FBI FINANCIAL CRIMES REPORT

The following excerpt is from the FBI website:

"February 27th, 2012 Posted by Tracy Russo

The following post appears courtesy of the FBI.
The founder of a $7 billion hedge fund is convicted of insider trading. A drug company pleads guilty to making and selling unsafe prescription drugs to Americans. The head of a financial company admits scamming distressed homeowners who were trying to avoid foreclosure.
These recent crimes and many more like them can cause great harm to the U.S economy and American consumers. That’s why financial crimes are such an investigative priority.
Today, we’re releasing an overview of the problem and our response to it in our latest Financial Crimes Report to the Public. The report—which covers the period from October 1, 2009, to September 30, 2011—explains dozens of fraud schemes, outlines emerging trends, details FBI accomplishments in combating financial crimes (including major cases), and offers tips on protecting yourself from these crimes.

Here’s a brief snapshot of key sections of the report:
Corporate fraud: One of the Bureau’s highest criminal priorities, our corporate fraud cases resulted in 242 indictments/informations and 241 convictions of corporate criminals during fiscal year (FY) 2011. While most of our cases involve accounting schemes designed to conceal the true condition of a corporation or business, we’ve seen an increase in the number of insider trading cases.

Securities/commodities fraud: In FY 2011, our cases resulted in 520 indictments/informations and 394 convictions. As a result of an often volatile market, we’ve seen a rise in this type of fraud as investors look for alternative investment opportunities. There have been increases in new schemes—like securities market manipulation via cyber intrusion—as well as the tried-and-true—like Ponzi scams.

Health care fraud: In FY 2011, 2,690 cases investigated by the FBI resulted in 1,676 informations/indictments and 736 convictions. Some of the more prevalent schemes included: billing for services not provided, duplicate claims, medically unnecessary services, upcoding of services or equipment, and kickbacks for referring patients for services paid for by Medicare/Medicaid. We’ve seen increasing involvement of organized criminal groups in many of these schemes.

Mortgage fraud: During 2011, mortgage origination loans were at their lowest levels since 2001, partially due to tighter underwriting standards, while foreclosures and delinquencies have skyrocketed over the past few years. So, distressed homeowner fraud has replaced loan origination fraud as the number one mortgage fraud threat in many FBI offices. Other schemes include illegal property flipping, equity skimming, loan modification schemes, and builder bailout/condo conversion. During FY 2011, we had 2,691 pending mortgage fraud cases.

Financial institution fraud: Investigations in this area focused on insider fraud (embezzlement and misapplication), check fraud, counterfeit negotiable instruments, check kiting, and fraud contributing to the failure of financial institutions.
Also mentioned in the report are two recent initiatives that support our efforts against financial crime: the forensic accountant program, which ensures that financial investigative matters are conducted with the high-level expertise needed in an increasingly complex global financial system; and our Financial Intelligence Center, which provides tactical analysis of financial intelligence data, identifies potential criminal enterprises, and enhances investigations."

CLOTHING EXECUTIVE CHARGED WITH FRAUD AND INSIDER TRADING

Finding honest management is very difficult. When I was young I had training with the loss prevention manager at a big box retail store. He told me several stories of some of the memorable people he had caught stealing. This included various store personnel including managers. I asked him how he could tell if someone might be a thief. He replied without hesitation that "Everyone steals if they think they can get away with it." As an investor I certainly have come to regret not keeping in mind the words of the old store detective.

The following case involves alleged fraud committed against investors in a line of children’s clothing called Carter's. Following is an excerpt from the SEC web page:

Washington, D.C., Dec. 20, 2010 — The Securities and Exchange Commission today charged a former Executive Vice President of children's clothing marketer Carter's Inc. for engaging in financial fraud and insider trading. The SEC alleges that Joseph M. Elles's misconduct caused an understatement of Carter's expenses and a material overstatement of its net income in several financial reporting periods.

The SEC also announced that it has entered a non-prosecution agreement with Carter's under which the Atlanta-based company will not be charged with any violations of the federal securities laws relating to Elles's unlawful conduct. The non-prosecution agreement reflects the relatively isolated nature of the unlawful conduct, Carter's prompt and complete self-reporting of the misconduct to the SEC, its exemplary and extensive cooperation in the investigation, including undertaking a thorough and comprehensive internal investigation, and Carter's extensive and substantial remedial actions. This marks the first non-prosecution agreement entered by the SEC since the announcement of the SEC's new cooperation initiative earlier this year.

