Making money can be very difficult if you work within our system of extremely volatile securities and commodities prices. One way to easily make money in such a system is to rig the system so that no matter what happens you will get someone else’s money out of their pocket and into yours.
It is common knowledge that many large investment firms will try to manipulate the prices of stocks sometimes on the upside but, usually it is toward the downside because when a stock price plunges small investors fear being wiped out and may also have margin calls to cover. (A margin call is when an investor is forced to sell stock because the value of his securities falls below the required total asset value to borrow money to buy on margin.) By instilling fear in the market for a stock the institutional short seller can get a stock price to tumble a lot without putting up a lot of money. It is legitimate to try to drive the price of a stock unless you have insider knowledge that diminishes or eliminates your own risk.
The following excerpt from the SEC web page is an illustration of a company that allegedly drove stock prices lower just prior to a public offering and then bought the stocks up very cheap:
“Washington, D.C., Sept. 23, 2010 — The Securities and Exchange Commission today charged Dallas-based hedge fund adviser Carlson Capital, L.P. with improperly participating in four public stock offerings after selling short those same stocks.
Carlson agreed to pay more than $2.6 million to settle the SEC's charges.
The SEC's Rule 105 of Regulation M helps prevent short selling that can reduce proceeds received by companies and shareholders by artificially depressing the market price shortly before the company prices its public offering. Rule 105 ensures that offering prices are set by natural forces of supply and demand rather than manipulative activity by prohibiting the short sale of an equity security during a restricted period — generally five business days before a public offering — and the purchase of that same security through the offering. The rule applies regardless of the trader's intent in selling short the stock.
According to the SEC's order, Carlson violated Rule 105 on four occasions and had policies and procedures that were insufficient to prevent the firm from participating in the relevant offerings. For one of those occasions, the SEC found a Rule 105 violation even though the portfolio manager who sold short the stock and the portfolio manager who bought the offering shares were different.
"Investment advisers must recognize that combined trading by different portfolio managers can still constitute a clear violation of Rule 105 when short selling takes place during a restricted period," said Antonia Chion, Associate Director of the SEC's Division of Enforcement. "This is true even when the portfolio managers have different investment approaches and generally make their own trading decisions."
In its order, the SEC found that the "separate accounts" exception to Rule 105 did not apply to Carlson's participation in that offering. If certain conditions are met, this exception allows the purchase of an offered security in an account that is "separate" from the account through which the same security was sold short. The Commission found that the combined activities of Carlson's portfolio managers violated Rule 105 and did not qualify for the separate accounts exception because the firm's portfolio managers:
Could access each others' trading positions and trade reports, and could consult with each other about companies of interest.
Reported to a single chief investment officer who supervised the firm's portfolios and had authority over the firm's positions.
Were not prohibited from coordinating with each other with respect to trading.
The SEC further found that the portfolio manager who sold short the particular stock during the restricted period received information — before the short sales were made — that indicated the other portfolio manager intended to buy offering shares.
Without admitting or denying the SEC's findings, Carlson agreed to pay a total of $2,653,234, which includes $2,256,386 in disgorgement of improper gains or avoided losses, a $260,000 penalty, and pre-judgment interest of $136,848. Carlson also consented to an order that imposes a censure and requires the firm to cease and desist from committing or causing any violations and any future violations of Rule 105. During the SEC's investigation, the adviser took remedial measures including implementation of an automated system that helps review the firm's prior short sales before it participates in offerings.”
In the above case there were two separate individuals involved that worked for the same firm. One sold the stock short while the other went long on the stock. The SEC suspected that there was collusion between the two individuals and the investment fund advisor agreed to pay back what it earned on the transaction and an additional penalty. The investment firm admitted to no wrongdoing.
It would be nice if the FBI would investigate the illegal acts of large corporations but,in truth FBI stands for For Big Institutions. In other words the FBI will investigate corparate fraud just like the SS would investigate the mental illness of Adolph Hitler.
This is a photo of the National Register of Historic Places listing with reference number 7000063
Sunday, October 3, 2010
Monday, September 27, 2010
THE PONZI REAL ESTATE FUND
Enron was never a rouge company that cheated their employees, investors and clients out of their money. Stealing money from employees, investors and clients is the way with many businesses today. For the most part government does nothing to improve this situation. The SEC is one of the few institutions that are currently investigating some of the fraudsters in America but, they have no power to prosecute the fraudsters and recommend anything except civil penalties. The power of the SEC is limited to fines and disgorgements. Even those committing Ponzi schemes, which are one of the most blatant forms of fraud, are often placed under no personal jeopardy of losing their freedom even if they admit to the crime.
Ponzi schemes are perpetrated in their most basic form by paying previous investors money using funds provided by new investors. As long as there is more money coming in from new investors than going out to old investors the Ponzi scheme can continue. The following is just another tale of a Ponzi scheme that was discovered. The next several paragraphs are taken from the SEC website:
“Washington, D.C., Sept. 21, 2010 — The Securities and Exchange Commission today charged a Minneapolis-based attorney and two San Francisco-area promoters with defrauding investors in a real estate lending fund by concealing the financial collapse of the fund's sole business partner.
