector General for Tax Administration. The TIGTA has come out with a new report that shows that the FTHBTC program hasn’t really gotten any better at weeding out the unscrupulous activity.

TIGTA estimates that 14,132 individuals received erroneous credits totaling at least $26.7 million. These erroneous credits included:

• 2,555 taxpayers receiving credits totaling $17.6 million for homes purchased prior to the dates allowed by law.

• 1,295 prisoners receiving credits totaling $9.1 million who were incarcerated at the time they reported that they purchased their home. These prisoners did not file joint returns, so their claims could not have been the result of purchases made with or by their spouses. Further, TIGTA found that 241 prisoners were serving life sentences at the time they claimed that they bought new primary residences.

•10,282 taxpayers receiving credits for homes that were also used by other taxpayers to claim the credit. (In one case, TIGTA found that 67 taxpayers were using the same home to claim the credit.) TIGTA auditors have not fully quantified the total of these erroneous credits, but all indications are that the total will be in the tens of millions of dollars.

But wait! There’s good news! Inspector General J. Russell George was happy to report that there has been improvements, “The good news is that the IRS has made significant strides resolving problems associated with this program. For example, no minors received the Credit, according to our report.”

Progress! They’ve managed to keep the under-eighteen crowd under control. But do we prefer this to prisoners doing life getting our tax dollars? Seems like a toss-up.

Errors, Fraud Still Occur in First-Time Homebuyer Credit Program [TIGTA]

Crowe Horwath Audit Partner Uses “The Tax Department Is on Another Floor” Defense

Auditors and audit firms have few options when it comes to defense strategy when they are sued for missing a fraud. If fraud occurs and an auditor partner claims to know everything that one should about his/her client, then the partner was probably in on it. That’s a little tricky.

However, if fraud occurs and the partner claims that he/she had no knowledge of any unscrupulous activity, then that means the audit sage is really just a two-bit glad-hander that couldn’t tell a debit from a credit.


And that appears to be the case of William Brizendine, a Crowe Horwath partner, who is claiming that he didn’t know about the relationship between executives of Peoples Bank of Northern Kentucky and Bill Erpenbeck who were engaged in scheme that artificially inflated the purchase price of model homes. Brizendine claims that he couldn’t possibly known that his client was involved with such a shifty character A) the bank’s execs didn’t tell him until after the shit hit the fan and B) this Erpenbeck character’s name only came up on the tax returns and why on Earth as an audit partner, would he look at those?

The bank’s lead attorney, Ron Parry, tried to establish that Brizendine was in a unique position to expose the fraud before it became large enough to take down the bank. Parry said auditors had to be aware of the business relationship because they also did the taxes of the company Finnan and Menne created with Erpenbeck.

[…]

Brizendine claimed he didn’t know of the relationship because he was just involved in the auditing of the bank and that JAMS tax returns were done by the tax department on another floor of the company’s offices.

Parry was able to show, however, that JAMS tax documents were sometimes sent directly to Brizendine. Brizendine claimed he never looked at those documents since his department didn’t prepare taxes.

Brizendine also admitted on the stand that he was the person who brought in the contract to do JAMS taxes.

Our Hopes for Sue Sachdeva’s Trial to Be a Circus Are Slowly Fading

The latest out of Brew Town is that a plea deal is in the works for alleged headphone bandit Sue Sachdeva. Rich Kirchen of the Milwaukee Business Journal reports that the U.S. Attorney confirmed that prosecutors were working with S-squared’s defense attorneys on a deal.


As far as all that loot is concerned, Kircher writes that the proceeds from the auction of said loot will go back to Koss.

We would humbly suggest that they get moving on this auction thing ASAP since Koss seems to be running short on time to get their restatements out. They’ve got 13 days and counting before the Nasdaq delists them like Lehman. Get an army of temps to whip that shit out so you can get back to running a ginormous, nepotistic headphone manufacturer.

Satyam: Does Anyone Mind if We Take Another Three Months to Finish Our Restatements?

With just a couple weeks until the June 30 deadline for the company to issue its restated financial statements, Satyam is requesting just a little more time to get this mulligan nailed down. Three months to be precise.

Yes, they’re completely aware that it’s been nearly 18 months since the shit hit the fan. And yes, this is the third time they’ve asked India’s Company Law Board (“CLB”) for an extension on the filing but at this point they figure expectations are so low, no one will get too worked up over it.


Except for an “analyst with a leading brokerage house.” who is quoted in the Business Times, “There is no clarity on what is happening within the company. They should have at least provided the current sales figure or the bench strength. How is the shareholder supposed to rate their stock?”

Since more than a few people might be caught up in “sales figures” and whatnot, Satyam went to the trouble to let everyone know that they’re working hard, ordering in, etc. etc. so you can rest your pretty little heads:

A Satyam official said, “The records have been under the custody of investigating agencies and we recently got a court clearance. Also, our auditors (KMPG and Deloitte) told us they need some more time for the restatement. It’s only a matter of a quarter.”

See? It’s just a matter of a quarter. Plus, you can’t really blame them – KPMG and Deloitte are the ones saying they need more time. Satyam has likely been bugging them for months about wrapping up but KPMG and Deloitte are probably complaining, saying things like, “we can’t find any documentation to supports these numbers” and “this doesn’t add up.”

So, TFB if some whiny analysts don’t like it. We’ll just find out just how big of nightmare these financial statements will be in due course.

SEC: Diebold Financial Execs Would Step Over Their Own Mothers to Meet Earnings Forecasts

The Diebold CFO, controller and Director of Corporate Accounting had a fairly standard routine back from 2002 to 2007 – 1) get daily “flash reports” 2) look at BS estimates that analysts came up with 3) cook up some ideas for meeting those estimates 4) make up the numbers.

Pretty standard stuff, especially if you buy the idea that “legally cooking the books is a critical skill for attracting investors.”


The SEC presented the accounting hocus-pocus earlier today:

The SEC alleges that Diebold’s financial management received “flash reports” — sometimes on a daily basis — comparing the company’s actual earnings to analyst earnings forecasts. Diebold’s financial management prepared “opportunity lists” of ways to close the gap between the company’s actual financial results and analyst forecasts. Many of the opportunities on these lists were fraudulent accounting transactions designed to improperly recognize revenue or otherwise inflate Diebold’s financial performance.

Among the fraudulent accounting practices used to inflate earnings and meet forecasts were:

• Improper use of “bill and hold” accounting.
• Recognition of revenue on a lease agreement subject to a side buy-back agreement.
• Manipulating reserves and accruals.
• Improperly delaying and capitalizing expenses.
• Writing up the value of used inventory.

Gotta give yourself some options, amiright? Can’t just simply rely on channel stuffing!