"Elles's trickery in secretly awarding excessive discounts deceived and damaged Carter's investors," said Robert Khuzami, Director of the SEC's Division of Enforcement. "While that was the wrong thing to do, Carter's did the right thing by promptly self-reporting the misconduct, taking thorough remedial action, and extensively cooperating with our investigation, for which it received the benefits of a non-prosecution agreement. In such circumstances, incentivizing appropriate corporate response to misconduct through the use of non-prosecution agreements is in the best interest of companies, shareholders and the SEC alike."

William P. Hicks, Associate Director of Enforcement in the SEC's Atlanta Regional Office, added, "Elles deceived accounting personnel at Carter's and caused financial misstatements to investors. After his misconduct inflated the company's earnings, Elles exercised options for the purchase of Carter's common stock and sold the resulting shares for his personal gain."

According to the SEC's complaint filed in U.S. District Court for the Northern District of Georgia, Elles conducted his scheme from 2004 to 2009 while serving as Carter's Executive Vice President of Sales. The SEC alleges that Elles fraudulently manipulated the dollar amount of discounts that Carter's granted to its largest wholesale customer — a large national department store — in order to induce that customer to purchase greater quantities of Carter's clothing for resale. Elles then concealed his misconduct by persuading the customer to defer subtracting the discounts from payments until later financial reporting periods. He created and signed false documents that misrepresented to Carter's accounting personnel the timing and amount of those discounts.

The SEC further alleges that Elles realized sizeable gains from insider trading in shares of Carter's common stock during the fraud. Between May 2005 and March 2009, Elles realized a profit before tax of approximately $4,739,862 from the exercises of options granted to him by Carter's and sales of the resulting shares. Each of these stock sales occurred prior to the company's initial disclosure relating to the fraud on Oct. 27, 2009, immediately after which the company's common stock share price dropped 23.8 percent.

After discovering Elles's actions and conducting its own internal investigation, Carter's was required to issue restated financial results for the affected periods.

Under the terms of the non-prosecution agreement, Carter's agreed to cooperate fully and truthfully in any further investigation conducted by the SEC staff as well as in the enforcement action filed against Elles.

The SEC's complaint alleges that Elles violated Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1, and aided and abetted violations of Sections 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11 and 13a-13. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and an officer and director bar against Elles."

The above shows the conumdrum that the government finds itself in when pursuing justice in cases involving securities manipulation. The people harmed by the fraud are the investors and the investors are often harmed by the government prosecuting the fraud since the value of their investment may be less than what it would have been had there been no prosecution of the criminals.

Being a corporate executive is a sweet deal since after cheating your investors you can then hold them hostage to thwart criminal prosecution. Someone who steals $100.00 worth of clothing from investors in a store may receive a much greater punishment than one who steals millions of dollars through securites fraud from investors in that same store.

SEC SAYS COMPANY DIRECTLY BOUGHT DISCOUNTED SECUITES AND DUMPED THEM ON THE PUBLIC

A few people in the media have been claiming that the securities market is rigged in favor of a few investors who have an inside track with exchanges and companies for the purpose of manipulating markets and swindling the public. If the following alleged crimes took place then this case is one that certainly proves that investing in securities based upon price moves and company information can be very dangerous for small investors. The following details are from the SEC web site:

Washington, D.C., Jan. 6, 2011 — The Securities and Exchange Commission today charged Gendarme Capital Corporation and its two executives with engaging in an illegal stock distribution scheme.

The SEC alleges that Gendarme repeatedly acquired deeply discounted shares from penny stock issuers under the pretense of a long-term investment and then dumped the shares into the market, essentially effecting public stock distributions without complying with the disclosure requirements of the federal securities laws. Through its two principals — CEO Ezat Rahimi of Elk Grove, Calif., and vice president Ian Lamphere of Lawrenceville, Vt. — Gendarme sold more than 15 billion shares of at least a dozen companies, netting illicit profits of more than $1.6 million.

