SEC

Be Careful What You Tweet, Mary Schapiro Might Be Watching

We’ve considered why your firm might want a social media policy in the past but it’s clear now that it’s not only wise to keep employees in check but to keep the SEC from breathing down everyone’s necks.

Regulation FD (fair disclosure) is meant to prevent selective disclosure by issuers of materialon and insider trading liability in connection with a trader’s “use” or “knowing possession” of material nonpublic information. The rules are designed to promote the full and fair disclosure of information by issuers, and to clarify and enhance existing prohibitions against insider trading.


Without a social media policy, any employee of the company tweeting or blogging about company events could broadly be assumed to be company communications. Whether or not these people are officially representing the company or not is irrelevant; selective disclosure could be as simple as a poorly-timed post about a company secret (i.e. “our awesome new product will be released in two weeks!”) on an employee’s Facebook page, which is public but limited to the employee’s 100 or so family and friends. In theory, an astute friend could take this as a buy signal, knowing X product will cause quite a storm once it hits the market. Welcome to insider trading: social media edition. Notice here that the intention is not what is important but rather the event itself. The SEC doesn’t care if the employee meant to pump up his or her employer’s stock but rather that the employee chose to selectively disclose information not readily available to the public that the employee is privy to to a limited group of people.

How far could the SEC take this?

The SEC’s guidance set forth three considerations to help determine whether information posted on corporate websites is considered “public.”

* Whether a company’s Web site is a recognized channel of distribution;
* Whether information is posted and accessible, and therefore disseminated in a manner calculated to reach investors; and
* Whether information is posted for a reasonable period so that it has been absorbed by investors.

The guidance goes on to clarify that statements made on blogs or other interactive websites are subject to the anti-fraud provisions of the federal securities laws, and companies cannot require investors to waive protections under the federal securities laws as a condition of using such interactive websites.

The only control companies have in this is to have a very clear, intelligent social media policy that either limits or forbids disclosure of non-public information through blogs and social media. This isn’t new (this interpretation was released in August of 2008) but what is new is the rumor that the SEC is beginning to send deficiency letters to registered investment advisers it examines, specifically those who do not have a social media policy in place.

A document request list sent by the SEC to some advisers asks for a broad range of data related to social media use, according to a compliance alert from ACA Compliance Group. Among other things, the SEC is seeking to identify how often advisers use social media websites such as Facebook, Twitter, LinkedIn, YouTube, Flickr, MySpace, Digg, Redditt, as well as any blogs used by, or subscribed to, by the adviser. They are also looking at communications made by, or received by an adviser on any social media website including among others, blog postings, messages, and/or tweets.

According to the WSJ, an SEC spokesman declined to comment on the deficiency letters. However, an SEC official said at a compliance conference last month that misuse of social media is an issue on their radar in SEC examinations and enforcement. Misuse being defined as investment advisers who fake information on their LinkedIn profiles to buff up their appearance to investors.

Technology at SEC Good Enough for Viewing Porn, Not Reliable Internal Controls

Last year the Government Accountability Office issued a report that called attention to the SEC’s accounting system (or lack thereof). Reuters now reports that the SEC will admit in testimony tomorrow that the material weaknesses in their accounting system are largely due to technology that would make your grandparents laugh.

“These material weaknesses are unacceptable,” the SEC’s top division directors said in prepared testimony that was viewed by Reuters. They added the “root causes” of the problems stem from “years of underinvesting in financial system technologies.”

It should be noted that while the accounting systems were not quite up to snuff for the GAO, the equipment used by employees was sufficient for viewing a metric asston of porn, which we just learned moments ago, was even more widespread than initially thought.

SEC says its accounting problems stem from technology [Reuters]

SEC Whistleblower Program Not Exactly Knocking Anyone’s Socks Off

The corporate watchdog has received just 168 complaints alleging corporate fraud in the first 6½ months of the program’s existence, according to data the SEC provided to The Post through a Freedom of Information Act request. The tally is from July 22, 2010, when the program was launched, through Feb. 2, 2011. At that rate, the SEC is receiving less than one tip a day — hardly the flood that led the agency to delay staffing the program while it pleaded with lawmakers for more funding. [NYP]

SEC’s Storied Tradition of Producing Unreliable Financial Statements Makes for an Awkward Situation

Namely, the Commission would like a bigger budget because Dodd-Frank is making their lives increasingly difficult but since they got such bad marks from the GAO the Times reports that it might be just a tad inappropriate since, ya know, the SEC’s own numbers are, arguably, unreliable:

Since the commission began producing audited statements in 2004, the Government Accountability Office has faulted its reporting almost every year. Last November, the G.A.O. said that the commission’s books were in such disarray that it had failed at some of the agency’s most fundamental tasks: accurately tracking income from fines, filing fees and the return of ill-gotten profits.

“A reasonable possibility exists that a material misstatement of S.E.C.’s financial statements would not be prevented, or detected and corrected on a timely basis,” the auditor concluded.

The auditor did not accuse the S.E.C. of cooking its books, and the mistakes were corrected before its latest financial statements were completed. But the fact that basic accounting continually bedevils the agency responsible for guaranteeing the soundness of American financial markets could prove especially awkward just as the S.E.C. is saying it desperately needs money to increase its regulatory power.

S.E.C. Hurt by Disarray in Its Books [NYT]

Enron Whistleblower: WikiLeaks > SEC

“I don’t think the SEC’s culture is one that will make this effective one iota,” said Sherron Watkins, a one-time vice president at Enron, referring to expanded protections for whistleblowers included in the Dodd-Frank financial reform law. If she was in the same situation today as 10 years ago, when Watkins approached government authorities about accounting fraud at Enron, she would probably instead take her information to an organization like WikiLeaks, Watkins said. [Paper Trail]

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

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

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

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

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

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

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

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

(UPDATE 2) Who Will Be the New PCAOB Board Members?

~ Update 2 includes statement from PCAOB and clips from the SEC press release.

The SEC is set to make announcement circa any minute this afternoon and rumor has it that there might be last minute changes that amount to “horse trading among commissioners.” Intrigue at the SEC that has nothing to do with porn! Who knew?!?

Francine McKenna also seems excited about it:


Your wild-ass guesses are welcome at this time. We’ll keep you updated once we hear the names.

UPDATE: Silly us. Tammy Whitehouse over at Compliance Week had the potentials yesterday and we somehow overlooked it:

The SEC is expected to name John Huber, former director of the SEC’s Division of Corporation Finance, Lewis Ferguson, former general counsel to the PCAOB, and Jay Hanson, national director of accounting for audit firm McGladrey & Pullen, to three seats that have been open at the PCAOB for more than a year. It’s not clear whether one of those three will be appointed chairman, or whether that title will be granted to Daniel Goelzer, the acting chairman who has held down the fort since Mark Olson resigned in July 2009.

Granted, there are lots of rumors swirling about this “horse trading” so we wouldn’t be surprised if one of these guys (i.e. Huber, Ferguson or Hanson) got dropped for [fill in the blank].

UPDATE 2: And now, perpetually acting PCAOB chair Dan Goelzer:

“I am very pleased that the SEC has appointed three outstanding individuals to the Board. I look forward to working with Jim Doty, Lew Ferguson, and Jay Hanson in continuing to carry out the Board’s mission to protect investors and promote public confidence in audited financial reporting.

“At the same time, I want to thank the retiring Board members, Bill Gradison and Charley Niemeier, for their immeasurable contributions as founding members of the Board and for their years of dedicated service. Investors owe them a debt of gratitude.”

So the trade was Huber for James Doty (who is taking the Chairmanship), the former SEC General Counsel. INTERESTING (at least in some circles). Fro the SEC press release:

Mr. Doty is currently a Partner at Baker Botts LLP in Washington, D.C. He has represented clients on a wide range of securities law matters. He also counsels boards of directors and audit committees on problems arising under the Sarbanes-Oxley Act and related issues. Mr. Doty served as the SEC’s General Counsel from 1990 to 1992. He received an LL.B. from Yale Law School, an M.A. from Harvard University, an A.B. from Oxford University, and a B.A. from Rice University.

Yale, Harvard, Oxford and Rice? Elijah Watt Sells winners, eat your hearts out.

IFRS: Four. More. Years.

Comments reflected “a lot of unanimity around, if we go in this direction, allowing sufficient time for companies to adjust,” said Schapiro in a question-and-answer session following her keynote address to the American Institute of Certified Public Accountants’ national conference on accounting and auditing issues for public companies. “It’s likely to be a minimum of four years,” but that’s still a point for the SEC to decide, she said, assuming it decides to incorporate IFRS into U.S. capital markets. [Compliance Week]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

UPDATE 2: Here is the full statement from Deloitte:

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

Complaint_Deloitte

GAO: SEC Basically Needs to Replace Their Entire Accounting System

“These material weaknesses are likely to continue to exist until the SEC’s accounting system is either significantly enhanced or replaced, key accounting activity in other systems is fully integrated with the accounting system at the transaction level, information security controls are significantly strengthened, and appropriate resources are dedicated to maintaining effective internal controls.”

~ From a report issued by the Government Accountability Office

SEC Intends to Take All the Time It Needs to Make Up Its Mind on IFRS

So any retiring knights out there feeling anxious can just cool it. And rubbing elbows with Deloitte talking about how great things will be isn’t going to make the Commission work faster.

That being said, Jim Kroeker will have you know that things are going along swimmingly, per the Commission’s press release:

“The staff has invested significant time and effort in executing the Work Plan, and we’ve made great progress to date,” said SEC Chief Accountant Jim Kroeker. “This progress report emphasizes the importance of transparency in the staff’s activities, and can help the public’s understanding of the magnitude of this project and the staff’s progress.”

So make no mistake; the SEC is on this. However, they do have some concerns, “[W]hether the international accounting rule maker is truly independent and whether IFRS is high quality.”

So if you could address those two things, that would be appreciated. Sir David.

Berkshire CFO Attempts to Kill SEC Curiosity

When you’re a folksy billionaire octogenarian, you can afford to have others do your dirty work. In the case of the Warren Buffet, he has Charlie Munger hate on accountants for anything and everything under the sun.

Similarly, when the SEC comes calling, the Sage of Omaha can ring up Berkshire CFO Marc Hamburg. On the one hand, you might expect WB to shoot the breeze with the SEC employees since they likely share a fondness for a certain film genre.


However, when the conversation turns to business, the old man probably claims that he has an interview on tax cuts, a bridge match with WHGIII or a lunch date with Z-Knowles. This allows him to turn the SEC scamps over to Hamburg who plays a little bit of a bad cop to the Buffet’s chatty, dirty Grandpa. The CFO then lets the SEC know, in no uncertain terms, that they’re barking up the wrong tree:

In an April letter, the SEC asked Berkshire why it was not recording write-downs on shares with $1.86 billion in unrealized losses, all of which had been in that position for at least a year.

Given the duration of those losses, the SEC said they appeared to be more than temporary and as such should have been written down.