The SEC alleges that Todd A. Ducksonn attorney who resides in Prior Lake, Minn., and Michael W. Bozora and Timothy R. Redpath, who reside in Marin County, Calif., raised more than $21 million from investors in the Capital Solutions Monthly Income Fund after the fund's sole business partner defaulted on its obligations to the fund. The SEC alleges that after this May 2008 default, the fund - whose sole business was to make real estate loans to a single borrower - had no meaningful income and was using new investor funds to pay existing investors.
"The fund's real estate lending strategy failed due to the collapse of the fund's sole borrower. Instead of disclosing this fact, Bozora, Redpath, and Duckson falsely claimed that the fund was positioned to profit from the U.S. real estate downturn," said Robert J. Burson, Senior Associate Regional Director of the SEC's Chicago Regional Office. "Investors were entitled to know true facts rather than the misleading positive spin that Bozora, Redpath, and Duckson provided."
The SEC alleges that after the default, Duckson, Bozora, and Redpath told investors that the fund was poised to take advantage of attractive lending opportunities provided by the collapse in the U.S. credit and real estate markets, when in fact the fund' s business strategy had failed.
According to the SEC's complaint filed in federal court in Minneapolis, Bozora and Redpath launched the fund in 2004 and, through August 2009, raised approximately $74 million from approximately 450 investors from across the U.S. After the May 2008 default by the fund's sole borrower, the fund foreclosed on the borrower's real estate projects. The SEC alleges that in late 2008, Bozora and Redpath asked Duckson, who was acting as the fund's outside counsel, to take over managing the fund. The SEC alleges that Duckson then began managing the fund while Bozora and Redpath continued to raise money from new investors. The SEC alleges that Bozora, Redpath, and Duckson failed to disclose the default and foreclosure to investors for several months.
The SEC alleges that Bozora, Redpath, and Duckson eventually made some disclosure of the default and foreclosure, but they minimized the impact of these events and continued to misleadingly promote the fund's ability to make new loans. In fact, the fund's ability to make new loans was limited. After the default and foreclosure, the fund was required to use most of its assets to maintain its existing real estate portfolio acquired through the foreclosure and to pay existing investors.
The SEC's complaint also charges True North Finance Corporation, a Minneapolis real estate lending company that merged with the fund in 2009, and True North's Chief Financial Officer Owen Mark Williams with accounting fraud. The SEC alleges that in 2008 and 2009, Williams caused True North to overstate its revenues by as much as 99 percent. The SEC alleges that True North improperly recognized revenue on interest from borrowers who were not paying True North and were in poor financial condition. The SEC further alleges that True North's recognition of revenue was contrary to its own revenue recognition policy, which stated that it would not recognize revenue where payment of interest was 90 days past due.
The SEC is seeking permanent injunctions, disgorgement, prejudgment interest and civil penalties against all of the defendants, and officer-director bars against Bozora, Redpath, Duckson, and Williams."
Perhaps these fraudsters might be bared from doing bad things in the future but, the future is a mysterious place. Today my own country is replete with criminals that make very large incomes based on bribery and fraudulant operations like Ponzi schemes.
Ponzi schemes are perpetrated in their most basic form by paying previous investors money using funds provided by new investors. As long as there is more money coming in from new investors than going out to old investors the Ponzi scheme can continue. The following is just another tale of a Ponzi scheme that was discovered. The next several paragraphs are taken from the SEC website:
“Washington, D.C., Sept. 21, 2010 — The Securities and Exchange Commission today charged a Minneapolis-based attorney and two San Francisco-area promoters with defrauding investors in a real estate lending fund by concealing the financial collapse of the fund's sole business partner.
The SEC alleges that Todd A. Ducksonn attorney who resides in Prior Lake, Minn., and Michael W. Bozora and Timothy R. Redpath, who reside in Marin County, Calif., raised more than $21 million from investors in the Capital Solutions Monthly Income Fund after the fund's sole business partner defaulted on its obligations to the fund. The SEC alleges that after this May 2008 default, the fund - whose sole business was to make real estate loans to a single borrower - had no meaningful income and was using new investor funds to pay existing investors.
"The fund's real estate lending strategy failed due to the collapse of the fund's sole borrower. Instead of disclosing this fact, Bozora, Redpath, and Duckson falsely claimed that the fund was positioned to profit from the U.S. real estate downturn," said Robert J. Burson, Senior Associate Regional Director of the SEC's Chicago Regional Office. "Investors were entitled to know true facts rather than the misleading positive spin that Bozora, Redpath, and Duckson provided."
The SEC alleges that after the default, Duckson, Bozora, and Redpath told investors that the fund was poised to take advantage of attractive lending opportunities provided by the collapse in the U.S. credit and real estate markets, when in fact the fund' s business strategy had failed.
According to the SEC's complaint filed in federal court in Minneapolis, Bozora and Redpath launched the fund in 2004 and, through August 2009, raised approximately $74 million from approximately 450 investors from across the U.S. After the May 2008 default by the fund's sole borrower, the fund foreclosed on the borrower's real estate projects. The SEC alleges that in late 2008, Bozora and Redpath asked Duckson, who was acting as the fund's outside counsel, to take over managing the fund. The SEC alleges that Duckson then began managing the fund while Bozora and Redpath continued to raise money from new investors. The SEC alleges that Bozora, Redpath, and Duckson failed to disclose the default and foreclosure to investors for several months.