"The federal securities laws are designed to ensure that buyers of stock in the open market have access to information about the companies in which they are investing," said Marc Fagel, Director of the SEC's San Francisco Regional Office. "Gendarme and its executives created a novel, but illegal, business plan to make an end-run around these investor protection laws, supposedly buying billions of shares of penny stock for investment purposes but instead turning around and dumping those shares into the market."
According to the SEC's complaint, filed today in federal district court in Sacramento, Gendarme began entering into agreements with penny stock issuers in early 2008. The agreements gave Gendarme the right to purchase stock at 30 to 50 percent discounts to the market price. The SEC alleges that, in an effort to avoid the registration and disclosure obligations of the federal securities laws, Gendarme falsely represented to issuers that it was purchasing shares for "investment purposes only." Contrary to those representations, Gendarme quickly dumped most of these shares on the public markets, profiting by more than $1.6 million from its unregistered stock distributions.

The SEC also alleges that Gendarme's outside attorney — Cassandra Armento of Greenwich, N.Y. — violated the securities laws by issuing more than 50 false legal opinion letters in support of Gendarme's activities. Armento repeatedly informed stock transfer agents that Gendarme was not an "underwriter" and thus had no intent to sell the stock. Thus, shares could be obtained by Gendarme without trading restrictions. However, the SEC alleges Armento made no inquiry into whether Gendarme intended to resell the stock, and was aware of information showing that it was likely that Gendarme was dumping the stock into the market.

The SEC's complaint charges Gendarme, Rahimi, Lamphere and Armento with violating the registration provisions of the federal securities laws. Against Gendarme, Rahimi, and Lamphere, the SEC seeks injunctive relief, disgorgement of ill-gotten gains, monetary penalties, and an order barring them from participating in an offering of penny stock. The SEC seeks injunctive relief and monetary penalties against Armento.”

The above case concerns low priced stocks however; the same types of shenanigans outlined by the SEC in the above case can happen in the case of any investment. Buying discounted to market priced shares of stock and then directly dumping them in the public market is certainly a reason some people are very rich and others are not.

SEC FILES CHARGES AGAINS DELL INC. FOR FRAUD

There are so many companies that cook their books to gain the approval of Wall Street. It is perhaps too often that traders and investors alike look to pundits on Wall Street to get information about a company. Some of the problem might be laziness on the part of potential purchasers of a given security. But, I suspect that a lot of the problem for purchases of securities is that the market moves so fast that by the time the real research and analysis is done on a company the company’s stock could have shot up several percent and then taken a nose dive only to shoot back up again. Doing corporate research and background checks is can be used to pick an entry point price to pay for a security but, because of extreme market volatility and the connectivity of our one world economy it is impossible to eliminate the gambling side to Wall Street. If something happens in Indonesia tomorrow it could cause a given company to go bankrupt or make billions. Since most companies are in several different countries keeping track of all the politics and economics in every country a company has ties to may be impossible.

The following is a story released by the SEC regarding Dell Inc. who seemed to consistently meet Wall Street expectations. You might recall the Bernard Madoff story in which he consistently did well for his investors and gave them fantastic returns. The Dell story like the Madoff story is a story of cooking the books so that investors did not panic when they saw that Dell did not meet the expectations of Wall Street gurus. Now Madoff cooked his books strictly to continue getting new investors to keep his Ponzi scheme going. Dell not only wanted to protect itself from investor flight but was also getting kickbacks from Intel to keep Dell from using another company’s CPU. In short, Dell made up for it’s shortfall in earnings from operations by taking bribes from Intel. Please read the excerpt from the SEC web site for details of this somewhat strange story.

“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.”

The above might be a very stupid crime on the part of Dell executives. After all, perhaps if they had used the CPU’s of an Intel competitor they might have had more sales, more revenues and more profits in which case, their ability to meet Wall Street expectations would have been met or exceeded. In any case, the fines were quite severe. The one problem I have with fining a company for committing fraud on its stockholders is that the stockholders (victims) end up paying for the crime twice. The first time they pay are when they are defrauded by paying too much for a stock and the second time they also pay by a declining stock price due to decreased profits because of large fines that the SEC levies. To levy fines against the victims seems stupid on the face of it and it is stupid. Congress should find a way to fix this problem but, too many of them became politicians because daddy does not trust them to run the family business.

In full disclosure I own shares in Intel but, I do not own shares in Dell. I do own a Dell computer and I have no complaints about the product or company services.