But in all seriousness, if you’re a top financial executive at a company and part of your daily routine is finding ways to increase profitability through accounting manipulation, at some point you’d have to think to yourself, “This is one shitty business we’re running.”

GAO Audit Uncovers Fraud at Head Start Programs

The Head Start Program, under the Department of Health and Human Services, provides child development services to mostly low-income families and their children. Up to 10% of Head Start-enrolled families can be over-income, with an income 130% above the poverty line.

Of course, things don’t always work out as they are supposed to and the GAO has discovered problems with about half of the centers it examined through the investigation, just a small sample of the 1,600 nonprofit centers running 3,000 Head Start programs.


From the GAO:

GAO received allegations of fraud and abuse involving two Head Start nonprofit grantees in the Midwest and Texas. Allegations include manipulating recorded income to make over-income applicants appear under-income, encouraging families to report that they were homeless when they were not, enrolling more than 10 percent of over-income children, and counting children as enrolled in more than one center at a time. GAO confirmed that one grantee operated several centers with more than 10 percent over-income students, and the other grantee manipulated enrollment data to over-report the number of children enrolled. GAO is still investigating the other allegations reported. Realizing that these fraud schemes could be perpetrated at other Head Start programs, GAO attempted to register fictitious children as part of 15 undercover test scenarios at centers in six states and the District of Columbia. In 8 instances staff at these centers fraudulently misrepresented information, including disregarding part of the families’ income to register over-income children into under-income slots. The undercover tests revealed that 7 Head Start employees lied about applicants’ employment status or misrepresented their earnings.

GAO managing director for special investigations Gregory Kutz told a House education committee last month that “the system is vulnerable to fraud.” No kidding.

While unable to determine the motivation of Head Start employees to commit fraud by adjusting income levels on applications, Kutz theorized that management of nonprofit agencies receiving Head Start funds pressured staff to fudge, fiddle with, or straight up fake figures on applications in order to keep federal funds coming in.

Head Start has served over 25 million children since 1965 and there are currently over 1 million children enrolled in Head Start programs.

Adrienne Gonzalez is the founder of Jr. Deputy Accountant, a former CPA wrangler and a Going Concern contributor . You can see more of her posts here.

Barry Minkow Isn’t Buying Anthony Weiner’s Report That Says Goldline International Is More or Less a Fraud

Last time we saw Congressman Anthony Weiner, he was attempting to discuss the IRS’ role in the enforcement of healthcare with spin-hater Bill O’Reilly. While that particular encounter was quite fun (especially Weiner’s huffing and O’Reilly’s eye-rolling) the video of the Congressman’s recent appearance on Fox Business News is quite good.

But what we’d really like to see him have a conversation with Barry Minkow about how that Barry thinks the Congressman’s report on Goldline International is unmitigated bullshit:


Friend of GC, Tracy Coenen participated in the Minkow’s investigation and she presents the findings over at Fraud Files Blog. Here’s a sample:

Allegation: Weiner criticizes Goldline because of complaints on the website Ripoff Report lodged by consumers who say Goldline representatives improperly hold themselves out as investment advisors.

What Weiner didn’t tell you: Ripoff Report says (in response to the consumer complaints) that you can feel completely confident doing business with Goldline. Weiner gave us only half of the story in his report.

Allegation: Goldline grossly overcharges for its products

What Weiner didn’t tell you: Our sampling of coins listed in the Weiner report showed that Goldline’s prices were very comparable to those of six competitors. He also forgot to mention that companies are free to set whatever prices they like for their products.

Allegation: Goldline says they’ll buy back your gold and silver, but doesn’t “guarantee” that

What Weiner didn’t tell you: It is against the law for Goldline to offer a buyback guarantee. If they offered such a guarantee, they would be in violation of securities laws because their salespeople are not licensed broker dealers.

Regardless of how you feel about Glenn Beck, gold coins, or Anthony Weiner’s Fox News-esque ability for interrupting, it kinda sorta sounds like the Congressman’s investigators don’t know a non-fraud when they see one. Besides, we’ll take the word of a convicted-felon-turned-fraud-buster over any report that comes out of Congress. Especially in an election year.

A message left with Congressman Weiner’s spokesperson was not immediately returned.

Goldline International: An In-Depth Look at Congressman Weiner’s Allegations, And How He Got It Wrong [FDI]
Barry Minkow debunks the Glenn Beck and Goldline International fraud connection [Fraud Files Blog]
Weiner Takes on Goldline and Fox Business — At The Same Time [Weiner.house.gov]

IRS, SEC Put a Stop to the Latest Money Manager Ripping Off the Most Important People in the World

What the hell is gonna to take for a celebrity to get an honest money manager around these parts?

IRS agents arrested Kenneth Starr (not this guy) today who has managed money for celebrities including Martin Scorsese, Uma Thurman and financial shitshows Annie Leibovitz and Wesley Snipes.


The SEC has frozen his assets alleging that Starr “made unauthorized transfers of money in client accounts that ultimately wound up in Starr’s personal accounts.” But it was for a good reason – the man needs roof over his head, according to the complaint “Starr and his companies transferred $7 million from the accounts of three clients between April 13 and April 16, 2010, without any authorization. The transferred funds were ultimately used to purchase a $7.6 million apartment on the Upper East Side in Manhattan on April 16.”

Former New York City Council President Andrew Stein was also named in the complaint, and “is charged with lying to the IRS and federal agents about his involvement with Wind River.” Wind River being a company that Starr allegedly syphoned money to, that Stein used for personal expenses. However we’re mostly shocked to learn that Stein briefly dated Ann Coultershudder.

Financial whiz busted for duping celebs clients Wesley Snipes, Martin Scorsese in $30M Ponzi scheme [NYDN]
Celebrity Investment Adviser Charged With Ponzi Scheme [Gawker]
SEC Files Emergency Charges Against New York-Based Financial Advisor for Defrauding Clients [SEC Press Release]

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]

Despite Being a ‘Wreck of a Man,’ Allen Stanford Managed to Fire Another Attorney

Things are not going so well for the Stan as he awaits trial in H-town.

For starters, he managed to fire another lawyer, which is not going to go over well with Judge David Hittner. Judge Hittner warned Stan about his Steinbrenner-ish ways last month, “You’ve had 10 attorneys attempt to enter this case on your behalf. I will not entertain any further substitutions.”

And secondly, Al doesn’t seem to be very good at making friends:

When Mr. Stanford surrendered to authorities, he was a healthy 59-year-old man,” Stanford’s Houston-based lawyer, Robert Bennett, wrote in a brief on which Harvard Law Professor Alan Dershowitz consulted.

“Mr. Stanford’s pretrial incarceration has reduced him to a wreck of a man: he has suffered potentially life-impairing illnesses; he has been so savagely beaten that he has lost all feeling in the right side of his face and has lost near-field vision in his right eye,” Bennett said.