The SEC alleges that Bozora, Redpath, and Duckson eventually made some disclosure of the default and foreclosure, but they minimized the impact of these events and continued to misleadingly promote the fund's ability to make new loans. In fact, the fund's ability to make new loans was limited. After the default and foreclosure, the fund was required to use most of its assets to maintain its existing real estate portfolio acquired through the foreclosure and to pay existing investors.
The SEC's complaint also charges True North Finance Corporation, a Minneapolis real estate lending company that merged with the fund in 2009, and True North's Chief Financial Officer Owen Mark Williams with accounting fraud. The SEC alleges that in 2008 and 2009, Williams caused True North to overstate its revenues by as much as 99 percent. The SEC alleges that True North improperly recognized revenue on interest from borrowers who were not paying True North and were in poor financial condition. The SEC further alleges that True North's recognition of revenue was contrary to its own revenue recognition policy, which stated that it would not recognize revenue where payment of interest was 90 days past due.
The SEC is seeking permanent injunctions, disgorgement, prejudgment interest and civil penalties against all of the defendants, and officer-director bars against Bozora, Redpath, Duckson, and Williams."
Perhaps these fraudsters might be bared from doing bad things in the future but, the future is a mysterious place. Today my own country is replete with criminals that make very large incomes based on bribery and fraudulant operations like Ponzi schemes.
Sunday, September 19, 2010
STEALING 3/5 OF SHAREHOLDER VALUE IS A BAD ACCOUNTING PRACTICE
It is wonderful when accountants go to jail for stealing. My father was an accountant for most of his life and was incredibly honest. It was a real stickler for making sure the numbers balanced and that no was stealing. The following is a tale from the SEC web site about accounts that made sure they got their share of corporate income from the Koss Corporation. Koss is a relatively small corporation that trades publicly at a current price of less than $6.00 per share. The alleged embezzlement is for $30,000,000 which is astounding in that the shareholder value in the company is less than $50,000,000. In addition, this company currently has a negative earnings per share.
Please read the following excerpt from the SEC web page to see the type of modern accounting practice that is used in some U.S. corporations:
“Washington, D.C., Aug. 31, 2010 — The Securities and Exchange Commission today charged two former senior accounting professionals at a Milwaukee-based headphone manufacturer with accounting fraud, books-and-records violations, and related misconduct arising from the embezzlement of more than $30 million from the company.
The SEC alleges that Sujata Sachdeva, who was the vice president of finance and principal accounting officer at Koss Corporation, stole money from company accounts to make millions of dollars in payments on her personal credit card and for other extravagant personal purchases from luxury retailers. With the assistance of Koss senior accountant Julie Mulvaney, Sachdeva concealed the theft on Koss’s balance sheet and income statement by overstating assets, expenses, and cost of sales, and by understating liabilities and sales. Based on the fraudulent records prepared by Sachdeva and Mulvaney, Koss prepared materially false financial statements and filed materially false current, quarterly, and annual reports with the SEC.
“Sachdeva brazenly stole millions from Koss Corporation with Mulvaney’s assistance and then used crooked accounting to cover up the theft,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. “Sachdeva and Mulvaney abused their positions of trust and defrauded Koss shareholders who rely upon corporate filings for accurate information about the company’s financial condition.”
According to the SEC’s complaint, filed in U.S. District Court for the Eastern District of Wisconsin, the scheme began in 2004 and lasted through December 2009. After discovering the embezzlement, Koss amended and restated its financial statements for fiscal years 2008 and 2009 and the first three quarters of fiscal year 2010. Both Sachdeva and Mulvaney have been terminated by the company.
The SEC’s complaint alleges that Sachdeva, a resident of Mequon, Wisc., embezzled funds from company accounts through a variety of means, including cashier’s checks, unauthorized wire transfers, and unauthorized payments from petty cash. Sachdeva fraudulently authorized the issuance of more than 500 cashier’s checks totaling more than $15 million. She used them to make approximately $10 million in payments to American Express for her personal credit card, and also used them to make direct payments to luxury retailers. At times, Sachdeva used acronyms in an attempt to conceal the identities of the check recipients — such as “N.M. Inc.” for Neiman Marcus and “S.F.A. Inc.” for Saks Fifth Avenue.
According to the SEC’s complaint, Sachdeva used the embezzled funds to finance an extravagant lifestyle, including prolific purchases of designer clothes, furs, purses, shoes, and jewelry as well as china, statues, and household furnishings. She also used the stolen funds to buy automobiles, pay for airline tickets and hotels during personal travel, and finance home improvements and renovations. Meanwhile Mulvaney, who lives in Milwaukee, concealed and facilitated the theft by preparing false journal entries to disguise Sachdeva’s misappropriation of funds.
The SEC’s complaint charges Sachdeva with violations of the antifraud provisions of the federal securities laws and charges both Sachdeva and Mulvaney with violations of the reporting, books and records and internal control provisions of the federal securities laws. The SEC seeks a permanent injunction, disgorgement of ill-gotten gains and financial penalties against Sachdeva and Mulvaney, and an order barring Sachdeva from serving as an officer or director of a public company.