In a detailed response, Berkshire Chief Financial Officer Marc Hamburg said most of the losses with more than 12 months’ duration as of December 31 were concentrated in Kraft and U.S. Bancorp, shares it had acquired in 2006 and 2007.

Hamburg said that as of December 31, Berkshire determined both companies had enough earnings potential that their share prices would eventually exceed the original cost of the stock. It also has the “ability and intent” to hold the shares until they recovered, he said.

“We believe it is reasonably possible that the market prices of Kraft Foods and U.S. Bancorp will recover to our cost within the next one to two years assuming that there are no material adverse events affecting these companies or the industries in which they operate,” Hamburg said.

And if this doesn’t work, they’ll just schedule Munger for another speech.

SEC questioned Warren Buffett’s Berkshire on loss accounting [Reuters]

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]

Charlie Gasparino: “As of right now” Erin Callan Won’t Be Charged By the SEC

But next Monday, Wednesday or post-Labor Day, it could be a completely different story!


We’re waiting on the video from our friends over at FBN but for now here’s what the Fox Business News Breaking specialist has for us:

On who from Lehman Brothers will be charged by the SEC:
“There is a lot of speculation as to who will be charged in the SEC’s investigation of Lehman Brothers. As of right now at least, it will not be the former CFO Erin Callan.”

On how we know Callan is not being charged:
“Attorney for Callan Robert Cleary tells FBN she has not received a Wells Notice. As of right now she is not going to get charged. It could still come.”

On when the charges will be filed:
“This is an interesting development because the end game on this is clearly happening. And it’s the two year anniversary of Lehman’s bankruptcy Callan was one of the people putting out the positive image of the firm as it was imploding that’s what they are investigating.”

So there you have it! Things are day-to-day for Ms Callan (i.e. kicking it in the Hamptons, dating a fire fighter). The situation remains fluid.

American Apparel Goes Two for Two: Q2 Filing Late, Q1 Still Pending

Fashion cannot be rushed people. Ask the gang at Fashionista. They’ll tell you.

However, it is still a business which sometimes includes dealing with auditors and other outsiders that want various documentation and whatnot that can simply be delayed if it hinders the creative process. That is, if you keep your company private.

But the second you want to give the American public the opportunity to invest in your skinny jeans, leggings, and thong tanks, you’re playing on the SEC’s turf. This means things happen on a schedule. Delays, excuses or pervy CEO behavior will not be tolerated if it results in late filings.

American Apparel expects to report a loss in the second quarter and requested additional time to file its financial report after the resignation of its auditor, Deloitte & Touche.

It is the latest bump for the hipster clothing chain. The company said in May that it expected a loss for the first quarter, but it hasn’t filed that quarterly report with the Securities and Exchange Commission either.

[…]

Deloitte & Touche resigned as American Apparel’s auditor after the accounting firm said it found material weaknesses in internal controls over financial reporting. Deloitte requested more information from the company to determine if there were problems in previous financial reports. American Apparel said Tuesday it was working to provide that information.

Dov! These 10-Qs are not optional! Plus, it doesn’t help that the financial data that you provide is less reliable than what the federal government issues.

Presumably Marcum was persistent (and comfortable) enough to get you to push the button before so what the hell man? You’ve got them back on your team so this should NBD. You best get the house in order before your stock gets banished to the sheets that are the same color as your undies.

American Apparel expects 2Q loss; request 2Q delay [Bloomberg BusinessWeek]

Earlier:
Deloitte Resigns as American Apparel Auditor; Hotness of Engagement Team Presumably Not an Issue

Ex-Deloitte Partner, Son To Shell Out $1.1 Million to Settle SEC Insider Trading Charges

Last we had heard of Thomas Flanagan, Deloitte had just taken him to the woodshed, successfully suing him for breach of fiduciary duty, fraud, and breach of contract related to Tom’s insider trading activities of Deloitte clients.

Now it’s the SEC’s turn to get in on this sweet action. The Commission charged Flanagan and his son, Patrick Flanagan for insider trading of Deloitte clients including Best Buy, Sears, Walgreens and Motorola.

Why Flanagan, the 38-year veteran of Deloitte and Vice Chairman of Clients and Markets, who thought that in the twilight of his career, the best move would be to engage in some insider trading is still a mystery. Since he was presumably pushing 60, one couldn’t help but wonder if perhaps his memory was going and he just totally spaced the independence thing.

But actually, no. Turns out, Tom Flanagan is just a liar:

According to the SEC’s complaint, Thomas Flanagan concealed his trades in the securities of Deloitte’s clients and circumvented Deloitte’s independence controls. He failed to report the prohibited trades to Deloitte, lied to Deloitte about his compliance with its independence policies, and provided false information to Deloitte’s personal income tax preparers about the identity of the companies whose securities he traded.

Flanagan & Son will be paying over $1.1 million in disgorgement and fines for their little stunt. And Robert Khuzhami had a little reminder for anyone else out there that thinks they can get cute, “Flanagan’s insider trading violated one of the most fundamental rules of public accounting. All audit firms should learn from this unfortunate episode and employ vigorous controls designed to ensure compliance with the SEC’s auditor independence rules.”

SEC Charges Former Deloitte Partner and Son With Insider Trading [SEC Press Release]
SEC Complaint Against Thomas Flanagan and Patrick Flanagan [SEC Complaint]

A Few People Noticed That New Century Execs Settled with SEC

There were just a few reports late on Friday about New Century Execs settling with the SEC over the failure to make certain risk disclosures. However, it’s worth mentioning that this is still more coverage than the settlement that KPMG reached with New Century that we reported on in late June – still no press release – but that’s neither here nor there.


SEC statement:

On July 29, 2010, the Commission accepted settlement offers from three former officers of New Century Financial Corporation. Brad A. Morrice, the former CEO and co-founder; Patti M. Dodge, the former CFO; and David N. Kenneally, the former controller, consented to the relief described below without admitting or denying the allegations in the Commission’s Complaint. The settlement offers, which have been submitted to the Court for approval, are contingent upon the Court’s approval of a global settlement in In re New Century, Case No. 07-931-DDP (C.D. Cal.).

The Commission’s complaint alleges, among other things, that New Century’s second and third quarter 2006 Forms 10-Q and two late 2006 private stock offerings contained false and misleading statements regarding its subprime mortgage business. The complaint further alleges that Morrice and Dodge knew about certain negative trends in New Century’s loan portfolio from reports they received and that they participated in the disclosure process, but they did not take adequate steps to ensure that the negative trends were properly disclosed. The Commission’s complaint also alleges that in the second and third quarters of 2006, Kenneally, contrary to Generally Accepted Accounting Principles, implemented changes to New Century’s method for estimating its loan repurchase obligation and failed to ensure that New Century’s backlog of pending loan repurchase requests were properly accounted for, resulting in an understatement of New Century’s repurchase reserve and a material overstatement of New Century’s financial results.

That “material overstatement” consisted of a $90 million profit in Q3 of ’06 that was actually a $18 loss.

Morrice, Dodge and Kenneally all agreed to cough up some of their ill gotten gains and were subjected to fines but they didn’t come close to Michael Dell sized proportions.

SEC Settles with Former Officers of Subprime Lender New Century [SEC]
Ex-New Century Managers to Pay $1.5 Million Over Subprime Lender’s Failure [Bloomberg]

Dell Is the Latest to Go the SEC’s Woodshed; Settlement of $100 million for Fraudulent Accounting, Disclosure Violations

Sure, it’s not $550 million and it’s certainly not Goldman Sachs but the SEC seems to be having a pre-tay, pret-tay, pre-tay good July. On the other hand, some people think this settlement is more harsh than Goldman’s since Michael Dell was fined personally and Lloyd Blankein was not.

In addition to Dell, the man, the SEC charged former CEO Kevin Rollins and former CFO James Schneider for their roles in the disclosure violations related to payments the company received from Intel Corp. Former VP of Finance Nicholas Dunning and former Assslie Jackson were charged for their roles in the fraudulent accounting.

Washington, D.C., July 22, 2010 – The Securities and Exchange Commission today charged Dell Inc. with failing to disclose material information to investors and using fraudulent accounting to make it falsely appear that the company was consistently meeting Wall Street earnings targets and reducing its operating expenses.

The SEC alleges that Dell did not disclose to investors large exclusivity payments the company received from Intel Corporation to not use central processing units (CPUs) manufactured by Intel’s main rival. It was these payments rather than the company’s management and operations that allowed Dell to meet its earnings targets. After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company’s decreased profitability.

The SEC charged Dell Chairman and CEO Michael Dell, former CEO Kevin Rollins, and former CFO James Schneider for their roles in the disclosure violations. The SEC charged Schneider, former regional Vice President of Finance Nicholas Dunning, and former Assistant Controller Leslie Jackson for their roles in the improper accounting.

Dell Inc. agreed to pay a $100 million penalty to settle the SEC’s charges. Michael Dell and Rollins each agreed to pay a $4 million penalty, and Schneider agreed to pay $3 million, to settle the SEC’s charges against them. Dunning and Jackson also agreed to settle the SEC’s charges.

“Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Michael Dell and other senior Dell executives fell short of that standard repeatedly over many years, and today they are held accountable.”

Christopher Conte, Associate Director of the SEC’s Division of Enforcement, added, “Dell manipulated its accounting over an extended period to project financial results that the company wished it had achieved, but could not. Dell was only able to meet Wall Street targets consistently during this period by breaking the rules. The financial results that public companies communicate to the investing public must reflect reality.”

The SEC’s complaint, filed in federal district court in Washington, D.C., alleges that Dell Inc., Michael Dell, Rollins, and Schneider misrepresented the basis for the company’s ability to consistently meet or exceed consensus analyst EPS estimates from fiscal year 2002 through fiscal year 2006. Without the Intel payments, Dell would have missed the EPS consensus in every quarter during this period. The SEC’s complaint further alleges that Dell’s most senior former accounting personnel including Schneider, Dunning, and Jackson engaged in improper accounting by maintaining a series of “cookie jar” reserves that it used to cover shortfalls in operating results from FY 2002 to FY 2005. Dell’s fraudulent accounting made it appear that it was consistently meeting Wall Street earnings targets and reducing its operating expenses through the company’s management and operations.

According to the SEC’s complaint, Intel made exclusivity payments to Dell in order for Dell to not use CPUs manufactured by its rival – Advance Micro Devices, Inc. (AMD). These exclusivity payments grew from 10 percent of Dell’s operating income in FY 2003 to 38 percent in FY 2006, and peaked at 76 percent in the first quarter of FY 2007. The SEC alleges that Dell Inc., Michael Dell, Rollins, and Schneider failed to disclose the basis for the company’s sharp drop in its operating results in its second quarter of FY 2007 as Intel cut its payments after Dell announced its intention to begin using AMD CPUs. In dollar terms, the reduction in Intel exclusivity payments was equivalent to 75 percent of the decline in Dell’s operating income. Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding if Dell added AMD as a vendor. Nevertheless, in Dell’s second quarter FY 2007 earnings call, they told investors that the sharp drop in the company’s operating results was attributable to Dell pricing too aggressively in the face of slowing demand and to component costs declining less than expected.