Naturally, AS’s lawyers want him out and placed on house arrest ASAP since his trial doesn’t start until January but so far no one is convinced that Al won’t bolt the second he gets outside the prison walls.

“Savagely beaten” Stanford asks to be freed [Reuters]

Seems Hard to Believe That a Pre-Loaded Sponge Company Would Have to Resort to Fraud

Today in “they just made the numbers up” news, it’s shocking that a company with this business description:

We design, produce, market, and distribute cleaning products primarily for vehicular use utilizing patented technology relating to sponges containing hydrophilic, or liquid absorbing, foam polyurethane matrices and other technologies. Our products can be pre-loaded with detergents and waxes, which are absorbed in the core of the product then gradually released during use. We have designed and are conducting additional research and development for products and applications using hydrophilic technology and other technologies for kitchen and bath, health and beauty, auto, medial and pet use, which we intend to market and sell as part of our product offering. There is no assurance that we will successfully be able to market and sell products for kitchen and bath, health and beauty, auto, medial and/or pet use.

…would have to make up five customers out of thin air to account for 99% of their revenue:

According to the SEC’s complaint, after several years of relatively little business with a single customer comprising the bulk of Spongetech’s limited sales, Metter and Moskowitz began to paint a more promising and misleading picture of Spongetech’s business. Beginning in approximately April 2007, Spongetech issued dozens of phony press releases touting increasingly larger, yet fictitious, sales orders and revenue. The press releases fraudulently exaggerated the demand for pre-soaped sponges by referencing millions of dollars in sales orders, business, and revenue from five primary customers that purportedly accounted for 99 percent of Spongetech’s business, yet none of those customers actually existed.

Yes, they had an auditor. According to the the last 10-KSB filed it was Drakeford & Drakeford, LLC who has had their own share of trouble.

SEC Charges Spongetech and Senior Executives in Pump-and-Dump Scheme [SEC Press Release]
SEC v. Spongetech, et al. [SEC]

Utah Accountant Who Filed $393 Million in Fake Tax Refunds Can Never Ever Ever Do Taxes Again

Dick Jenkins is a bad, bad tax accountant; the Justice Department says so.

“Given the sheer brazenness of Jenkins’s conduct, he is essentially stealing … from the U.S. Treasury,” said U.S. District Judge Dale A. Kimball, who entered the civil injuction against him last week. Jenkins was accused of filing $393 million in fraudulent tax refunds, including a single $210 million dollar refund for one customer and $402,920 for himself that he didn’t have coming (I don’t care how good you think you are at deductions, that’s BS).


Jenkins was not barred by the court from doing taxes forever because he screwed his clients (they received $294,292 in fake refunds) but because “Jenkins’s conduct results in irreparable harm to the United States.” You heard right, the Salt Lake Federal Court is pissed because he tried to remove $393 million from the Treasury through tax fraud, who cares about the clients?

Maybe this is what the PCAOB was talking about when they mentioned unusual transactions without giving specifics. I’d say it qualifies.

Salt Lake Federal Court Bars CPA from Preparing Tax Returns for Others [Media Newswire]

Cuomo: Espada’s Looting of Nonprofit ‘Reprehensible’

In the largest nonprofit fraud case we’ve ever seen, State Senator Pedro Espada, Jr is getting it from NY Attorney General Andrew Cuomo for perpetrating a $14 million scam using his non-profit as an ATM. Ouch.

Soundview Comprehensive Community Development Corp., a Bronx-based health care non-profit, appears to be little more than a vehicle for Espada’s extravagant lifestyle and Cuomo doesn’t find any of it to be entertainment.


“Siphoning money from a charity would be egregious under any circumstances, but the fact that this was orchestrated by the State Senate Majority Leader makes it especially reprehensible,” Cuomo said in a statement.

Espada’s charity allegedly paid $100,000 for campaign literature, $80,000 on meals for Espada (including $20,000 for sushi – one of JDA’s weaknesses but hey, at least I pay for my own), vacations for the family and $2,500 a month for a co-op rental in the Bronx in which Espada supposedly lives. Double ouch.

If you’re into that sort of thing, you can check out the summons from the AG’s office here.

To date, Cuomo’s complaint is merely a civil one but he has left the door wide open for criminal charges against Espada and 19 others, including family members installed on the charity’s board. Taking a page from the Crazy Eddie fraud handbook, I see.

Espada also allegedly used the nonprofit’s corporate credit card to cover up to $450,000 in expenses that he’s now admitted may have been personal. Snicker snicker, everyone knows the corporate card should only be used for personal expenses if one is trying to fund an affair and hoping the wife doesn’t find out. Duh.

Because being a nonprofit looting Senate majority leader is hard work, Espada took the first 14 weeks of the year off and charged the paid leave to – you guessed it – Soundview. Since its board is packed with friends and family, they approved a $75,000 payout for personal expenses associated with this respite in a lump-sum payment at the beginning of the year.

Espada has responded by claiming Cuomo’s accusations amount to little more than a “witch hunt” meant to advance the AG’s political career. Whatevs.

Meanwhile, Espada’s Senate homies are praying for him. For $14 million bucks, he needs all the Hail Marys he can get, especially since the FBI and IRS raided the clinic this morning. Good luck with that.

So You Want to Be a Forensic Accountant

Forensic accounting is about as sexy as it gets these days for boutique accounting services. For starters, there’s no shortage of work. And even if you’re too inexperienced to start up your own firm, you might be able to cut your teeth at a Big 4 forensic practice or since the SEC seems to getting serious about doing its job, you could go that route.

Hell, even if you’re currently on the other side of this equation (i.e. the perp) it seems to have worked out for at least a couple people, namely Barry Minkow and Sam Ae–>
The AICPA sees the potential and is on the offensive, offering a
“Certified in Financial Forensics” credential starting in 2008 after demand for such a cred came from its members.

The Institute recently published Characteristics and Skills of the Forensic Accountant, a survey of attorneys, forensic CPAs and academics that presents their “views on the qualities they believed were essential in a forensic accountant.”

Surprisingly, the three groups managed to agree on the most important trait, “All three groups surveyed overwhelmingly cited analytical ability as the most essential characteristic of a forensic accountant: 78 percent of attorneys, 86 percent of CPAs and 90 percent of academics.”

And that’s where the agreement ends:

Attorneys believed oral communications to be the most important skill, reflecting the need to express an opinion effectively in a court of law. CPAs, on the other hand, identified critical and strategic thinking as most important, with written and oral communications as second and third, respectively. The academics agreed with the CPAs that critical and strategic thinking was the prime skill, but, interestingly, rated auditing skills and investigative ability as second and third.

Hard to believe this differing opinions here. Lawyers prefer blabbing? Accountants prefer keeping their heads down and academics take it to an even brainier level? Shock.