Sachdeva entered into a plea agreement with the U.S. Attorney’s Office for the Eastern District of Wisconsin on July 27, 2010, in a parallel criminal proceeding and pled guilty to six counts of wire fraud. Sachdeva admitted her multi-million-dollar theft from company and her scheme to falsify the company’s accounting records to hide her embezzlement. Sachdeva is scheduled to be sentenced on Nov. 18, 2010.”
It is good to see these crooks caught and prosecuted by the U.S. Attorney’s office and at least one of them will face some sort of personal jeopardy. But, perhaps these people should be Deans of some our businesses schools. It is not everyone who can steal thirty million dollars from a company which has a stock holder value (market cap) of about fifty million dollars. This tale is like the tale of Rumplestilskin turning straw into gold except, the first born of the investors may not have to be taken away to pay for the gold.
Please read the following excerpt from the SEC web page to see the type of modern accounting practice that is used in some U.S. corporations:
“Washington, D.C., Aug. 31, 2010 — The Securities and Exchange Commission today charged two former senior accounting professionals at a Milwaukee-based headphone manufacturer with accounting fraud, books-and-records violations, and related misconduct arising from the embezzlement of more than $30 million from the company.
The SEC alleges that Sujata Sachdeva, who was the vice president of finance and principal accounting officer at Koss Corporation, stole money from company accounts to make millions of dollars in payments on her personal credit card and for other extravagant personal purchases from luxury retailers. With the assistance of Koss senior accountant Julie Mulvaney, Sachdeva concealed the theft on Koss’s balance sheet and income statement by overstating assets, expenses, and cost of sales, and by understating liabilities and sales. Based on the fraudulent records prepared by Sachdeva and Mulvaney, Koss prepared materially false financial statements and filed materially false current, quarterly, and annual reports with the SEC.
“Sachdeva brazenly stole millions from Koss Corporation with Mulvaney’s assistance and then used crooked accounting to cover up the theft,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. “Sachdeva and Mulvaney abused their positions of trust and defrauded Koss shareholders who rely upon corporate filings for accurate information about the company’s financial condition.”
According to the SEC’s complaint, filed in U.S. District Court for the Eastern District of Wisconsin, the scheme began in 2004 and lasted through December 2009. After discovering the embezzlement, Koss amended and restated its financial statements for fiscal years 2008 and 2009 and the first three quarters of fiscal year 2010. Both Sachdeva and Mulvaney have been terminated by the company.
The SEC’s complaint alleges that Sachdeva, a resident of Mequon, Wisc., embezzled funds from company accounts through a variety of means, including cashier’s checks, unauthorized wire transfers, and unauthorized payments from petty cash. Sachdeva fraudulently authorized the issuance of more than 500 cashier’s checks totaling more than $15 million. She used them to make approximately $10 million in payments to American Express for her personal credit card, and also used them to make direct payments to luxury retailers. At times, Sachdeva used acronyms in an attempt to conceal the identities of the check recipients — such as “N.M. Inc.” for Neiman Marcus and “S.F.A. Inc.” for Saks Fifth Avenue.
According to the SEC’s complaint, Sachdeva used the embezzled funds to finance an extravagant lifestyle, including prolific purchases of designer clothes, furs, purses, shoes, and jewelry as well as china, statues, and household furnishings. She also used the stolen funds to buy automobiles, pay for airline tickets and hotels during personal travel, and finance home improvements and renovations. Meanwhile Mulvaney, who lives in Milwaukee, concealed and facilitated the theft by preparing false journal entries to disguise Sachdeva’s misappropriation of funds.
The SEC’s complaint charges Sachdeva with violations of the antifraud provisions of the federal securities laws and charges both Sachdeva and Mulvaney with violations of the reporting, books and records and internal control provisions of the federal securities laws. The SEC seeks a permanent injunction, disgorgement of ill-gotten gains and financial penalties against Sachdeva and Mulvaney, and an order barring Sachdeva from serving as an officer or director of a public company.
Sachdeva entered into a plea agreement with the U.S. Attorney’s Office for the Eastern District of Wisconsin on July 27, 2010, in a parallel criminal proceeding and pled guilty to six counts of wire fraud. Sachdeva admitted her multi-million-dollar theft from company and her scheme to falsify the company’s accounting records to hide her embezzlement. Sachdeva is scheduled to be sentenced on Nov. 18, 2010.”
It is good to see these crooks caught and prosecuted by the U.S. Attorney’s office and at least one of them will face some sort of personal jeopardy. But, perhaps these people should be Deans of some our businesses schools. It is not everyone who can steal thirty million dollars from a company which has a stock holder value (market cap) of about fifty million dollars. This tale is like the tale of Rumplestilskin turning straw into gold except, the first born of the investors may not have to be taken away to pay for the gold.