The SEC’s complaint further alleges that the reserve manipulations allowed Dell to materially misstate its earnings and its operating expenses as a percentage of revenue – an important financial metric that the company itself highlighted – for more than three years. The manipulations also enabled Dell to misstate materially the trend and amount of operating income of its EMEA segment, an important business unit that Dell also highlighted, from the third quarter of FY 2003 through the first quarter of FY 2005.

Without admitting or denying the SEC’s allegations, Dell Inc. consented to the entry of an order that permanently restrains and enjoins it from violation of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13a-13. Dell Inc. also agreed to enhance its Disclosure Review Committee and disclosure processes, including the retention of an independent consultant to recommend improvements to those processes and enhance training regarding the disclosure requirements of the federal securities laws.

Michael Dell and Rollins settled the SEC’s disclosure charges, without admitting or denying the SEC’s allegations, by each agreeing to pay the $4 million penalties and consenting to the entry of an order that permanently restrains and enjoins each of them from violating Sections 17(a)(2) and (3) of the Securities Act and from violating or aiding and abetting violations of other provisions of the federal securities laws.

Schneider consented to settle the disclosure and accounting fraud charges against him without admitting or denying the SEC’s allegations, and agreed to pay the $3 million penalty, disgorgement of $83,096, and prejudgment interest of $38,640. Dunning and Jackson consented to settle the SEC’s improper accounting charges without admitting or denying the SEC’s allegations. Dunning agreed to pay a penalty of $50,000. In their settlement offers, Schneider, Dunning and Jackson consented to the issuance of administrative orders pursuant to Rule 102(e) of the Commission’s Rules of Practice, suspending each of them from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after five years for Schneider and three years for Dunning and Jackson.

The SEC’s investigation is continuing as to other individuals.

James Blenko, Shelby Hunt, Jonathan Jacobs, Ian Rupell, Robert Peak, Brian Palechek, and Jeffrey Anderson conducted the SEC’s investigation in this matter. Litigation efforts in the ongoing case will be led by Jack Worland and Richard Skaff.

The SEC acknowledges the assistance of the Federal Trade Commission in this investigation.

Dell, Man and Machine (Maker), Close to Settlement with SEC

In SEC-settlements-that-don’t-involve-Goldman Sachs news, Dell put their annual shareholders meeting on a brief kibosh because the company and founder Michael Dell are thisclose to settling charges for omitting disclosures for dealings with Intel Corp.

Dell Inc proposed a settlement with U.S. financial regulators over a long-running investigation of the computer maker’s accounting, and adjourned its annual shareholders meeting on Friday.

Dell adjourned the meeting until August 12 to give shareholders time to consider the discussions related to the settlement, which was announced shortly after the meeting convened.

It said earlier that the company and Chief Executive Michael Dell submitted a settlement proposal, which was still subject to approval by the U.S. Securities and Exchange Commission as well as a U.S. District Court.

The probe into accounting matters began in 2005. Dell later acknowledged accounting errors and restated financial results from 2003-2007.

Nothing to get too worked up over probably since the company only set aside $100 mil but if the entertainment for the meeting had to cancel (e.g. Dallas Cowboys cheerleaders), there’s probably a lot of upset people down in Round Rock.

The SEC Should Be Careful Not to Spend All $550 Million in One Place

Hopefully they’ll spread it around, you know, with lifetime memberships to: ladyboyjuice.com, kinkycomments.com, sexyavatars.net, cafebuckskin.blogspot.com et al.

Goldman Sachs has agreed to pay $550 million to the Securities and Exchange Commission, the largest penalty ever paid by a Wall Street firm, to settle charges of securities fraud linked to mortgage investments.

Under the terms of the deal, Goldman will pay $300 million in fines to the Treasury Department, with the rest serving as restitution to investors in the mortgage-linked security. Goldman will not admit wrongdoing, though it will admit that its marketing materials for the investment “contained incomplete information.”

That doesn’t sound nearly as fun but we understand a few people may have gotten hurt on this deal.

Goldman Settles With S.E.C. for $550 Million [NYT]

The Frank-Dodd Act Could Solve Part of the Unemployment Problem

“In 2,500 pages of dense prose, we’re about to receive legislation that could better be entitled ‘The Lawyers’ and Lobbyists’ Full Employment Act.”’

~ Harvey Pitt, former SEC Chairman, graduated with his law degree from St. John’s in 1968.

Despite Big Name Supporters, SEC Self-funding Falls By the Wayside

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

As President Obama gearsng financial regulatory bill, one little discussed but important potential provision that did not survive the final version would have provided for self-funding by the Securities and Exchange Commission.

This is a policy advocated by people like New York Senator Chuck Schumer and Representative Barney Frank as well as SEC chairman Mary Schapiro. It would enable the agency to use some or all of the fees and/or fines it collects to pay its bills.


In fact, other financial regulators are currently self-funded, including the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

Wachtell Lipton Rosen & Katz points out that a proposal that the SEC should be able to fund itself based on the fees it collects was ultimately rejected. Instead, the conferees agreed that the SEC should continue to be subject to the Congressional appropriations process, and provided for certain baseline appropriations through 2015, according to the law firm. It adds that the proposed Act also requires the White House to submit unaltered to Congress the SEC’s annual budget, and establishes a $100 million reserve fund.

This is a controversial issue and current and past commissioners are divided over whether this is a good idea.

Opponents say self-funding would create a conflict of interest because it would increase the SEC’s incentive to seek the largest possible fines. Former commissioner Luis Aguilar, who supports self-funding, is sensitive to these concerns. So, he supported self funding, but only based on fees and registrations, not fines.

He had pointed out that the 2010 budget of slightly more than $1 billion is well below the $1.4 billion or so the SEC figures to bring in from those fee sources. Self-funding could also enable the SEC to attract better candidates by increasing the pay scale, something Representative Frank says he supports.

One former chairman told me last year he doubts Congress would go along with self-funding. He asserts the system of campaign finance has given the business community leverage over Congress, whose main lever of control over the SEC is its budget. “When big patrons come to see them and say stop the SEC, the power of the purse is critical to them,” the former chairman insists.

Back in June, 40 prominent securities lawyers fired off a letter asserting that a self-financed SEC “is one of the most important parts of the financial services reform legislation presently before you.”

They pointed out that from 2005 to 2009, the SEC collected about $7.4 billion from transaction and registration fees, which were turned over to the government, but Congress appropriated just $4.5 billion for the agency’s budget during that period. “The chronic under-funding of the SEC has severely impeded the SEC’s ability to keep pace with market and technology changes,” the lawyers stated. “After shrinking in size for a number of years, the SEC is only now beginning to grow again. Meanwhile, the securities industry and corporate activities it regulates have grown tremendously in size and sophistication over the last two decades.”

They noted that between 2004 and 2007 SEC enforcement and examination staff declined 10 percent and its information technology initiatives plunged 50 percent, while at the same time, trading volume doubled, the number of investment advisers jumped 50 percent and the funds they manage grew almost 60 percent.

In a speech in June, Schapiro insisted that self funding ensures independence, facilitates long-term planning, and closes the resource gap between the agency and the entities the SEC regulate. “In the process, it allows the SEC to better protect millions of investors whose savings are at stake,” she added.

Self funding also ensures an SEC that is more effective at identifying and addressing the kinds of risk that dealt a significant blow to the American economy, she told her audience.

Schapiro pointed out that in the immediate post-Enron era, the SEC saw significant increases in its budget. But funding dropped just as markets were growing in size and complexity. At the height of the pre-financial crisis frenzy, Schapiro added, the SEC was actually forced to reduce staff. “Only now can we afford to begin to develop the new technology that will allow us to evaluate, store and retrieve the kind of tip information that might stop the next major fraud,” she said.

Schapiro said self funding would have many benefits for investors: It would allow the SEC to increase its professional and technical capacity, to keep up with the financial industry’s rapid growth; It would enhance our long-term planning process, allowing the SEC to address the increasingly sophisticated technologies, products, and trading strategies adopted by the financial services industry; and, It would provide the flexibility to react to developing risks in the same way that our domestic and foreign counterparts did during the recent financial crisis, with rapid staffing and strategic responses that help control systemic damage.

She added: “To truly protect investors to the best of their abilities, they need the independence, planning ability and resources that self funding provides.”

What’s the Next Move in This PCAOB Situation?

Jonathan Weil over at Bloomberg has a new column up today and he is less enthusiastic about the Supreme Court decision in FEF v. PCAOB than say, everyone else.

JW is mostly wondering why we should keep having an “independent” PCAOB inside the SEC since the board members will now be at the mercy of the towing the political line inside the Commission, “While the court

Were PwC and Grant Thornton Ignoring Overstock.com’s Accounting Issues?

Yesterday we briefly picked up the Overstock beat as Sam Antar pointed out that everyone’s favorite Salt Lake City resident got a little confused about when they knew about their gain contingency existed that resulted in some contradictory disclosures.

As you may misremember, this arose from the company for recoveries from underbilled fulfillment partners by improperly claiming that a ‘gain contingency’ existed under accounting rules.”

Now Sam has pointed us to some correspondence between the SEC and Overstock that indicates that PwC wasn’t concerned about the issue until the Commission pointed it out and succeeding auditor Grant Thornton was unmoved until Overstock brought it up:

Please tell us if, and the extent of, your auditors’ national accounting office involvement in these issues during audit of your 2008 financial statements or the reviews of your fiscal 2009 quarterly filings.

PwC served as our auditor during the audit of our 2008 financial statements. PwC has informed us that it did not consult with its national accounting office regarding the above issues when they were identified in Q4 2008 or Q1 2009. However, in connection with this response to your letter dated November 3, 2009, PwC has consulted with its national office in regard to both the fulfillment partner under billing and partner overpayment issues and based on context of this being an area that is a highly facts and circumstances based issue that requires significant judgment where reasonable parties have different views, PwC continues to concur with our accounting and disclosure consistent with its reflection of the underlying economics and our past practices of not billing or collecting for our billing errors, rather negotiating for future price concessions that were contingent on future sales.

Grant Thornton (“GT”) reviewed our Q1 and Q2 2009 quarterly filings. To our knowledge the GT local engagement team did not review these issues with its national accounting office at the time of our Q1 and Q2 2009 quarterly filings. In early October, as we prepared our response to your October 1 letter, we asked GT for its national office’s opinion. It was our understanding at the time that GT’s national office concurred that we had used an appropriate (if not preferred) accounting treatment. Only after we received your November 3 letter, did we become aware that GT’s previous “national office” opinion had in fact been an “informal request” only, and not a “formal request.”

In the case of PwC, it’s entirely possible that they just trusted that OSTK knew what they were doing and went along with it. Obviously a huge mistake. When the SEC came calling however, they moseyed through it again and rang up the accounting wonks at 300 Mad.