We shot a message over to Tracy Coenen, friend of GC, forensic accountant for her thoughts and she notes that all these people surveyed are missing something important – intuition:

I think what they’re missing is investigative intuition. It’s common for people to think that a good auditor makes a good forensic accountant, and that’s simply not the case. Some people have a gift for thinking outside the box and can get a gut feel for what’s wrong. Others only have a gift for reconciling numbers and using checklists. The survey addressed investigative intuition, but it didn’t even make it into the top five of core skills. I think that’s wrong on many levels.

We’d have to agree that there is something to be said for raw talent. You can try and teach someone the necessary skills but if they don’t have that sleuth mentality, forensics probably won’t be a natural fit. Sam Antar agrees, and he laid out his own crucial characteristics for us:

The AICPA likes to talk about the skills of an effective forensic accountant, but it ignores the important personality traits required for them to be successful:

• An effective forensic accountant must have a pair of double iron clad balls and a triple thick skin. Prospective forensic accountants can count on making many enemies in the course of their work and must be unhinged by the retaliation that normally follows uncovering fraud and other misconduct.

• The saying, “It takes one to know one” applies to being an effective forensic accountant. If a forensic accountant is not a convicted felon (like me), there must be at least some degree of larceny wired into their personalities. Effective forensic accountants must at least think like a scumbag to understand criminal behavior, techniques, and countermeasures.

• “Critical and strategic thinking” are relatively ineffective unless the forensic accountant exercises “professional paranoia” in the conduct of their work. Effective forensic accountants must be born cynics and skeptics and never accept any information at face value. A healthy degree of paranoia helps.

Without the personality traits enumerated above, no amount of education can help a person be an effective forensic accountant.

Regardless of the differing opinions, the AICPA wants more people getting into forensics and we think that’s a good thing. However, since the chances of a CSI: Bean Counter are nil, more traditional recruitment measures have to be employed.

AICPA Report Educates CPA Firms, Professors on Forensic Accounting [AICPA Press Release]
AICPA Forensic and Valuation Services Center [Website]

Quote of the Day: Tom Petters Will Start Paying You Back in 2060 | 04.08.10

“Every day, I am fraught with pain and anguish for those affected by my actions. For those who lost money, I will work to repair and replace what has been lost.”

~ Convicted Ponzi Schemer Tom Petters, at his sentencing where Judge Richard Kyle sentenced him to 50 years in prison.

KPMG Survey: India is a Hotbed for Fraud Due to Competition, Diminishing Ethical Values

In this morning’s Roundup, we told you about the ICAI belly-aching about the Big 4 circumventing the rules in India to the point of extreme annoyance but technically not breaking said rules.

Strangely enough, BusinessWeek has a story today that cites a KPMG report that found that fraud is on the rise in India due not to shifty international accounting cooperatives but rather to, among other things, the pressure of increased competition in the last two years.


As you might expect, fraud due to financial reporting is the biggest problem. The report cited, “weak rules and the inability of authorities to enforce regulation.” Other things mentioned as opportunities for chicanery:

• “Volatile economic conditions”
• “Increasing business and technological complexities”

So does that mean opportunities for fraud are ubiquitous? Do the respondents really believe that India is the only place where this is happening?

And the attitude/lack of self-control part of your triangle:

• “Diminishing ethical values”
• “Failure on part of managers to act against deviations from established policies and processes”

Diminishing ethical values? Deviating from established policies? Again, the respondents can’t think this is unique to India so shall we just assume that it’s more widespread there?

Some other contributing factors cited were “executives vying for higher pay, weak internal controls and increasing competition…for market share.” But wait! KPMG’s survey said that there were “’encouraging signs’ that mechanisms for detection of fraud through internal audits had improved.” That’s nice despite the fact that sounds similar to something that Overstock management said in their earnings call yesterday.

If you have “weak rules” accompanied by spineless bureaucrats that won’t even enforce those rules, of course you’re going to have some problems. ICAI seemingly wants to blame everything on the Big 4 probably because that’s the going trend these days. We’re not saying you can’t throw some blame towards PwC for missing the phantom $1 billion at Satyam but if your financial reporting regulatory infrastructure is akin to the something out of Deadwood, circa 19th Century, then maybe you should be more consider making some fundamental changes.

Fraud Rises in India as Competition Increases, KPMG Study Says [Bloomberg BusinessWeek]

Former NFL Player Avoids Prison…for Tax Fraud

Typically when current or former NFL player gets into trouble with the law it usually consists of 1) drugs/alcohol 2) assault 3) the occasional (or shockingly frequent?) homicide.


Former Buffalo Bills running back Darick Holmes pleaded guilty last year to 15 counts of tax fraud and order to pay $53k in restitution to the IRS. He had been running a scam in Buffalo showing people how to file bogus tax returns, “Holmes admitted that, while spending time in Buffalo in 2004 and 2005, he helped people file tax returns that listed false information about where they had worked and how much they paid in taxes. When the tax filers received refunds, Holmes got a cut of the money.”

Holmes was sentenced to one year of home confinement which had the prosecutor all bent out of shape since Holmes’ co-defendant, Darryle Buckner, was sentenced to a year in prison and wasn’t found to be as “culpable” as Holmes. The judge felt that Holmes was remorseful (that’s a new one for a tax crime) and was impressed with his work with troubled teens.

Holmes has had a rough go of it, he was shot seven times right after his arrest in 2008, according to the prosecutor it was during an $80,000 marijuana deal. Yeesh, This prosecutor guy is really pissed about this sentence.

The real moral of the story is you’re probably better off listening to Joe Biden (?) than an ex-NFL player when it comes getting tax advice.

Ex-Bill Holmes avoids prison in tax fraud case [Buffalo News]

Koss Fraud May Have Been Due, in No Small Part, to Michael Koss Holding Five Executive Positions

[caption id="attachment_3471" align="alignright" width="150" caption="Hi. I\'m Sue and I\'m a shopaholic "][/caption]

It’s been nearly three weeks since we last picked up the Koss/Sue Sachdeva beat, when we told you about Michael Koss resigning as the audit committee chair of Strattec Security Corp. At that time, Strattec had also elected to give Grant Thornton the boot as its auditor.

Over the weekend, the Milwaukee Journal Sentinel posted a lengthy-ish piece on the “relaxed oversight and lax controls” as the opportunity for the chronic shop ’til you dropper Sue Sachdeva to make off with $31 million. These particular issues (i.e. incestuous management and virtually no internal controls) are a matter of record although it’s interesting to note the new details that come to light.


The article mentions how Michael Koss managed to “serve” in five executive roles at the company: vice chairman, chief executive officer, chief operating officer, president and chief financial officer. PLUS, the aforementioned audit committee chairmanship at Strattec.