Sunday, September 12, 2010
SEC CHARGES SKIN CARE COMPANY CFO WITH COOKING THE BOOKS
Fraud is so common in the American investment community that it is a wonder that the DJIA trades above 1,000 points. Financial statements are rendered worthless because so many accountants are willing to take bribes and falsely report income and losses (commonly known as cooking the books). So what is an investor to do? Well, based upon the performance of the stock market this year, most have choose to put their money under their mattress and wait and see if someone will ever get serious about stopping the rampant fraud throughout our economy. The following is an excerpt from the SEC blog which tells the tale of a company that allegedly defrauded investors with the help of an accounting firm:
“Washington, D.C., Aug. 9, 2010 — The Securities and Exchange Commission today charged the former chief financial officer of a Seattle-area skin care retailer with fraudulently boosting earnings by reporting sales of anti-aging products promoted through Home Shopping Network infomercials while the products still sat unsold in the company’s warehouse. The agency also separately settled charges against the company and began administrative proceedings against the company’s outside auditors for professional misconduct.
The SEC alleges that Karl Redekopp, the former CFO of International Commercial Television Inc. (ICTV), turned millions of dollars of quarterly losses into profits by falsely accounting for ICTV's sales of the Derma Wand, a skin care appliance that purports to reduce wrinkles and improve skin appearance. Redekopp fraudulently recognized revenue before the Home Shopping Network had actually sold or delivered the product to viewers. He also improperly recognized revenue before a free trial period offered by the company had expired, and failed to reverse revenue from products that had been returned. Redekopp's misconduct caused the company to falsely report millions of dollars in excess revenue in 2007 and 2008.
"Redekopp violated fundamental principles of accounting to fraudulently boost ICTV's bottom line and conceal its true financial health from investors," said Marc J. Fagel, Director of the SEC's San Francisco Regional Office. "Unfortunately, ICTV's auditors turned a blind eye to the company's financial irregularities and failed to fulfill their role in investor protection."
The SEC's complaint against Redekopp, filed in federal district court in Tacoma, Wash., alleges that Redekopp recorded "sales" of products that had not been shipped or that the customer was not obligated to pay for. Redekopp's fraudulent accounting resulted in ICTV adjusting net sales by more than $3.7 million over a five-quarter period in 2007 and 2008, negating all originally reported net income for those periods to restated net losses. For example, for year-end 2007 alone, ICTV restated its originally reported net income of $1.5 million to a net loss of $1.1 million after correcting the fraudulent reporting.
The SEC's complaint charges Redekopp, who lives in Vancouver, B.C., with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws. The SEC seeks a permanent injunction, a financial penalty, and an order barring him from serving as an officer of a public company.
In a separate complaint, the SEC charged ICTV for its misleading financial statements. Without admitting or denying the allegations, ICTV agreed to settle the charges by consenting to a final judgment permanently enjoining the company from future violations of the reporting, books and records, and internal control provisions of the federal securities laws.
The SEC instituted administrative proceedings against ICTV's former outside auditors Steven H. Dohan, Nancy L. Brown and their Miami-area firm Dohan + Company CPAs as well as Erez Bahar, a Canadian Chartered Accountant who lives in Vancouver.
According to the SEC's order, Dohan, Brown, and Bahar were responsible for the issuance of an unqualified audit report stating that ICTV's financial statements were fairly reported in conformity with Generally Accepted Accounting Principles (GAAP) and that the audit had been conducted in accordance with Public Company Accounting Oversight Board (PCAOB) auditing standards. The SEC's Division of Enforcement alleges that the former auditors failed to identify the material accounting deficiencies and violations of GAAP that formed the basis of the SEC's enforcement action against Redekopp. The Division of Enforcement alleges that Dohan, Brown, Bahar, and Dohan + Company CPAs engaged in improper professional conduct under Rule 102(e) of the Commission's Rules of Practice. An administrative hearing will be scheduled to determine whether remedial sanctions are appropriate.”
This is another case where the SEC is taking action but, where is the Department of Justice? It seems that white collar crime is legal in the eyes of prosecutors. The theft of investment funds by fraudsters may well be recognized by historians as the reason for our current economic mess and also as the reason for our nation’s long term demise. Printing money to pour into the bottomless pit of Wall Street fraudster's pockets will cure nothing in the long run.
The government can only do so much to stimulate the economy. Before the economy can improve the general population must have a positive attitude toward business. For big business executives to simply blame the government for everything and then rail against any legislation that gets tough on fraudsters’ shows to the American public that business is not to be trusted any more than government. After all, if a business executive is not committing fraud then why is he against prosecuting those who are fraudsters? Perhaps “birds of a feather” do flock together.
For government and business to believe that doing nothing to clean up the horrific fraud in our economy caused by government and business, will somehow make things get better over time is ridiculous. Relying on luck or divine intervention to fix things will fix nothing because it was not a divinity or bad luck that caused this economic fiasco. To misquote Shakespeare, the economic problem that government and big business have isn’t in their stars, it’s in themselves.
“Washington, D.C., Aug. 9, 2010 — The Securities and Exchange Commission today charged the former chief financial officer of a Seattle-area skin care retailer with fraudulently boosting earnings by reporting sales of anti-aging products promoted through Home Shopping Network infomercials while the products still sat unsold in the company’s warehouse. The agency also separately settled charges against the company and began administrative proceedings against the company’s outside auditors for professional misconduct.