But the Grant Thornton engagement team, who came in after all this went down was seemingly on board with it without consulting with its own national accounting gurus even though the SEC was already on this like stink on a monkey. GT making an “informal request” of its national office on an SEC inquiry seems a little tepid.

HOWEVER! You have to remember that this is all in the words of Overstock which hasn’t always been forthcoming/reliable/truthful in its filings. Then again, maybe there’s something to this whole auditor “Yes men” thing.

Does Anyone Have a Crayon for Mary Schapiro?

“The SEC’s efforts are, and will always be, a work in progress. We will continually refocus our energies as circumstances warrant, as new ideas are offered and considered, as we consider your opinions and suggestions. But the outlines are emerging, the colors are being filled in, and I am hopeful that a portrait of a financial marketplace more stable and efficient than the one we saw in 2008 is beginning to emerge.”

SEC Chair Mary Schapiro at CEO Quarterly Meeting of the Business Roundtable on the SEC’s ongoing efforts to color inside the lines. Apparently the Commission was free-handing all this time.

Mary Schapiro Isn’t Too Concerned About the Convergence Delay

Earlier in the week we heard the devastating news that the FASB and IASB’s convergence efforts, despite a good hustle, would not meet the G20’s deadline of June 2011.

FASB Chairman Bob Herz indicated that this was a serious case of the Boards having bigger eyeshades than their double-entry stomachs could handle but he tried to squelch the disappointment by assuring everyone that the mission is not a failure and the Boards would “get most if not all of [the accounting standard proposals] done by the end of 2011.”

Roberto and IASB Chair Sir David Tweedie, feeling bad about how the whole thing turned out, decided to send a letter to the G20, presumably to keep them from getting their panties in knot:

It is expected that this action by the FASB and IASB will not negatively impact the Securities and Exchange Commission’s work plan, announced in February, to consider in 2011 whether and how to incorporate IFRS into the US financial system.

We appreciate the support of the G20 for the development of a single set of high quality global accounting standards. The two boards remain committed to achieving that objective. We shall continue to provide timely updates regarding our progress.

Ohhh, right. The SEC. What do they think about all this? Judging by Mary Schapiro’s attitude of “assuming completion of the convergence projects” as a precursor to IFRS, she’s totally cool with it, making her thoughts known in a statement yesterday:

The boards believe that the modified plan will contribute to increased quality in the standards because it provides additional time for stakeholders to thoroughly consider the proposals and give both boards quality feedback. I view this as time that is well invested.

Quality financial reporting standards established through an independent process are threshold criteria against which the Commission’s future consideration of the role of IFRS in the U.S. reporting system will be based. I foresee no reason that the adjustment to the targeted timeline for certain joint projects should impact the staff’s analyses under the Work Plan issued in February 2010, particularly when that adjustment is designed to enhance the quality of the standards. Indeed, focused efforts on those standards the boards consider highest priority for the improvement of U.S. GAAP and IFRS will facilitate the staff’s analyses.

Accordingly, I am confident that we continue to be on schedule for a Commission determination in 2011 about whether to incorporate IFRS into the financial reporting system for U.S. issuers.

In other words, no rush guys. Take it from Mary, this happens all the time.

IASB and FASB update to G20 Leaders [IASB]
Chairman Schapiro Statement on FASB-IASB Decision to Modify Timing of Certain Convergence Projects [SEC]

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.”

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]

You Can Forget About Landing That CFO Position at the SEC

Mary Schapiro took some time out of her fraud fighting Friday to ask Kenneth Johnson to quit acting as the Commission’s CFO and to take on the official responsibility of running the Office of Financial Management.

Mr Johnson (KenJo?) vehemently accepted the offer and threw in a shout out to the boss, “I’m honored to accept this new role at such an important time for the agency. Chairman Schapiro is deeply committed to strong financial management, and I’m proud to lead the agency’s initiatives in this area.”


Presumably, the CFO position isn’t a kicking-down-doors type job so Johnson’s first order of business should be to determine the savings on a group rate at one porn site that can appropriate service all tastes.

Washington, D.C., May 21, 2010 — Securities and Exchange Commission Chairman Mary L. Schapiro today announced that Kenneth A. Johnson has been named Chief Financial Officer for the agency.

Mr. Johnson has been serving as acting CFO for much of the past year. The agency’s CFO is responsible for leading its Office of Financial Management, which handles the budget, finance, and accounting operations for the SEC.

“I’m delighted that Ken has agreed to take on this role at the SEC,” said Chairman Schapiro. “His deep experience in the financial arena will be incredibly valuable as we grow as an agency.”

Mr. Johnson added, “I’m honored to accept this new role at such an important time for the agency. Chairman Schapiro is deeply committed to strong financial management, and I’m proud to lead the agency’s initiatives in this area.”

Mr. Johnson, 37, joined the SEC in 2003 as a Management Analyst in the Office of the Executive Director. In that role, he advised on all aspects of the budget process, developed strategy initiatives, and responded to inquiries from the Office of Management and Budget (OMB) and Congress regarding the SEC’s budget and financial operations. He became Chief Management Analyst in 2006.

Mr. Johnson has served as a valuable staff expert on legislative proposals, and he managed the development of the SEC’s long-range Strategic Plan that would guide agency policy through 2015.

Prior to joining the SEC staff, Mr. Johnson worked as a Commerce Analyst at the Congressional Budget Office. His primary responsibility in that role was to analyze and report on the budgetary effects of committee-approved legislation.

Mr. Johnson earned his Masters in Public Policy from the Kennedy School of Government at Harvard University, and earned his BA at Stanford University.

At Which Point the SEC Will Announce That “Things Are Progressing” on IFRS

“As we move forward, we are committed to providing public progress reports beginning no later than October 2010 and frequently thereafter until the work is complete.”

~ SEC Chief Accountant James Kroeker’s testimony for tomorrow’s hearing before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.

Michel Barnier: EU Is ‘Impatient’ with SEC, FASB Pussyfooting Around on Accounting Standard Convergence

Michel Barnier is certainly doing his damnedest to make a name for himself by virtue of the accounting standards convergence and scrutinizing the role of auditors.

Accountancy Age reports his latest soundbite at a speech in Washington today, telling “leaders” that while their efforts to converge international accounting standards and U.S. GAAP are admirable, that he and the entire continent of Europe are getting sick of the stalling.

“I appreciate that the US authorities have made progress towards convergence, but in the EU, we are getting impatient.”

Apparently Mr Barnier has had enough with this little dance going on between the FASB and the SEC. The FASB has been punting to the SEC fairly regularly and we’re all aware of the SEC’s tendency for inaction, so maybe Barns figured that a Frenchman calling out Americans on their own turf would help move things along.

Barnier tells US that Europe is “getting impatient” on accounting convergence [Accountancy Age]

Grant Thornton Survey Shows That CFOs Might Be Ignoring the SEC’s XBRL Deadline

It has been well established in these pages and elsewhere that the SEC has had its share of problems. Take your pick: 1) missing the biggest financial fraud in the history of the world 2) hiring an army of porn-addicted accountants and lawyers to protect our markets 3) waffling on IFRS 4) did we mention missing huge frauds?

To be fair, the Commission has been working hard to redeem itself by cracking down on dubious activity (from Goldman to Overstock), hiring more fraud experts and giving those tranny porn-obsessed employees a second chance.


Regardless of the turnaround-in-progress, CFOs in this country seem to have ceased taking the SEC seriously. Sure the 10-Ks and Qs still get filed but those were in place long before the wheels fell off.

In a recent survey, Grant Thornton found that, despite a SEC deadline for public companies to utilize eXtensible Business Reporting Language (XBRL), a fair amount of CFOs don’t seem all that worried about reporting their financial statements using the technology:

64 percent of public companies do not currently report financial results using eXtensible Business Reporting Language (XBRL); and of those, half have no plans to in the future even though the SEC mandated that public companies have to report their financials using Interactive Data by 2011.

“It’s concerning that almost a third of public companies still have no plan on using XBRL to report their financials despite the requirement that all public companies comply with XBRL filing requirements by mid-year 2011,” said Sean Denham, a partner in Grant Thornton’s Professional Standards Group and a member of the AICPA’s XBRL Task Force. “I foresee a lot of companies playing catch up as the 2011 SEC deadline approaches.”

Whether this lack of action can be attributed to defiance, fear of technology, or pure laziness is not explained but we wouldn’t rule out the possibility that the SEC has an outright mutiny on its hands.

A third of public companies have no plans to use XBRL – despite SEC mandate requiring XBRL use by 2011 [GT Press Release]
Also see: XBR-Lax [CFO Blog]

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]

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

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

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


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

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

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

US seeks secure funding of global accounting board [Reuters]

Goldman Sachs May Inspire a Redefinition of “Fiduciary Duty”

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

One bit of commentary I’ve noticed in the blogosphere following yesterday’s Goldman show is that the bank could toggle back and forth between being an investment advisor and a broker dealer when it came to any fiduciary duty it owed to investors in its crappy mortgage deals.

That may or may not be a loophole that needs closing, as Senator Collins’ line of inquiry suggested. Surely, banks like Goldman shouldn’t be able to use it as such.

But it’s important to remember that this is not an issue in the SEC’s case against the bank.


Take another look at the complaint. It charges Goldman with violations of three specific provisions of the securities laws, Section 17 (a) of the Securities Act of 1933 and Section 10 (b) and Rule 10-b (5) of the Securities Exchange Act of 1934. All of them relate to deceit, plain and simple.

Here’s the exact wording from the complaint: Goldman, the SEC charges, “employed devices, schemes or artifices to defraud, made untrue statements of material facts or omissions of material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon persons.”

Nope, nothing about fiduciary duty there.

Goldman’s defense here, essentially, is that the bank didn’t have to disclose those facts the SEC refers to, because the investors in the deal in question were sophisticated or already knew or should have known that another party that was betting against them had helped select the portfolio, and that any other information it failed to disclose wasn’t material.

Nothing about fiduciary duty there, either.

So while the back and forth over that issue may be important to any legislation aimed at reforming such practices, it’s not strictly relevant to the legal case.

Of course, we’re talking about a jury trial here, so the atmospherics surrounding the case, including what the bank should have done that it wasn’t legally required to do, aren’t totally irrelevant.

Anyway, I was somewhat puzzled over the significance of the fiduciary issue when I stumbled across it earlier this morning. And I figured others might be as well.

(UPDATE) Let’s Take a Closer Look at This SEC Accountant’s Porn Activity

Since we’ve been out of the number crunching biz on a day to day basis, our reaction to the 16,000 attempts by an SEC accountant to access porn was simply, “Holy shit, that’s a lot.”


Thankfully, we still have plenty of friends that still burn up the 10-key calcs and we got a drop from one of them a little while ago:

I did [a] calc on that accountant that viewed porn sites up to 16,000 in one month. He was averaging 725x per day (including weekends). That is impressive. I don’t think I can hit 725 times in a year (and I don’t even have a girlfriend), let alone one month.

The best part of this whole ordeal is that it’s now becoming a political football and hyperbole that even makes us scoff.