Now, we’re not entirely sure what the responsibilities would be for each of the positions at Koss but at a regular company, one of these jobs would result in some or possibly all of the following: insomnia, workaholism, a drug problem, an ugly divorce. Throw in the responsibilities of an audit committee chairmanship and one would assume that Michael Koss walked across Lake Michigan to get to work.

Oh, and just so you’re aware, the Journal Sentinel brings up that MK was an anthropology major. You may have some opinions about that.

The JS also spoke to one of the women that was fired along with Suze, Tracy Malone, who “still speaks highly of the company, although it fired her and objected to her claim for unemployment compensation.” Koss fired Malone because they allege that she “she knew of the misappropriation of funds but failed to report it to superiors.” Ms Malone’s attorney has stated these allegations are false.

So hang on a minute. Your lawyer says you were fired under “false allegations”, the company rejects your claim for unemployment comp, and you still speak highly of said company? Yeesh, have some self-respect lady.

Theft at Koss blamed on relaxed attitude, lax oversight [Milwaukee Journal Sentinel]

The Latest Developments in the Overstock Accounting Mess

In case you haven’t been paying attention, this has been a banner week for the alleged but fairly obvious and ongoing Overstock.com accounting drama (aka “The Quarterly Lie”) and now’s your chance to get caught up. Thank me later (unless you are Patrick Byrne, in which case you are welcome to trash me later out of pure, outraged butthurtedness).

Gross violations of the sanctity of GAAP are not the largest of Overstock’s numerous accounting issues. I know, how could it get any worse? Sam Antar discovers GAAP violations both new and old in this, the latest hilariously fraudulent SEC filing by our friends at OSTK. What makes it even funnier is that they apparently attempted to slip in the new violations with old ones in the hopes that the SEC (and those of us paying attention) may not notice.

Overstock.com nonchalantly lumped in its latest GAAP violations with other GAAP violations previously disclosed by the company on January 29, rather than separately disclosing them. Those newly identified GAAP violations add to a long laundry list of other violations.

Well that’s cute. Now I may not be an SEC filing savant like some among us but, um, something smells wrong here. I’d say I can’t put my finger on it but I can, the only problem is I can’t seem to wash the stink off my finger.

Gary Weiss is also all over it (naturally) and is equally shocked that OSTK would attempt to casually insert new, previously undisclosed accounting violations in with the old, previously disclosed accounting violations as if, you know, it’s a good idea to just lump them all in together while we’re on the subject of violating GAAP accounting. I’m no CPA but if I were advising Overstock on its accounting practices, I might warn against netting its creative accounting in SEC filings for starters. Separately stated items, people, come on.

Do you think it’s merely a coincidence that Overstock has burned through two audit firms in a year’s time? Perhaps not and maybe KPMG has the magic touch that will turn Overstock’s straw financials into gold but if we were the betting type, we’d put our money on indictments and a really messy fall for the Salt Lake City outlet.

We’re all calling bullshit, Overstock. Your turn.

Five Questions with Tracy Coenen

If you’re currently engaged in fraudulent activity at your company, eventually you’re going to find yourself in Tracy Coenen’s Fraud Files Blog. She has published two books on the subject, Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud and more than a 100 articles in industry publications.

When she’s not writing about all things fraud, Tracy runs Sequence, Inc., providing forensic accounting and fraud examination services. The Sue Sachdeva/Koss fiasco happened in her backyard of Milwaukee and she’s been all over it, providing fine quotes on the matter.


Why do you blog?
Somebody has to expose the frauds and scams!

Why should you accountants read your blog?
Because I have interesting insights and I’m not afraid to state my very strong opinions.

Who is your favorite blogger?
Mike Masnick at Techdirt

Best thing about blogging for accountants?
There is a wide open market for accounting bloggers to be thought leaders (and to market themselves) because so few accounting and finance professionals are blogging about their profession.

The biggest issue facing accountants today is…
Truly understanding how fraud happens and how to find and prevent it.

The Latest Homebuyer Tax Credit Scam: Now with HUD!

That the First-time Homebuyers Credit is riddled with fraud is old news. Like all refundable credits, where the government writes you a check if the credit exceeds the tax shown on your return, it’s a magnet for grifters. What’s new is cross-agency efforts enable First-Time Homebuyer Credit fraud, with video.

James O’Keefe, notorious for donning pimpwear and taping ACORN officials happily facilitating tax fraud and child prostitution, and then for getting arrested in Louisiana, took his act to Detroit and Chicago offices of the U.S. Department of Housing and Urban Development posing as a tax credit scammer. One conversation went like this:

The law says that the tax credit maxes out at $8,000 for an $80,000 home. On the tape, O’Keefe asked a staffer, “What if I bought a place for $50,000, but the seller and I agreed to write down $80,000 as the purchase price?”

“Flip it any way you want,” the staffer replied.

What if the place is worth much less — like only $6,000?

“Yup, you can do that.”

This version of the Homebuyer Credit scam can get around the checks the IRS has in place to prevent fraud. The primary IRS anti-fraud check for the homebuyer credit is a requirement that a copy of an HUD-1 form or settlement statement be attached to the 1040 claiming the credit. If the buyer and seller collude to dummy up a HUD-1 form, the “buyer” is reasonably likely to get the credit as long as there isn’t some other item on the return that flags it – such as an address that’s different from the one for the “home” on the settlement statement.

The scammers wouldn’t be out of the woods by any means. The IRS might well catch up with the scammers. But then again, they might not, or if they did, the money could be long gone. For someone living in in a Detroit neighborhood where houses sell for as little as $1,000, splitting $8,000 with a scammer might be one of the less-risky opportunities at hand.

Quote of the Day: No Ponzi Scheme Bailouts | 03.11.10

“[I]t is hard to justify giving special compensation to the investors of Mr. Madoff and Mr. Stanford just because they lost significant amounts of money with little prospect of any recovery.”

~ Peter J. Henning, on Madoff and Stanford victims lobbying members of Congress for a law that would compensate them for some of their losses.

Sacramento Accountant Pleads Guilty; Anyone Looking Need a Fleet of Limos?

William “Don’t Call me Carl the Groundskeeper” Murray pleaded guilty in Sacramento late yesterday to thieving more than $13 million from his clients for nearly a decade. Murray used the funds mostly on himself including “a fleet of limousines, 10 hand-woven Persian rugs, expensive celebrity art, luxury cars, a wine locker at Morton’s, The Steakhouse, sports memorabilia and jewelry.”


Okay, so we’re not terribly impressed with Carl’s loot. Rugs that tie the room together? Fine. Celebrity art? Fine. Sport memorabilia is fine if that’s your thing (Chris Webber jock straps?).