The SEC alleges that Karl Redekopp, the former CFO of International Commercial Television Inc. (ICTV), turned millions of dollars of quarterly losses into profits by falsely accounting for ICTV's sales of the Derma Wand, a skin care appliance that purports to reduce wrinkles and improve skin appearance. Redekopp fraudulently recognized revenue before the Home Shopping Network had actually sold or delivered the product to viewers. He also improperly recognized revenue before a free trial period offered by the company had expired, and failed to reverse revenue from products that had been returned. Redekopp's misconduct caused the company to falsely report millions of dollars in excess revenue in 2007 and 2008.
"Redekopp violated fundamental principles of accounting to fraudulently boost ICTV's bottom line and conceal its true financial health from investors," said Marc J. Fagel, Director of the SEC's San Francisco Regional Office. "Unfortunately, ICTV's auditors turned a blind eye to the company's financial irregularities and failed to fulfill their role in investor protection."
The SEC's complaint against Redekopp, filed in federal district court in Tacoma, Wash., alleges that Redekopp recorded "sales" of products that had not been shipped or that the customer was not obligated to pay for. Redekopp's fraudulent accounting resulted in ICTV adjusting net sales by more than $3.7 million over a five-quarter period in 2007 and 2008, negating all originally reported net income for those periods to restated net losses. For example, for year-end 2007 alone, ICTV restated its originally reported net income of $1.5 million to a net loss of $1.1 million after correcting the fraudulent reporting.
The SEC's complaint charges Redekopp, who lives in Vancouver, B.C., with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws. The SEC seeks a permanent injunction, a financial penalty, and an order barring him from serving as an officer of a public company.
In a separate complaint, the SEC charged ICTV for its misleading financial statements. Without admitting or denying the allegations, ICTV agreed to settle the charges by consenting to a final judgment permanently enjoining the company from future violations of the reporting, books and records, and internal control provisions of the federal securities laws.
The SEC instituted administrative proceedings against ICTV's former outside auditors Steven H. Dohan, Nancy L. Brown and their Miami-area firm Dohan + Company CPAs as well as Erez Bahar, a Canadian Chartered Accountant who lives in Vancouver.
According to the SEC's order, Dohan, Brown, and Bahar were responsible for the issuance of an unqualified audit report stating that ICTV's financial statements were fairly reported in conformity with Generally Accepted Accounting Principles (GAAP) and that the audit had been conducted in accordance with Public Company Accounting Oversight Board (PCAOB) auditing standards. The SEC's Division of Enforcement alleges that the former auditors failed to identify the material accounting deficiencies and violations of GAAP that formed the basis of the SEC's enforcement action against Redekopp. The Division of Enforcement alleges that Dohan, Brown, Bahar, and Dohan + Company CPAs engaged in improper professional conduct under Rule 102(e) of the Commission's Rules of Practice. An administrative hearing will be scheduled to determine whether remedial sanctions are appropriate.”
This is another case where the SEC is taking action but, where is the Department of Justice? It seems that white collar crime is legal in the eyes of prosecutors. The theft of investment funds by fraudsters may well be recognized by historians as the reason for our current economic mess and also as the reason for our nation’s long term demise. Printing money to pour into the bottomless pit of Wall Street fraudster's pockets will cure nothing in the long run.
The government can only do so much to stimulate the economy. Before the economy can improve the general population must have a positive attitude toward business. For big business executives to simply blame the government for everything and then rail against any legislation that gets tough on fraudsters’ shows to the American public that business is not to be trusted any more than government. After all, if a business executive is not committing fraud then why is he against prosecuting those who are fraudsters? Perhaps “birds of a feather” do flock together.
For government and business to believe that doing nothing to clean up the horrific fraud in our economy caused by government and business, will somehow make things get better over time is ridiculous. Relying on luck or divine intervention to fix things will fix nothing because it was not a divinity or bad luck that caused this economic fiasco. To misquote Shakespeare, the economic problem that government and big business have isn’t in their stars, it’s in themselves.
Sunday, September 5, 2010
SEC CHARGES TWO SPAINARDS WITH INSIDER TRAIDNG
It is good to see that the current SEC is willing to go after all kinds of fraudsters. In the past fraud did not seem important to the SEC until there was a complete meltdown in the stock market, commodities market or more recently, the housing market. The following case seems fairly straight forward. It seems that a resident of Spain who was an officer at a large bank (Banco Santander, S.A.) decided that he and another man could make a lot of money on some inside information that he had obtained through his position. The following excerpt from the SEC web page explains in detail the fraud and the remedy that the SEC is asking for:
Washington, D.C., Aug. 24, 2010 — The Securities and Exchange Commission has charged two residents of Madrid, Spain with insider trading and obtained an emergency court order to freeze their assets after they made nearly $1.1 million in illegal profits by trading in advance of last week's public announcement of a multi-billion dollar cash tender offer by BHP Billiton Plc to acquire Potash Corp. of Saskatchewan Inc.