UPDATE: Our stupid friend is obviously rusty on the calc (they’re no longer in public accounting) and we’ve been re-informed by said friend that 725x is based on 22 workdays (i.e. not including weekends).

Even more importantly, how many accountants out there double-checked this pre-update calc and then failed to get all self-righteous about it?

Furthermore, and perhaps most importantly, the bar has been raised in the wasting time department. Granted this accountant was wasting everyone’s tax dollars while those of you in public accounting are wasting your clients’ dollars but these porn surfing numbers are no doubt a challenge worth accepting. Go forth.

In Non-Goldman Sachs News, Mary Schapiro Doesn’t Think Much of Your Report on the SEC’s Response to Allen Stanford

In case you haven’t turned on a TV, been on the Internet or talked to single human being today you’re aware that Mary Schapiro and the Commission are little busy raining shit all over Team Jehovah.

As fun as this must be for the SEC, for some reason there are a few people that would like to discuss the SEC’s reaction to a Ponzi scheme whose alleged perp will likely die awaiting trial.


Even though Mary Schapiro can’t believe this timing (!), fine, she’ll humor you. But don’t interrupt again. They are trying to God’s work (and maybe win over some voters).

The following is a statement from SEC Chairman Mary L. Schapiro regarding SEC Office of the Inspector General (OIG) Report 526 — “Investigation of the SEC’s Response to Concerns Regarding Robert Allen Stanford’s Alleged Ponzi Scheme”:

“This report recounts events that occurred at the Commission between 1997 and 2005. Since that time, much has changed and continues to change regarding the agency’s leadership, its internal procedures and its culture of collaboration. The report makes seven recommendations, most of which have been implemented since 2005. We will carefully analyze the report and implement any additional reforms as necessary for effective investor protection.”

In other words, “I’m turning this ship around, and most of your bullshit suggestions are already in place, so how about you take your light your OIG report on fire?”

SEC Might Bring Civil Charges Against Ernst & Young Soon, Maybe

Charlie Gasparino is reporting that the SEC probe in the Lehman Brothers bankruptcy is “ramping up” and that the Commission is under hella-pressure to bring civil charges against Dick Fuld, Ernst & Young and whoever else is on the list.

It’s unclear if the SEC can muster the necessary proof to show that top executives like former CEO Richard Fuld or the firm’s outside auditor Ernst & Young intentionally misled investors about the health of Lehman’s balance sheet in the months before it filed for bankruptcy in mid-September 2008, according to people close to the probe…It’s unclear when any charges might be filed by the SEC, but people close to the inquiry say the SEC believes it does bring one, it must do so “very soon,” possibly within a few months given a combination of the outrage over the report’s findings and that Lehman’s bankruptcy is going on two years old.

Okay, so things are urgent but not that urgent. It’ll be Father’s Day maybe the 4th of July by the time we get a Mary Schapiro smackdown.

But that’s not all! Things are really serious at Ernst & Young now because Charlie reports that E&Y “has hired high-profile white-collar attorney William McLucas as its outside counsel in the matter, people close to the firm say. McLucas had been the SEC’s enforcement chief before entering private practice.” We checked with our friends over at ATL and it turns out that Mr McLucas is a partner at high-powered WilmerHale and was lead counsel to the special committee of the Enron Board that reported “hard-hitting findings” (sayeth he).

Since Mr McLucas doesn’t take shit from the likes of short-seller Jim Chanos, we’ll take Charlie’s word that things are pretty serious over at 5 Times Square.

E&Y spokesman Charlie Perkins declined to comment.

SEC Probe of Lehman Picking Up Steam [FBN]
See also:
Gasparino: SEC May Be Forced To Do Something About This Whole Lehman Thing [DB]

Apparently the Porn Problem Has Spread from the SEC to the IRS

This is the last thing the IRS needs. Well, maybe next-to-last.


“An IRS employee is charged with having child pornography on a laptop computer that police said he left in a garbage bag in a wooded area in Sterling Heights. Alan E. Erickson, 45, of Sterling Heights is charged with one count of using a computer to commit a crime and five counts of possession of child sexually abusive material, officials said.”

Dumping a laptop in the woods? And child porn to boot? Jesus. You thought the death threats against IRS agents were bad before…

IRS employee charged in porn case [Detroit Free Press]

Image source: Sterling Heights Police via DFP

Dear CFO, Tell Us Everything We Want to Know About Your Repos or We’re Coming in with Guns Blazing. Sincerely, the SEC

As we mentioned this morning, twn to brass tacks on these repurchase agreements that have captivated the entire financial world. Maybe “captivated” is overstating it but there’s been no shortage of commentary out there blaming Lehman’s shifty accounting ways for nearly ending the entire world as we know it.

The SEC let Lehman Brothers and Ernst & Young take their public beatings but now they’re moving on. The Commish’s Division of Corporation Finance sent out the following letter to “certain public companies” (aka banks) this month in order to get the scoop on their repos.


Furthermore, you should probably take this letter as a good indication of how the SEC feels about them in general, sayeth Edith Orenstein, ” would suggest companies, auditors, legal counsel, and audit committees consider such “Dear CFO” letters as illustrative of the SEC’s general view on accounting and disclosure matters for the issue(s) addressed in the letter.”

Oh yeah, about that letter. It’s long and has plenty of standard SEC vernacular so we’ll give you the abbreviated version (although the full thing appears below for you sickos).

“For those repurchase agreements you account for as collateralized financings, please quantify the average quarterly balance for each of the past three years. In addition, quantify the period end balance for each of those quarters and the maximum balance at any month-end. Explain the causes and business reasons for significant variances among these amounts.”

Translation: “Listen you shifty bastards, we know you move that sh*t off the books right before the end of the quarter. You won’t be able to hide it when we ask you for the averages.”

“[I]f you accounted for repurchase agreements, securities lending transactions, or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets as sales and did not provide disclosure of those transactions in your Management’s Discussion and Analysis, please advise us of the basis for your conclusion that disclosure was not necessary and describe the process you undertook to reach that conclusion.”

Translation: “We’re guessing you didn’t tell anyone that you were parking a bunch of capital sucking crap off your books in your MD&A. If that’s the case, you get to explain to us, in excruciating detail, how you came to that asinine conclusion.”

If the Commission isn’t satisfied, it’s likely that the next step will be an interrogation in a poorly lit room. When your handlers leave, an incessant buzzing sound will commence until you soil yourself. Then they’ll try asking you again. Keep your fingers crossed that you don’t get a letter.

Dear Chief Financial Officer:

We are currently reviewing your Form 10-K for fiscal year ended ______. In our effort to better understand the decisions you made in determining the accounting for certain of your repurchase agreements, securities lending transactions, or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets, we ask that you provide us with information relating to those decisions and your disclosure.

With regard to your repurchase agreements, please tell us whether you account for any of those agreements as sales for accounting purposes in your financial statements. If you do, we ask that you:

• Quantify the amount of repurchase agreements qualifying for sales accounting at each quarterly balance sheet date for each of the past three years.

• Quantify the average quarterly balance of repurchase agreements qualifying for sales accounting for each of the past three years.

•Describe all the differences in transaction terms that result in certain of your repurchase agreements qualifying as sales versus collateralized financings.

•Provide a detailed analysis supporting your use of sales accounting for your repurchase agreements.

• Describe the business reasons for structuring the repurchase agreements as sales transactions versus collateralized financings. To the extent the amounts accounted for as sales transactions have varied over the past three years, discuss the reasons for quarterly changes in the amounts qualifying for sales accounting.

• Describe how your use of sales accounting for certain of your repurchase agreements impacts any ratios or metrics you use publicly, provide to analysts and credit rating agencies, disclose in your filings with the SEC, or provide to other regulatory agencies.

• Tell us whether the repurchase agreements qualifying for sales accounting are concentrated with certain counterparties and/or concentrated within certain countries. If you have any such concentrations, please discuss the reasons for them.

• Tell us whether you have changed your original accounting on any repurchase agreements during the last three years. If you have, explain specifically how you determined the original accounting as either a sales transaction or as a collateralized financing transaction noting the specific facts and circumstances leading to this determination. Describe the factors, events or changes which resulted in your changing your accounting and describe how the change impacted your financial statements.

• For those repurchase agreements you account for as collateralized financings, please quantify the average quarterly balance for each of the past three years. In addition, quantify the period end balance for each of those quarters and the maximum balance at any month-end. Explain the causes and business reasons for significant variances among these amounts.

In addition, please tell us:

• Whether you have any securities lending transactions that you account for as sales pursuant to the guidance in ASC 860-10. If you do, quantify the amount of these transactions at each quarterly balance sheet date for each of the past three years. Provide a detailed analysis supporting your decision to account for these securities lending transactions as sales.

• Whether you have any other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets, similar to repurchase or securities lending transactions that you account for as sales pursuant to the guidance in ASC 860. If you do, describe the key terms and nature of these transactions and quantify the amount of the transactions at each quarterly balance sheet date for the past three years.

• Whether you have offset financial assets and financial liabilities in the balance sheet where a right of setoff — the general principle for offsetting — does not exist. If you have offset financial assets and financial liabilities in the balance sheet where a right of setoff does not exist, please identify those circumstances, explain the basis for your presentation policy, and quantify the gross amount of the financial assets and financial liabilities that are offset in the balance sheet. For example, please tell us whether you have offset securities owned (long positions) with securities sold, but not yet purchased (short positions), along with any basis for your presentation policy and the related gross amounts that are offset.

Finally, if you accounted for repurchase agreements, securities lending transactions, or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets as sales and did not provide disclosure of those transactions in your Management’s Discussion and Analysis, please advise us of the basis for your conclusion that disclosure was not necessary and describe the process you undertook to reach that conclusion. We refer you to paragraphs (a)(1) and (a)(4) of Item 303 of Regulation S-K.

As noted above, we seek to better understand the basis for your decisions and your disclosure. Please provide us with a written response to these questions within ten business days from the date of this letter or tell us when you will respond. Upon our review of your response to these questions, we may have additional comments that we will provide to you with any other comments we may have on your Form 10-K.

Please contact me if you have any questions.

Sincerely,

Senior Assistant Chief Accountant

Can the SEC’s New Chief Accountant of Enforcement Division Stay Focused?

Howard Scheck is newest member of the SEC Dream Team, joining the Commission after leaving the Forensic & Dispute Consulting Practice of Deloitte Financial Advisory Services. Mr Scheck will serve as the Chief Accountant in the Enforcement Division, working for Robert Khuzhami.

Khuzhami is thrilled to have Howie on board, saying in the Commission’s press release, “Financial statement and accounting fraud are high enforcement priorities for the SEC, and Howard is highly qualified to lead our accounting staff in its relentless pursuit of these wrongful practices that are so harmful to investors.”


Sounds like Scheck is the man for the job, having been an forensic expert at Deloitte and working in the Enforcement Division for ten years as well but the question that really needs to be asked is, can he exert some self-control while on the job and avoid ladyboyx.com?