But no homes? Boats? Tahoe is 90 minutes away for crissakes. And why on Earth would you buy a fleet of limos? In Sacremento? Does the Governator ride around in stretch Hummers? Is part of California’s perpetual budget nightmare due to members of the legislature splurging on luxury transportation to go to Starbucks?

And a wine locker at Morton’s? Seriously bad choices, Carl. Apparently accountants are good at stealing money (temporarily of course) but only so-so when it comes to spending it.

Sacramento accountant pleads guilty in $13M fraud case [Sacremento Business Journal]

Reason #10,308 to Not Engage in Dubioius Accounting Practices

So! Thinking about getting a little aggressive with the accounting? Forget aggressive, let’s just say you need to make your numbers next quarter come hell or high water? Maybe there are some pesky internal controls that you would really, really like to get around. For the good of the company of course.

Do whatcha gotta do but before you do, consider the sentence of Charles McCall, the former chairman of McKesson Corp. first. If, after reading his story, you decide it’s still worth the risk, then proceed with your plans.

A former chairman of San Francisco-based McKesson Corp. has been sentenced in federal court to 10 years in prison for securities fraud in an accounting scheme that cost shareholders $8.6 billion in 1999.

Charles McCall, 65, of Delray Beach, Fla., was given the prison term by U.S. District Judge William Alsup in San Francisco on Friday.

McCall was convicted by a jury in Alsup’s court in November of four counts of securities fraud and one count of circumventing the company’s internal accounting controls.

Prosecutors said that in the fraud, HBO & Co. and McKesson HBOC inflated revenues by backdating software sales and concealing side letters that would have allowed buyers to cancel proposed purchases that the company had counted as revenue.

This poor bastard got sentenced to 10 years (at 65, he’ll be lucky if manages to serve the full sentence) and he probably doesn’t know a internal control from his ass, other than at one time, he thought it was enough of a hindrance that he’d just ignore it altogether. If anyone has an extra copy of COSO laying around, kindly send it his way. He’ll have time to get caught up on the idea.

Ex-McKesson chairman gets 10 year sentence [SF Chronicle]

Sam Antar at Stanford: Jr. Deputy Accountant Gets a Live Dose of the Criminal Mind

Last week, I took the day off from work and headed down the 101 to sit in on former Crazy Eddie CFO and self-proclaimed criminal Sam E. Antar speaking to Stanford MBA students on, what else, fraud and the criminal mind. Sam is a friend of both JDA and Going Concern and it was excellent to see him recount the Crazy Eddie story to an auditorium of future MBAs.

Ironically, he showed up wearing an SEC baseball cap, which is akin to JDA owning a Federal Reserve hoodie (I do) and didn’t waste a second getting to the point of his visit.

“I’m gonna be the guy that fucks you guys up,” he told the room before beginning the presentation, “I’m a racist and a scum bag but I hate everyone equally.”


I could literally see the audience squirm in response. I already knew Sam was a tad offensive and was counting on getting an extra dose of it; there was no squirming in the media corner.

“Political correctness helps the criminal, not you,” he explained, “It limits your behavior, not the criminal’s.”

Right.

Sam went into auditor standards like the fraud triangle though insisted there is no such thing as rationalization. “Criminals know right from wrong. We don’t plan on failure.”

We even got to see a vintage Crazy Eddie ad spot as Sam’s presentation was spliced with images from the 2006 Court TV episode of Masterminds detailing the Crazy Eddie fraud. That’s for the sections that Sam doesn’t tell you; the details are plentiful in his spiel though don’t let that catch you off guard, he insists he is still just as dangerous as he was before he was caught.

You can get the Crazy Eddie backstory from Sam’s Web site (if you aren’t fortunate enough to be able to play hooky and see him spook Stanford MBA students in person) here, here, and here. If you get the chance, I highly recommend checking him out live (leave your valuables in the car).

And then there’s the video of Sam and Eddie meeting up decades after their fraud was discovered — and Sam gave up his family (and, consequently, himself) — that I recommend you not miss.

So long as there are unqualified auditors being piled into audits they aren’t trained to perform, there will be guys like Sam E. Antar figuring out a way to distract, deter, and delude them, no matter what it takes. For Crazy Eddie, it didn’t take much. What’s to say things have changed?

Sam Antar Photograph by Buck Ennis for Crain’s New York Business and Investment News.

SEC Reminds Us of Past Mistakes; Arrests Madoff Associate

One day after it was reported that fraud detecting superman Harry Markopolos called the Commissioners “idiots” and Mary Schapiro “coldly polite” (that’s a compliment, isn’t it?) the SEC is charging another Madoff associate.

Today the Commission brought charges of “conspiracy, securities fraud, falsifying books and records of a broker-dealer, false filings with the U.S. Securities and Exchange Commission and filing false federal tax returns,” against Daniel Bonventre, according to several reports.


Bonventre was the master of making the internal accounting look legit, as opposed to lying to peoples’ faces directly. He was responsible for accounting entries that “[hid] the scope of the investment advisory operations and understating Madoff liabilities by billions of dollars.”

The Commission also brought civil charges against Bonventre, “alleging he helped disguise Madoff’s fraud and financial losses at Madoff’s firm by misusing and improperly recording investor money to create the false appearance of legitimate income.”

While the rest of the media focuses on the who, the what and the how long will that person be spending in FPMITA prison, “Dirty Diapers” Markopolos probably just wanted remind everyone that A) the SEC missed this by ignoring him several times and B) he still doesn’t think too highly of them. Oh, and he has a book coming out.

DOJ, SEC Announce Charges Against Madoff Exec Bonventre [Dow Jones via WSJ]
Madoff Aide Bonventre Becomes Sixth Charged in Fraud [Bloomberg BusinessWeek]
Madoff Whistleblower Slams Obama’s SEC: ‘They’re A Bunch Of Idiots There’ [HuffPo]

Former Pastor Figures Eighth Commandment Is Overrated, Steals from Nonprofit

It takes a certain kind of person to defraud a non-profit organization. In a word: scumbag. Now consider the idea of a pastor of a church defrauding a non-profit organization. A non-profit organization that is tasked with providing cash and food for those in dire need. This person would be David Croyle, the former pastor of Stahl Mennonite Church in Johnstown, PA.

Croyle embezzled around $18,000 from St. Francis Sharing and Caring Inc. from 2005 to 2008. We figure he Either came to the conclusion that doing the Good Lord’s work was incredibly overrated or that he just plain needed the money. Seriously though, $18k? Did he really want a slightly used Honda Civic or something?


Regardless of the motive, Croyle has been charged with “56 counts each of theft by deception, failure to make required disposition of funds, theft and receiving stolen property,” according to the Daily American.

Part of Croyle’s duties at St. Francis was to determine eligible individuals, so he created C&A Management Services. Magically this company was “eligible” and then he requested checks payable to the company. Eventually someone found this a little fishy and hired Wessel & Co. a local accounting firm who discovered the embezzlement.