The SEC alleges that Juan Jose Fernandez Garcia and Luis Martin Caro Sanchez purchased — on the basis of material, non-public information about the impending tender offer — hundreds of "out-of-the-money" call option contracts for stock in Potash in the days leading up to the public announcement of BHP's bid on August 17. Garcia is the head of a research arm at Banco Santander, S.A. — a Spanish banking group advising BHP on its bid. Garcia and Sanchez jointly spent a little more than $61,000 to purchase the contracts in U.S. brokerage accounts. Immediately after BHP's offer was announced publicly on August 17, Garcia and Sanchez sold all of their options for illicit profits of nearly $1.1 million.
"Garcia and Sanchez tried to move off-shore highly suspicious trading profits made just a few days before. When abusive market practices occur, as in the case against Garcia and Sanchez, we will act swiftly and decisively to deny wrongdoers the profits of their illegal activity," said Daniel M. Hawke, Chief of the Enforcement Division's Market Abuse Unit.
According to the SEC's complaint filed Friday in U.S. District Court for the Northern District of Illinois and unsealed by the court today, BHP made an unsolicited $38.6 billion offer to purchase all of the stock of Potash for $130 per share in cash. The acquisition share price represented a 16 percent premium above Potash's closing price of $112.15 on August 16. Potash, based in Saskatoon, Canada, is the world's largest producer of fertilizer minerals and its stock trades on the New York Stock Exchange. BHP, based in Melbourne, Australia, is the world's largest mining company.
The SEC alleges that Garcia was in possession of material, nonpublic information regarding BHP's offer to acquire Potash while he purchased approximately 282 call option contracts for Potash stock from August 12 to 16. The majority of the contracts were set to expire on August 21, and all but six of the call option contracts purchased by Garcia were out-of-the-money. Sanchez, while in possession of material, nonpublic information regarding BHP's offer to acquire Potash, purchased approximately 331 out-of-the-money call option contracts for Potash stock on August 12 and 13. He purchased the contracts in an account at Interactive Brokers LLC — the same U.S. brokerage firm through which Garcia traded his Potash call option contracts. Sanchez's contracts were set to expire within weeks of the purchase date. Neither individual had previously traded this year in Potash securities through his account at Interactive Brokers.
The emergency court order obtained late Friday by the SEC on an ex parte basis and unsealed by the court today freezes approximately $1.1 million in assets and, among other things, grants expedited discovery and prohibits Garcia and Sanchez from destroying evidence.
The SEC alleges that Garcia and Sanchez violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. In addition to the emergency relief, the Commission is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.
The SEC's investigation is continuing.”
The above dealt with a relatively small amount of money stolen by not such rich and powerful men. You have to wonder how often such crimes are committed and whether or not the same outcome occurs when such crimes are committed by much richer and more powerful men who have access to even more insider information. Nevertheless, the SEC did some good investigative work in finding these individuals before they could hide the money in a foreign account.
Washington, D.C., Aug. 24, 2010 — The Securities and Exchange Commission has charged two residents of Madrid, Spain with insider trading and obtained an emergency court order to freeze their assets after they made nearly $1.1 million in illegal profits by trading in advance of last week's public announcement of a multi-billion dollar cash tender offer by BHP Billiton Plc to acquire Potash Corp. of Saskatchewan Inc.
The SEC alleges that Juan Jose Fernandez Garcia and Luis Martin Caro Sanchez purchased — on the basis of material, non-public information about the impending tender offer — hundreds of "out-of-the-money" call option contracts for stock in Potash in the days leading up to the public announcement of BHP's bid on August 17. Garcia is the head of a research arm at Banco Santander, S.A. — a Spanish banking group advising BHP on its bid. Garcia and Sanchez jointly spent a little more than $61,000 to purchase the contracts in U.S. brokerage accounts. Immediately after BHP's offer was announced publicly on August 17, Garcia and Sanchez sold all of their options for illicit profits of nearly $1.1 million.
"Garcia and Sanchez tried to move off-shore highly suspicious trading profits made just a few days before. When abusive market practices occur, as in the case against Garcia and Sanchez, we will act swiftly and decisively to deny wrongdoers the profits of their illegal activity," said Daniel M. Hawke, Chief of the Enforcement Division's Market Abuse Unit.
According to the SEC's complaint filed Friday in U.S. District Court for the Northern District of Illinois and unsealed by the court today, BHP made an unsolicited $38.6 billion offer to purchase all of the stock of Potash for $130 per share in cash. The acquisition share price represented a 16 percent premium above Potash's closing price of $112.15 on August 16. Potash, based in Saskatoon, Canada, is the world's largest producer of fertilizer minerals and its stock trades on the New York Stock Exchange. BHP, based in Melbourne, Australia, is the world's largest mining company.
The SEC alleges that Garcia was in possession of material, nonpublic information regarding BHP's offer to acquire Potash while he purchased approximately 282 call option contracts for Potash stock from August 12 to 16. The majority of the contracts were set to expire on August 21, and all but six of the call option contracts purchased by Garcia were out-of-the-money. Sanchez, while in possession of material, nonpublic information regarding BHP's offer to acquire Potash, purchased approximately 331 out-of-the-money call option contracts for Potash stock on August 12 and 13. He purchased the contracts in an account at Interactive Brokers LLC — the same U.S. brokerage firm through which Garcia traded his Potash call option contracts. Sanchez's contracts were set to expire within weeks of the purchase date. Neither individual had previously traded this year in Potash securities through his account at Interactive Brokers.