Not only has the SEC proven time and again that they aren’t the brightest group but that viewing porn on the job to cope with the stress is a-okay.

While other protectors of the markets are perusing the web for the best tranny-porn that can be seen for free, will Scheck be able to focus on slapping accountants on the wrist? Khuzhami seems like the no-nonsense sort but the herd mentality at the Commission may be too much to bear.

Howard A. Scheck Named Chief Accountant in SEC Enforcement Division [SEC.gov]

CPAs Spanked by SEC for Porn Site Audit

Let it be known that if you are peddling porn and engaged in online pimping, you do not want the SEC on your back.

WebCPA reports that Stephen Corso of Las Vegas and Brian Rabinovitz of Oak Park, CA got the SEC smack down in a Nevada federal court for filing materially false and misleading financial statements from 1999 – 2002 (that’s quite a backlog) and that audit staff – under the boys’ supervision – omitted important info and violated the sanctity of auditor independence during audits of Exotics.com


While the enforcement doesn’t go into specifics, we’re happy to. Exotics.com bills itself as the world’s premiere source for – wait for it – beautiful female adult entertainers. Not to be outdone, Exotics also boasts a veritable cornucopia of escort options including “BDSM & fetish providers, exotic dancers, strippers, sensual and erotic massage specialists, TSTV and other adult entertainment.” It’s that “other that really scares me. Self-billed as the Quicker Pecker Upper (kid you not), the site headline right around the time the SEC brought the heat was “Better than Wives, Girlfriends, and Porn” – and apparently above performing audits according to GAAS?

So, who wants to wildly speculate as to how audit staff violated auditor independence?

Here’s the 2005 release from our friends at the SEC:

[T]he accountants fraudulently participated in audits of Exotics-Nevada’s year-end financial statements and in a review of its quarterly financial statements and failed to conduct those engagements in accordance with GAAS, as required. The Commission also alleges in its complaint that, among other things, the accountants prepared or created many of Exotics-Nevada’s books and records and then audited the financial statements they created. According to the complaint, they also caused their firms to issue false audit reports which, together with the underlying financial statements, were incorporated in Exotics-Nevada’s public filings with the Commission.

Now listen, little auditors, you don’t shit where you live and you don’t audit your own statements. Audit sampling? I could see how it would be hard to resist in this particular instance.

CPAs Disciplined for Porn Site Accounting Fraud [Web CPA]
SEC Complaint

Quote of the Day: Mary Schapiro Is Being Coy | 03.18.10

“It is safe to assume that we are looking at the conduct of a number of firms.”

~ Mary Schapiro, to a House appropriations subcommittee, not specifically naming Lehman Brothers or Ernst & Young.

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.

Tax and SEC Deadline Watch: Are You About to Get Your Life Back?

Doubtful!

But it is March 15th and corporate return extensions are being submitted en masse. Tomorrow is also the deadline for accelerated filers to submit their 10-Ks so auditors that are borderline delirious (and probably feeling frumpy) might get more than four hours of sleep this week.

For you tax jockeys, today could mean a couple of things: 1) this is a bump in the road and your life will be even more hectic as your deadbeat clients who are now realizing that April 15th is coming up fast or 2) you don’t touch anything that isn’t an 1120 and you’re in the clear for awhile.


And for you auditors, hopefully you haven’t forgotten our little teaching lesson from the previous deadline? Try and catch all the embedded “f*cks.” And hey! E&Y is still having Canadian Tuxedo Fridays for a couple more weeks so that’s something to look forward to, amiright?

Yes, there are some of you out there that are still billing monster hours with no end in sight. But look at this way, if you haven’t quit by now, you’re in it to the end, so you better just read this reminder from Deloitte and get back to it. It’ll be over soon enough.

There’s a Very Good Reason Why Harry Markopolos Shouldn’t Be SEC Chairman

The man is a forensic sleuth, no question. Is he a hero? What’s a hero? Could he train young SEC grasshoppers to be fraud detecting machines like him? Probably. David Weidner — among others — isn’t enthused, especially with Harry’s idea about who should play him in a movie (Hanks, Damon, Cage).


And we’ll just go on record to say that we aren’t on board for Marks to take over either. Forget about our constant griping about the pipe dream that is accounting rule convergence and how HM’s input won’t likely amount to squat. That’s not what’s important.

What’s important to remember is that the man cannot control his bodily functions. As you may recall, the ACFE named Markopolos as their Fraud Examiner of the year and he spoke at their big to-do in Vegas where he admitted that he regularly soiled himself while investigating Bernie Madoff. This is unacceptable.

Look, maybe this isn’t a big deal for some of you but if the man wants to be in the big chair he can’t be changing his undies every couple of hours when he’s trying to crack a big case. Do you think Mary Schapiro has drawer full of extra VS? NO. WAY. So before you jump on the Marks bandwagon for the next Chair of Enforcing the Financial Universe, let’s not forget that when he gets nervous, he’ll be extra unpleasant to be around.

Harry Markopolos, SEC Chairman? [WSJ]

Grant Thornton Was Not Impressed with the SEC’s Waffling on IFRS

We really weren’t expecting much of a reaction from accounting firms on the SEC’s conclusion that there’s no rush on the IFRS issue. The Commission statement that it supports “a single set of high quality accounting standards” was good enough for PricewaterhouseCoopers, who issued a press release the day of the announcement.


The press release sounds eerily similar to the SEC’s statement with a quote from Bob Moritz thrown in for good measure:

“PricewaterhouseCoopers continues to support the goal of moving toward a single set of high quality global accounting standards,” said PricewaterhouseCoopers LLP U.S. Chairman and Senior Partner Bob Moritz. “We believe that IFRS is in the best interest of stakeholders, including investors both here and globally. We are, therefore, encouraged by these statements from the SEC.”

So PwC is encouraged by the recent development. This isn’t shocking. P. Dubs will be on board because they don’t strike us a bunch that will rock the boat. Presumably, any a hint of discontent from the Firm could potenitally jeopardize their ubiquitous magazine list presence.

On the other hand, we were surprised to see this Tweet from Emily Chasan of Reuters that pointed us to the Grant Thornton press release that came out today.

GT was NOT IMPRESSED with the SEC’s latest commitment to non-commitment, “like many in this country and elsewhere, we were hoping that the SEC would announce a mandatory date for switching to IFRS by U.S. public companies. Instead, the Commission reaffirmed that it expected to decide in 2011, provided resolution of certain issues.”

Now in case you’re questioning GT’s sincerity in this matter, they make their case for why this feet dragging is unacceptable:

Whether the U.S. races or crawls toward IFRS could mean the difference between staying in front or falling behind. The rest of the world is moving forward, boldly. Major economies like Japan, China and India have already chosen IFRS. It is unrealistic — and risky — to think that we can stand outside looking in forever. If we don’t want our influence and opportunities stripped away, we must make sure that we keep a seat at the table.

This is probably as insubordinate as you can expect an accounting firm to get over an issue that is “largely academic” but it is refreshing to see a little public honesty out of GT.

Grant Thornton LLP statement regarding SEC and IFRS Roadmap [Press Release]
PricewaterhouseCoopers States Support for SEC Move Toward Single Set of High Quality Accounting Standards [Press Release]

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]

SEC Votes to String this IFRS Thing Along

AS PREDICTED. And It was unanimous. Sure, it wasn’t the boldest call we’ve ever made here at GC but we thought it was worth pointing out that the SEC really didn’t have much of a choice.

The good news is that the Commission doesn’t need to sweat this for now. They’re just letting everyone know that they’re tepidly re-re-committing to International Financial Reporting Standards but ONLY if the IASB and FASB can pull off meaningful convergence and the IASB stops being a bunch of lily-livered bean counters and tells the pols to BTFO.


Web CPA reports, “In the commission’s vote Wednesday, the SEC reiterated its cautious support for IFRS, contingent upon reaching a number of milestones, including convergence of U.S. GAAP with IFRS and improved governance of the International Accounting Standards Board.”

And even if that happens, the SEC staff has to check everything out so that everyone knows exactly what will result from the U.S. adopting IFRS (probably the rapture). Once that’s settled then we can talk about how this will get done.

Mary Schapiro’s words:

“In 2011, upon conclusion of the fact-gathering and analysis set forth in the work plan – and assuming completion of the convergence projects – the commission will then be in a position to determine whether to incorporate IFRS into the financial reporting system for U.S. public companies. Until that time, we will expect staff to provide periodic written public reports to the commission on the progress of its efforts.”

Back to work everybody. There are future meetings to be planned.

SEC Votes on Work Plan for Incorporating IFRS [Web CPA]
Earlier: SEC Meeting on Roadmap Will Likely Lead to More Meetings on Roadmap

SEC Meeting on Roadmap Will Likely Lead to More Meetings on Roadmap

We hope! Remember how James Kroeker said how the Commission was “turning our focus back to the proposed roadmap”? No? Well, he did. And apparently he was serious because the SEC is having a meeting tomorrow about said roadmap. The whole time we’ve been reading about this map to godknowswhere, we just figured it was a figment of our imagination.

But a meeting! A meeting to decide whether or not the SEC will publish a statement! That’s somewhat encouraging, isn’t it? Here’s exactly what’s on the docket for the Sunshine Act Meeting:

“The Commission will consider whether to publish a statement regarding its continued support for a single-set of high-quality globally accepted accounting standards and its ongoing consideration of incorporating International Financial Reporting Standards into the financial reporting system for U.S. issuers.”


Okay, so if we’re reading this right, this particular sit-down will be to decide whether or not the Commission will put out an official statement regarding global accounting standards and if IFRS is good enough for us here in the US of A. Since everyone seems to be doubting the SEC’s ability to play nice with the rest of the world on the whole issue, they figured a hippie-ish sounding meeting should help calm everybody down.

We can only foresee two outcomes from this meeting: 1) the SEC decides that they will publish a statement (after more meetings) and give an approximate date that the statement will be released and it will be delayed for an indeterminable amount of time, or 2) the Commission decides it will not publish a statement that the IASB can take its self-righteous double-entry accounting attitude back to London-town and we’ll just do whatever the hell we want. THE END.

SEC to Meet Wednesday on IFRS Roadmap [Web CPA]
SEC considers reaffirming commitment to global standards [Accountancy Age]

The New Inspections Director at the SEC Will Enjoy Low Expectations

relax.jpgA little afterthought on Carlo di Florio’s new gig as the director of the Office of Compliance and Inspections and Examinations (“OCIE”). And no, we’re not caving to the request of some to go ape over the revolving door that is every financial regulatory agency.
Our thought is this man has absolutely no pressure heading into his new job. None. Look at the track record of his predecessor:

Lori Richards, who had headed OCIE since its creation in 1995, left the SEC last August. She was one of several high-level officials, including the enforcement director, who departed the agency after Schapiro took the helm in January 2009.

Kotz has detailed how the SEC bungled five investigations of Madoff’s brokerage business between June 1992 and December 2008, when the financier confessed to his sons that he was operating a fraudulent scheme. Top SEC officials have pledged to fix the problems and said they have made major changes.