Somewhere God is shaking his head and somewhere else entirely, Sue Sachdeva is thinking, “Was this guy even trying?”

Police: pastor swindled nonprofit [Daily American]

Koss: Financial Results Will Be Better Now That the Whole Fraud Thing Is Over

Hopefully! Headphone master Michael Koss officially announced that things are back to business as usual at casa de Koss now that Sue Sachdeva’s sticky fingers aren’t around.

“The company has continued to operate in the normal course of business despite the disruption resulting from the discovery of the unauthorized transactions,” Chief Executive Officer Michael J. Koss said in a statement. “We believe that the elimination of these unauthorized transactions will enhance our future operating results.”


What a relief! No mention of how the pending lawsuits against Koss will affect operating results, however. We understand that it could be a sensitive issue at the moment.

The Company filed its 10-Q yesterday and an 8-K today that explains that those restated, not-so-good results that you’re expecting will be done pronto. Don’t expect to see anything before April but not past June, swear.

After that, watch out everybody, Koss will be on fire, blowing those analyst estimates out of the water. In the meantime things are moving along and those internal controls, yeah, they’re working on them but they reminded everyone in the 10-Q that even if they designed the best internal control systems on Earth, it still wouldn’t guarantee that bad stuff won’t happen:

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. It is possible for even the best control system to be circumvented by those with the intent, knowledge and opportunity to do so.

Not to put to fine a point on it but a half-assed control system would have detected this fraud, never mind the “well conceived and operated” part.

With fraud claims exposed, Koss expects better financial results [Milwaukee Journal-Sentinel]

At Blackwater, Strippers and Hookers are Legitimate Expenses

Allegedly of course!

It’s bad enough when even the Iraqis are saying GTFO but that’s exactly what’s happened to about 250 ex-Blackwater employees still lingering around Iraq. “I don’t think the Iraqi government is willing to have any Blackwater member, even if they are working in other companies,” government spokesman Ali al-Dabbagh told CNN in January.”

But it isn’t just the Iraqis with a Blackwater bone to pick – former Blackwater employees allege the security firm hired strippers, prostitutes, and “incompetent personnel” to defraud authorities while working security details in Iraq and Afghanistan, as well as in post-Katrina Louisiana.


WTF is going on here? If you’re going to rip off the federal government, I guess it’s good to get your money’s worth, especially if you know their internal controls are for shit.

CNN:

Melan Davis, who was involved in record-keeping, said Blackwater billed the government for prostitution services in Afghanistan from a Filipino female, whose name was on Blackwater’s payroll roster under a category called “Morale Welfare Recreation.”

She said Blackwater billed the woman’s plane tickets and monthly salary to the United States.

The lawsuit also said a vendor being paid for “cleaning services” in Louisiana was providing strippers.

Blackwater spokespeople (the company is now known as Xe, though we won’t pontificate as to why another rebranding might be appropriate at this time) claim Davis must be trippin’. Strippers? Hookers? Fake receipts? No way!

“The allegations are without merit and the company will vigorously defend against this lawsuit. It is noteworthy that the government has declined to intervene in this action,” Xe told CNN.

This is not the first time Blackwater has been accused of defrauding the government; California’s Henry Waxman (D) accused the contractor of running a tax scheme to avoid paying what his staffers estimated as $15.5 million in Social Security and Medicare taxes, $15.8 million federal income tax withholding and $500,000 in unemployment taxes between May 2006 and March 2007.

So? What’s worse? Not paying taxes or expensing “Morale Welfare Recreation” on Uncle Sam’s dime?

(UPDATE) Ex-Hospital CFO Pleads Guilty to Tax Evasion, Health Care Fraud

In dubious CFO news, Vincent Rubio, the former financial chief at Tustin Hospital and Medical Center, agreed to plead guilty yesterday for paying kickbacks to “marketers” who recruited homeless people from the Skid Row area of Los Angeles.

Rubio pleaded guilty to health care fraud and tax evasion; he was the fifth person to charged in the investigation that is still ongoing. He faces fifteen years in prison After the homeless people were treated, the hospital billed Medicare and Medi-Cal for unnecessary treatments.


The AP piece doesn’t have much to it so we’re got to wondering all sorts of things like: A) Who discovered this fraud? Was it — gasp — the auditors? B) what were these unnecessary treatments? We’re these displaced individuals getting checked for hernias or less intrusive procedures? C) how much was Medicare and Medi-Cal charged? Are we talking Madoff-esque numbers? D) When the homeless were finished up at the hospital did they strap them to a rickshaw and send them back out in the streets or did they try to help them for real?

We called the hospital to find out more and we were connected to a spokesperson, who told us that she could not comment on the matter. She informed us that our message would be relayed to the hospital’s President, James Young. At the time of posting, we had not heard back from him. We’ll update this post with any comment or further information.

Ex-hospital CFO pleads guilty in homeless scam [AP via SF Chronicle]

UPDATE Friday, February 12th: We received the press release from Pacific Health, the owner of the Hospital:

February 11, 2010

Press Release

Pacific Health Corporation learned of the allegation that a third party made improper payments to Vince Rubio on November 30, 2006. Upon receipt of the allegation, Pacific Health Corporation contacted its outside counsel to investigate the allegation.

Within one day of the allegation being received, Pacific Health Corporation took employment action in the matter, placing Mr. Rubio on leave. Within one week, Pacific Health Corporation terminated the employment of Mr. Rubio.

After the completion of the its internal review and taking the employment action, Pacific Health reported the matter to law enforcement officials. That took place in early 2007.

Ernst & Young Gives Going Concern Warning to Allen Stanford Liquidator

If you’re given the task of running down assets that are left over from a Ponzi scheme, you’d think somone would throw in a little something for the effort. That stolen money is going to find itself after all.

Well! Apparently this is not so, especially as it relates to UK recovery firm Vantis. Vantis has been scouring the Earth for any of the plunder left over from the Allen Stanford hide the $7 billion game.

Six months into it, Vantis can’t get paid for its treasure hunt services and now Ernst & Young has said that the firm’s very life is at stake if they can’t start convincing some people to pay up.


Among the excuses that Vantis is claiming are the fact that most of the assets in the U.S. have been frozen and that the U.S. liquidator Ralph Janvey doesn’t play nice.

But hey! They’re still confident everything will be hunk-dory, “The UK recovery firm said it remained ‘confident’ that it would be able to recover its fees ‘in due course’ but said the timing remained uncertain.”

So more or less you’re day-to-day, right? Welcome to the prestigious Club of Those Ripped off by Allen Stanford.

Vantis faces going concern threat over liquidation of Allen Stanford’s bank [Telegraph]

Koss VP Sue Sachdeva: Shopping Addict or Burgeoning Retail Queen?