So essentially he’s following 13 years of utter incompetence.
Plus, according to the Commission, Carlo was a dynamo at P. Dubs helping them build their “corporate governance, risk management and regulatory compliance practice[s]” and was a top dog for “[investigating] corporate fraud, corruption, conflicts of interest and money laundering.” So if he’s the jim-dandy they say he is, he’ll be finding fraud in his sleep. The SEC is in total rebuilding mode and he’s following over a decade of failure so is there anything he could possibly do to screw this up? A few decent busts a year and this guy will go down in history like Eliot Ness.
Well played, Carlo. Well played indeed.
Head of SEC Inspections Office Named [AP via NYT]

A Note to the SEC

Web CPA, October 30, 2009:

Kroeker reiterated earlier statements that he and SEC Chair Mary Schapiro had made, indicating the SEC was turning its attention this fall to the proposed IFRS roadmap. When asked about the date, Kroeker said, “There will be follow-up on the roadmap this fall.” Asked to define the word “fall,” he noted that the season ends on Dec. 21.

Fall ended at 12:47 pm EST today. Anyone seen this map?

SEC to CPAs: Consider the Investors or You Will Be Dealt With

jameskroeker.jpgServants of the capital markets, in your day to day activity have you been thinking about the investors out there that depend on you? What they need? What they want? Do you really know them? If not, the Chief Accountant would like you to start, pretty please:

Securities and Exchange Commission Chief Accountant James L. Kroeker told leaders of the accounting profession that independent auditors will be expected to consider the interests of the “investing public” — not just their audit clients — when performing their duties.
The mission of his office will be to “put investor protection at the forefront in all that we do,” he said in an address to the American Institute of CPAs’ National Conference on SEC Developments.
Under his watch, “you are likely to notice we will be more proactively seeking to understand and discuss the views of investors.” Accountants “should not be surprised when we ask you whether you have considered the perspective of the investing public.”

He does think that majority of you are a-okay and “are honest hard-working professionals who simply want to ‘do the right thing,'” but dang it, are you sure you’re thinking about investors? All the time? Like, right this second? That’s your job, you know. The OCA just wants to jump your shit remind you.
And if you’re not thinking about investors, you’ll be dealt with professionally but don’t confuse that with a regulatory rollover. Expect something more along the lines of wishing you were never born:

“You should not confuse professionalism with a notion of leniency. Those who fail to live up to their responsibilities and those who cause harm to investors or our capital markets can expect that we will take appropriate action.”

Got it? The SEC dream team will deal with you that don’t start taking this shit seriously. You see those crazy-eyes? You think he’s joking? Now get back to it, with investors on the brain.
SEC Chief Accountant Tells CPAs to Consider Investors [Web CPA]

Some Former New Century Execs Are Not Having a Good Monday

Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for 140px-United_States_Securities_and_Exchange_Commission.pngFormer executives of New Century, the Southern California subprime lender that filed for bankruptcy in 2007, are the latest examples on the SEC’s “We’re Back to Cracking Skulls” tour. The SEC has filed a civil complaint against former CEO Brad Morrice, CFO Patti Dodge, and controller David Kenneally.
From the press release:

In its complaint, the SEC alleges that New Century disclosures generally sought to assure investors that its business was not at risk and was performing better than its peers. Defendants, however, failed to disclose important negative information, including dramatic increases in early loan defaults, loan repurchases, and pending loan repurchase requests. Defendants knew this negative information from numerous internal reports they regularly received, including weekly reports that Morrice ominously entitled “Storm Watch.”
The complaint also alleges that Dodge and Kenneally fraudulently accounted for expenses related to bad loans that it had to repurchase. In the face of dramatically increasing loan repurchases and a huge, undisclosed backlog of repurchase demands, Kenneally, with Dodge’s knowledge, made changes to New Century’s accounting for loan repurchases in both the second and third quarters of 2006. These undisclosed accounting changes violated generally accepted accounting principles and resulted in New Century’s improperly avoiding substantial repurchase expenses and materially overstating its financial results.

“Violated generally accepted accounting principles” has got to make more than a few people at KPMG nervous. Especially if you’re the partner that wrote, ‘As far as I am concerned, we are done. The client thinks we are done. All we are going to do is piss everybody off.’ We’re guessing he/she wasn’t on the ‘Storm Watch’ mailing list, otherwise KPMG might not have a $1 billion lawsuit on its hands.
SEC Charges Former Officers of Subprime Lender New Century With Fraud [SEC Press Relase]
Also see:
SEC Charges Former New Century Executives With Fraud [WSJ]
S.E.C. Accuses 3 New Century Ex-Officers of Fraud [DealBook]

The Latest Badge of Honor for the SEC

[The] GAO says the SEC ended its fiscal year on Sept. 30 with ineffective internal control over financial reporting, a now recurring theme ince [sic] the SEC was first required in 2002 to submit audited financial statements to Congress and the Office of Management and Budget.
“In connection with our prior audits, GAO has made numerous recommendations to SEC to address the internal control issues that continued to persist during fiscal year 2009,” GAO wrote in its report. The deficiencies that most troubled the government auditor were problems with information security, financial reporting processes, fund balance with the U.S. Treasury, registrant deposits, budgetary resources, and risk assessment and monitoring processes.
The deficiencies add up to a material weakness, GAO said, giving good reason to wonder whether data processed by SEC’s systems are reliable and adequately protected.

SEC Gets Another Material Weakness Finding from GAO [Compliance Week]

The SEC Is Still Putting the Dream Team Together

Thumbnail image for Thumbnail image for Thumbnail image for 140px-United_States_Securities_and_Exchange_Commission.pngWhen tasked with protecting investors by going after the likes of Mark Cuban, the key players must be selected very carefully. Accordingly, the SEC continues to make key appointments in due course. The newest guardian of the investing public is Paul Beswick. He will serve as the head of the Accounting Group in the Office of the Chief Accountant (“OCA”).
For those of you not intimately familiar with the SEC’s enigmatic web, the Accounting Group is the portion of the OCA that likes to stick its beak into the biznass that matters most to accountants and auditors:

The Accounting group works closely with private-sector accounting bodies such as the Financial Accounting Standards Board. Registrants, auditors, and other divisions and offices within the SEC regularly consult with the group regarding the application of accounting standards and financial disclosure requirements.
Mr. Beswick will continue to support the Office of the Chief Accountant’s work related to oversight of the Public Company Accounting Oversight Board (PCAOB) until a replacement is named for his prior position.

Administrative matters simply do not appear to be at the top of the Commission’s to-do list. Understandably, there have been far more pressing matters, such as training employees, developing SIMS for personal finance education (with Bust Out while you wait) and appointing 20-something Chief Operating Officers. Your continued patience is appreciated.
Paul Beswick Named SEC Deputy Chief Accountant in Charge of Accounting Group [SEC.gov]

CFO of the Week: Chen Tang

CFO_insider.jpgNot to mention father of the year and buddy for life.
Chen Tang, a former CFO of a private equity fund in San Francisco, is being accused of running an insider trading ring that includes friends, relatives, and his two daughters, aged 9 and 11.
Allegedly the ring made off with $8 million trading on non-public information related to Tempuc-pedic International, Inc. and Acxiom Corporation.
Tang’s daughters are considered relief defendants, as trades were carried out in brokerage accounts opened in their names. Personally we’d like to see them charged as the masterminds in this case but nothing in the complaint indicates that they knew anything about the scam.
The SEC stays on a roll with this latest bust, however this is the first case that we’ve heard of that includes minors (but still probably have maturity levels that are above Mark Cuban’s). The SEC obviously has to maintain the blind justice concept, so no mercy will be shown on the two pre-teens who probably spent the money on Miley Cyrus tickets.
The SEC’s latest haul includes two kids, aged 9 and 11… [FT Alphaville]
SEC Charges Former CFO and Six Relatives and Friends in California-Based Insider Trading Ring [SEC Press Release]

The SEC’s Education of the Public Now Includes Video Games

Thumbnail image for Mary Schapiro.jpgJust when you thought the SEC had run out of good ideas, investor.gov comes along and just blows your mind all over again.
Nevermind Mary Schapiro’s surprisingly pleasant welcome and tips on how to avoid fraud. The Money Game page is where the real ingenuity comes into play.
Moneytopia takes a while to load, which obviously serves as proof that this latest method of educating the public has caught fire like no one could have expected.
Except for the Commission that is. Lucky for us, Schape & Co. had the foresight to realize how popular Moneytopia would be and allows you to play Bust Out while you wait.
When the game finally loads (after our horrendous score of 600), Moneytopia takes a stab at our earlier suggestion regarding financial statements, using cartoons and make believe wealth and connections to explain how to be not only a better investor but an honest investor. Like we said, another bullseye.

Ex-Deloitte Analyst Is the New Wunderkind at the SEC

Thumbnail image for gun_awkward.jpgWunderkind is a little premature but we’re hopeful! Awhile back we encouraged you to help the ailing Securities and Exchange Commission get its act together. We had really no expectation that anyone would take us seriously.
On Friday, the Commission announced that 29-year old Adam Storch would be the new Chief Operating Officer of the enforcement division. Storch joined the SEC on October 13th to assume the newly created position.


It’s pretty obvious that Storch craves letters behind his name as he has “certifications in accounting, fraud examination and auditing” according to Bloomberg. JDA isn’t impressed:

As a 28 year old myself let me tell you, this is beyond disheartening. We should not be in charge of anything, much less our nation’s regulatory enforcement. We are a generation of self-centered, lazy morons (yeah I said it) and sure there are a few exceptions but for the most part, no one my age will do anything unless they get a pat on the head and a “good boy” gold star just for pissing in the toilet instead of on the floor.