It’s been a few days since we had read anything on embezzler of the year 2009, Sue Sachdeva. We figured the whole thing was on the fast track to getting resolved since her attorney started claiming that the woman has an addiction. Well today, we checked in over at Fraud Files Blog where Tracy Coenen has come up with a theory that blows the whole shop until you die argument out of the water

Since Sue had 461 different pairs of shoes that ranged from sizes 8 to 14 (!) and 34 fur coats, Tracy is thinking that S-squared didn’t have a shopping problem; she was simply working on achieving an entrepreneurial dream:

She couldn’t have worn that range of sizes, but that range would have been perfect for someone retailing the merchandise. I bet we’re going to hear soon that Sachdeva was selling this merchandise to domestic and overseas retailers at a fraction of their wholesale value.

It’s already a matter of record that SS was having garage sales at her desk, so Tracy’s logic makes sense. We’re now convinced Sue had bigger plans.

Obviously enamored with the idea of a Sachdeva Goodman’s, Suze may have gotten a little ahead of herself as Tracy notes, “[I]n late 2009 (which is fiscal 2010 for Koss) she got greedy and stole much more in a six month period than she ever had in one year.”

The indictment lists six wire transfers (total of nearly $3 mil) from Koss accounts directly to her personal AMEX accountant, so girl was definitely burning up the plastic. That’s not an addiction; that’s inventory. Besides, isn’t a shopping addiction a faux-addiction? The real tragedy here is that a dream was not reached and an accounting firm was fired. Neither makes us feel very good.

(UPDATE) Fooling Auditors Is So Easy, a Caveman Could Do It

Thumbnail image for sachdeva_sue.jpgIn the spirit of O.J. Simpson, Tracy Coenen explains today, that if Sue Sachdeva stole $31 million and spent most of it on some high-end threads and then sold the crap she didn’t want, it would’ve been a snap.
We’re not talking Enron type stuff here, just making off with cash:

All it takes are three steps to make this fraud nearly undetectable in a company in which the other members of the executive team aren’t paying attention. (And don’t worry, dear readers, that I may be giving away any secrets to committing fraud and covering it up. Any serious fraudster already knows these three things.)
1. Keep the fraud off the balance sheet.
2. Keep all transactions below the scope of testing by the auditors.
3. Don’t commit fraud during the last month of the fiscal year and the first month of the following fiscal year.
Can it really be this simple?


Here’s the quick and dirty:
Point 1 – Tracy notes that 80% of audit procedures focus on the balance sheet so if Suze was slamming all the bogus transactions amongst 4 or 5 income statement expense lines, no one would get wise to it.
Point 2If she did it, Suze probably knew what GT’s scope was (it’s supposed to be super-secret). She could plan the amount of her transactions to fall under this scope every time.
Point 3 – Auditors probably spent most of their time looking at bank statements for the last month of the fiscal year and the first month of the subsequent fiscal year. The rest of them don’t get much attention.
So there you have it. Throw in the incestuous management team, auditors that may be trying to get on each other and you’ve got a slam dunk.
UPDATE 7:38 pm: We got to wondering if Tracy’s statement “Any serious fraudster already knows these three things” were true, so we asked one. Crazy Eddie CFO, Sam Antar indulged us:

[Tracy] is correct. The fraudster always has the initiative because they are judgment oriented in their approach to crime, while auditors are process oriented in their approach to audits. In other words, fraudsters know how to think out of the box to solve problems and achieve their goals, while auditors rely too much on process and procedure to accomplish their missions. In the criminal’s world, judgment is more powerful than process.

We’ll leave it there (that’s right CNN).
Koss Corp.: Commit the fraud and cover it up [Fraud Files Blog]

Report: Accountants Responsible for Two-thirds of Embezzlements

Sue_Sachdeva.pngOkay auditors. No more excuses. You should already be giving everyone the stink-eye the second you walk in the door but now we’ve got a REPORT about embezzlement in the US of A that gives you all kinds of hints on who you should suspect — provable or not — of being the next Sue Sachdeva.
The Marquet Report on Embezzlement is an annual report put out by Marquet International, Ltd., a “an independent investigative, litigation support and security consulting firm” according to the company’s website.


Here are some of the key findings in the report:

• Women are more likely to embezzle than men.
• Men embezzle significantly more than women.
• Perpetrators typically begin their embezzlement schemes in their early 40s.
• By a significant margin, embezzlers are most likely to be individuals who hold
financial positions within organizations.
• The two broad industry categories that have the highest risk for a major
embezzlement are Financial Services and Government Agencies/Municipalities.
• The Financial Services industry suffers the greatest losses from major
embezzlements.
• On average, major embezzlement schemes last about 4½ years.
• California and Florida are consistently the states that experience the greatest
losses from major embezzlements.
• The vast majority of major embezzlements are caused by sole perpetrators
• Gambling is a clear motivating factor in driving some major embezzlements.
• Fewer than 10 percent of embezzlers have a criminal record – less than expected, but enough to suggest that pre-employment screening has merit.

Some takeaways: 1) Immediately suspect anyone that gambles. Even if it’s bingo games in the church basement; 2) If you’re in California or Florida you’ve got your work cut out for you; 3) By “a significant margin” they mean accounting/finance personnel were responsible in 67% of the cases. Executives were second, in 13% of the cases.
Annnnd since we know you’re wondering: the largest embezzlement case in 2009 was none other than our Suz. Based on the criteria above, it appears that she should have been under suspicion from day one but you can’t fault Grant Thornton too much. This is only the second report that Marquet has issued so chances are she still would have made off with $20 million. Oh well, you’ll get ’em next time!
The top ten from 2009:
Picture 2.png
Report On Major Embezzlements 2009.pdf

Koss VP Got Busted Just When She Was Getting Really Good at Stealing Money

Sue Sachdeva had this stealing money thing down so cold that she continually outdid herself, stealing greater sums of money every year until she was caught last month (thanks AMEX!).

If you need more evidence that everyone near this company (we’re looking straight at you Koss Family and Grant Thornton) was completely clueless, this should satisfy you.

Here’s the run down for the last six fiscal years ending June 30:

2005 – $2,195,477

2006 – $2,227,669

2007 – $3,160,310

2008 – $5,040,968

2009 – $8,485,937

Q1 and Q2 of 2010 – $10,243,310

Jesus, she was really getting good those last six months. Girl couldn’t spend it fast enough.

We’d really like to hear from GTers from the Milwaukee/Chicago offices to let us know how TPTB are handling everything. Maybe it’s NBD to them but we just want to know. We thought this story would stop getting ridiculous but so far it continues to impress.

Koss: Unauthorized transactions increased over years [The Business Journal of Milwaukee]