The biggest headline grabber (aside from urination accuracy) is that Storch is an ex-Goldman employee which is all fine and dandy for conspiratorial purposes but he is also an ex-Uncle Dangler where he was a, GASP, “senior analyst”. He’s definitely kicking himself for missing out on 100% free preventive healthcare.
The ‘Berg doesn’t have many other details on the Enforcement Division’s new fearless leader, so we invite any details on Mr. Storch for those that worked with him. Boxers or briefs? Boozehound or teetotaler? Does he get to carry a gun at the Commission? Since he’s in “enforcement” he’s got to be packing, especially as the COO. Khuzami probably has to take off the trigger locks for him though. Good luck man.
SEC Names Goldman’s Storch as Enforcement Unit Operations Chief [Bloomberg]

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

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

Mary Schapiro Would Never Support Low Quality Global Accounting Standards

Mary Schapiro.jpgWhether Mary Schapiro was just craving Toblerones right out of the factory or just needed to cool off after head butting the staff involved in the Mark Cuban case to get them fired up, the Chair of the Commission is over in Basel, Switzerland letting some other Schape-types know that she’s 100% behind “a global set of high-quality accounting standards.”
That’s great and all but why do we keep hearing the phrase ‘high-quality accounting standards’? Maybe it’s our wild imagination but is there a back room somewhere filled with bizarro accountants devising a plan to develop “the biggest set of piss-poor global accounting standards you could possibly imagine”?
Is that why the convergence will take so long because there are opposing forces with their own agenda? We all want quality accounting standards M. Schape unless you’re not telling us the whole story.
SEC seeks common goal for accounts [FT]

The SEC Still Wants a Piece of Mark Cuban

markcuban.jpgThat’s right! Schape and Co. are coming heavy this time bitch. They don’t know who you think you are, Mark Cuban, but you think you can just walk away from avoiding negligible losses to your net worth and get away with it? OH HELL NO.
The Commission is going to continue pursuing your alleged insider trading ass even though they haven’t been able to present a shred of evidence that you promised to sell those shares. No matter, they’ll pull something together.
Oh, and another thing Mr. Man-Child, the Commission won’t be paying your attorney fees. They realize you’re suing out of spite and regardless their hard-on for billionaires in their 50s that wear basketball jerseys, they won’t stand for it.
S.E.C. to Appeal Court Ruling on Mark Cuban [DealBook]

This Really Comes as No Surprise But We Feel Obligated to Ask for Your Help

Thumbnail image for Thumbnail image for 140px-United_States_Securities_and_Exchange_Commission.pngMore good news about your tax dollars at work. This time courtesy of the punching bag of government agencies:
More, after the jump

According to reports, an audit conducted by an outside firm found that the SEC’s acquisitions office failed to maintain accurate records on its contract and procurement activities, and reported data that was inaccurate to the federal procurement database.
In one glaring example, the regulator could not supply the auditor with data about all of the contracting activities from the SEC’s regional offices.

Good Lord. Recently laid off peeps, please do your country a bit of service and help out the complete f*(king nightmare that is our government. We implore you.

Accounting Professors Aren’t Waiting for Bureaucrats to Get Their Act Together

graduation.jpgEven though the convergence of IFRS and U.S. GAAP seems like a DeLorean ride away accounting professors polled believe that it should be included in the curriculum, according to Web CPA:
More, after the jump

The survey, by KPMG and the American Accounting Association, found that half of the professors who responded to the survey said they thought a low sense of urgency exists among U.S. regulators to adopt IFRS by a “date certain,” while only 16 percent believe regulators have a high sense of urgency.

Regardless of academics’ pessimism about the SEC getting their shit together and making this marriage of accounting rules happen, the slow integration into the American curriculum is still occurring:

Despite this challenge, 70 percent said they have taken significant steps to incorporate IFRS into the curriculum. In addition, 83 percent believe IFRS needs to be incorporated into their curricula by 2011…Given the dynamics of the current regulatory environment, 79 percent of faculty believe that U.S. GAAP should continue to be taught over the next three to five years, while progressively incorporating more IFRS concepts via a compare-and-contrast approach as the conversion date approaches.

A majority of the respondents to the survey also expect IFRS to be included in the CPA Exam by 2012/2013 and in intermediate accounting textbooks by 2011/2012.
For those of you still cracking the books, discuss if your profs have brought this up and what kind of priority they’re putting on IFRS. We’re not holding our breath for anything meaningful from TPTB.
Accounting Professors Urge IFRS Education [Web CPA]

Mail Order Porn Is Not a Red Flag at the SEC

discreet-packaging.gifThe latest Ponzi scheme busted by the new and improved SEC just reminds us that the Commission is rarely chasing after criminal masterminds and thus, has a long way to go before we’re going to be impressed with their efforts:
Continued, after the jump

The SEC alleges that Philip G. Barry and his firms Leverage Group, Leverage Option Management Co., Inc, and North American Financial Services defrauded investors, including senior citizens and retirees, by selling securities in Leverage investment funds….According to the Commission’s complaint, Barry spent the money by purchasing real estate in his own name and those of other entities he controlled, paying expenses of a separate mail order business that sold pornographic materials, and supporting his lifestyle.

Mail order porn? What century is this guy living in? Did he also churn his own butter and crank start his car? We understand that certain forms of entertainment are best appreciated when tangible and we do like getting pleasant surprises in the mail but porn in the mail?
This guy started ripping off senior citizens in 1999. Since porn was on the web pretty much from the get-go we’re pretty sure that the mail order stuff was at falling out of favor by this time. Nevertheless, it appears that no one at the Commission was aware that hot action was available on the web for the past ten years and more advanced training may be needed.
SEC Charges New York-Based Money Manager in $40 Million Ponzi Scheme [SEC.gov]

Depantsing Day for the SEC

cox.jpgIn the biggest shocker of the day, the inspector general of the SEC reports that the Commission never undertook a ‘thorough and competent’ investigation into Bernie Madoff’s operations.
This seems to be the official “our bad” statement by the SEC, although Chris Cox didn’t waste any time throwing worker bees under the bus, “Days after the conman’s arrest, the SEC’s then-chairman, Christopher Cox, faulted the agency’s staff for failing to act on ‘credible and specific allegations’ about the operation for at least a decade.”
More, after the jump


Harry Markopolos was soiling himself the whole time and no one bothered to listen probably because you called country club rules when you took the big chair, C-squared. Call us Monday morning QB but if some guy called us up with dirty undies screaming about the biggest fraud in history, we’re pretty sure we’d take him seriously.
Anyhoo, it’s all water near a bridge now. Schape and Co. are kicking ass and taking their sweet time naming key positions, so we’re sure that everything will be hunky-dory from here on out.
SEC Never Took ‘Competent’ Look at Madoff’s Firm, Report Finds [Bloomberg]
UPDATE: Check out more of the SEC sucking over at our sister site, Dealbreaker.

The SEC Awkwardly Reasserts its Authority

mschape.jpgThe SEC, having lost every shred of dignity it once had, is kindly reminding everyone that they are the authority on accounting rules. It sounds like the Commission is concerned that some of you might be a little confused by the new FASB Codification and just wanted to put it out there that M. Schape and crew are still the ones in charge.
Forget about any possibility of a bean counter coup that would upend the accounting rule universe. It’s not happening on Mary Schapiro’s watch.
Nevermind that it took the better part of a year to get a Chief Accountant officially appointed. The Commission was probably worried that, with all the hubbub, people may have lost some perspective, that’s all. The SEC, could torpedo this whole Codification nonsense back to the stone age, if it wanted to. Just wanted to remind everyone. Thanks.
SEC Clarifies Authority Over Accounting Rules [Compliance Week]

Apparently There Was No Rush on the Naming of the Chief Accountant

mary_schapiro_1218.jpgIt’s nearly September and Mary Schapiro has finally gotten around to naming a Chief Accountant. It’s been a busy 7-8 months, and with Ponzi schemes popping up out of nowhere and Steve Job’s liver, sometimes getting appointments made can’t be squeezed in.
James Kroeker, a former partner and Deloitte gets the honor of whatever it is the OCA actually does. Oh wait:
More, after the jump

Kroeker, who has held the job on an interim basis since January, would be responsible for interpreting rules requiring companies to disclose their financial health to shareholders. If named, he would referee disputes between banks and investors over writedowns for assets that lost value during the recession.

That’s it? This will be a breeze. Get crackin’ Jimmy. You’re got eight official months to get caught up on.
SEC’s Schapiro Said to Name Kroeker as Agency’s Top Accountant [Bloomberg]

The SEC Doesn’t Care if ‘The Numbers Don’t Work’

magic money.jpgTry to control yourselves, the SEC continues to kick some ass. The Commission has charged Terex Corporation of Westport, CT with accounting fraud:
Check out the details, after the jump

The Securities and Exchange Commission today charged Terex Corporation, a Westport, Conn.-based heavy equipment manufacturer, with accounting fraud for making material misstatements in its own financial reports to investors, as well as aiding and abetting a fraudulent accounting scheme at United Rentals, Inc. (URI), another Connecticut-based public company.

The Commission had previously charged URI executives with fraud back in September when the company paid $14 mil to settle with M. Schape and the gang. Terex is settling for $8 mil.
The complaint alleges that both companies engaged in some shady revenue recognition which enabled them to meet earnings forecasts. It also states that from 2000 to 2004, accountants at Terex couldn’t figure out some of their inter-company transactions so they just decided to RAM some journal entries in there to make it work.
We understand that. Every once in awhile it’s 1 am-ish and you’re looking at a bunch of numbers that are getting blurry and you say “F THIS“. Entry gets made. Done.
Problem is, the SEC doesn’t like that.
SEC Charges Terex Corporation With Accounting Fraud [SEC.gov]

SEC Doesn’t Care Who it Has to Hurt to Get Respect Again

mary_schapiro_1218.jpgAfter everything the SEC has been through, you might expect some government bureaucracies to wither and die at the hands of some irate congressional committee (ahem, Financial Services).
Not the Commission. No, the SEC has HAD IT with everybody’s Monday morning quarterbacking and is going to start kicking ass and taking names.
And they’re going to start by aggressively interpreting the clawback provisions in Sarbanes Oxley. Sounds incredibly snoozerific, we realize, but in the past the Commission has only gone after the bonuses of the actual scofflaws.
The new SEC has decided that it’s going to try and clawback the bonuses and performance-based pay back from those who knew squat about the fraud and just cashed checks.

Last week, the regulator asked a court to order the return of $4m (€2.82m, £2.43m) paid to Maynard Jenkins, former chief executive of CSK Auto, whose profits were allegedly inflated by accounting fraud committed by others: Mr Jenkins was not involved.

We especially feel bad for the guy being made to be an example at the hands of the SEC. The House of Schape/Cox has been the joke of the establishment for months so the Commission figures that if it has to make a few people miserable while they crawl their way back to semi-respectability, it’s a small price to pay.
‘Clawback’ marks tougher SEC stance [FT.com]

The SEC Knew Who Allen Stanford was Before 2009, Thankyouverymuch

stanford10.jpgThe SEC would like everyone to know that it was “actively investigating” Stan the Man “well before the multibillion-dollar fraud by Bernard Madoff was revealed” but was “hampered by a lack of cooperation” from the Gun Show.
The investigation started back in 2005 but the SEC decided it wasn’t really time to get serious with Stan until after the whole Madoff SNAFU broke. So it sounds like from 2005 to late 2008, the “actively investigating” consisted of the following:
SEC: Hi. Are you running a Ponzi scheme?
Stan: I’ll die and go to hell if it’s a Ponzi Scheme
SEC: Good enough for us. Thanks for your help.
Give the SEC a break people. They were really trying on this one.
Stanford Hampered SEC Probe [WSJ]

SEC Suit on Billionaire Man-Child Tossed

markcuban.jpgNice try losers.
In what has to be an especially shameful blow to the SEC’s confidence, a Dallas judge has tossed the civil-insider trading lawsuit against Mark Cuban.
As much as we would like to see Cuban squirm, the Judge basically told the SEC they got nada. The SEC, re-thinking its career choice, did not immediately return calls for comment.
Judge Dismisses SEC Insider-Trading Case Against Mark Cuban [WSJ]