The emergency court order obtained late Friday by the SEC on an ex parte basis and unsealed by the court today freezes approximately $1.1 million in assets and, among other things, grants expedited discovery and prohibits Garcia and Sanchez from destroying evidence.
The SEC alleges that Garcia and Sanchez violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. In addition to the emergency relief, the Commission is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.
The SEC's investigation is continuing.”
The above dealt with a relatively small amount of money stolen by not such rich and powerful men. You have to wonder how often such crimes are committed and whether or not the same outcome occurs when such crimes are committed by much richer and more powerful men who have access to even more insider information. Nevertheless, the SEC did some good investigative work in finding these individuals before they could hide the money in a foreign account.
Sunday, August 29, 2010
SEC CHARGES THE STATE OF NEW JERSEY WITH FRAUD
The following case involves the State of New Jersey selling municipal bonds that were in financial jeopardy of never paying off at the time the municipal bonds were sold. It seems that for several years New Jersey has been under funding two huge retirement programs; namely its pension program for teachers and the one they had for public employees. This under funding places New Jersey on the road to bankruptcy unless it does something drastic to curb its expenses. Municipal bonds are supposed to be a safe investment but, the inability of state and local governments to curb spending may spell the demise of the muni bonds. The following is an excerpt from the SEC web page which will go into detail regarding the case and the specific laws New Jersey violated:
“Washington, D.C., Aug. 18, 2010 — The Securities and Exchange Commission today charged the State of New Jersey with securities fraud for misrepresenting and failing to disclose to investors in billions of dollars worth of municipal bond offerings that it was under funding the state's two largest pension plans.
According to the SEC's order, New Jersey offered and sold more than $26 billion worth of municipal bonds in 79 offerings between August 2001 and April 2007. The offering documents for these securities created the false impression that the Teachers' Pension and Annuity Fund (TPAF) and the Public Employees' Retirement System (PERS) were being adequately funded; masking the fact that New Jersey was unable to make contributions to TPAF and PERS without raising taxes, cutting other services or otherwise affecting its budget. As a result, investors were not provided adequate information to evaluate the state's ability to fund the pensions or assess their impact on the state's financial condition.
New Jersey is the first state ever charged by the SEC for violations of the federal securities laws. New Jersey agreed to settle the case without admitting or denying the SEC's findings.
"All issuers of municipal securities, including states, are obligated to provide investors with the information necessary to evaluate material risks," said Robert Khuzami, Director of the SEC's Division of Enforcement. "The State of New Jersey didn't give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation."
Elaine C. Greenberg, Chief of the SEC's Municipal Securities and Public Pensions Unit, added, "Issuers of municipal bonds must be held accountable when they seek to borrow the public's money using offering documents containing false and misleading information. New Jersey hid its financial challenges from the very people who are most concerned about the state's financial health when investing in its future."
The SEC's order finds that New Jersey made material misrepresentations and omissions about the under funding of TPAF and PERS in such bond disclosure documents as preliminary official statements, official statements, and continuing disclosures. Among New Jersey's material misrepresentations and omissions:
Failed to disclose and misrepresented information about legislation adopted in 2001 that increased retirement benefits for employees and retirees enrolled in TPAF and PERS.
Failed to disclose and misrepresented information about special Benefit Enhancement Funds (BEFs) created by the 2001 legislation initially intended to fund the costs associated with the increased benefits.
Failed to disclose and misrepresented information about the state's use of the BEFs as part of a five-year "phase-in plan" to begin making contributions to TPAF and PERS.
Failed to disclose and misrepresented information about the state's alteration and eventual abandonment of the five-year phase-in plan.
The SEC's order further finds that New Jersey failed to provide certain present and historical financial information regarding its pension funding in bond disclosure documents. The state was aware of the under funding of TPAF and PERS and the potential effects of the under funding. Furthermore, the state had no written policies or procedures about the review or update of the bond offering documents and the state did not provide training to its employees about the state's disclosure obligations under accounting standards or the federal securities laws. Due to this lack of disclosure training and inadequate procedures for the drafting and review of bond disclosure documents, the state made material misrepresentations to investors and failed to disclose material information regarding TPAF and PERS in bond offering documents.
The SEC's order requires the State of New Jersey to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. New Jersey consented to the issuance of the order without admitting or denying the findings. In determining to accept New Jersey's offer to settle this matter, the Commission considered the cooperation afforded the SEC's staff during the investigation and certain remedial acts taken by the state.”
Some of the problems New Jersey had were in regard to the improper training of employees. Of course many times managers will look the other way when overly aggressive employees are achieving great sales results even though representations are puffery and sometimes just a big lie. Issuing mortgages to people who have no jobs might be the best example of employees being too aggressive to sell a product and managers happy to look the other way.
Now if the municipal bond industry is as fraught with fraud as the mortgage industry then many cities and states and even the nation may have some dire times ahead. Since most areas of America have no industrial base there is no way for governments to raise large amounts of money except by borrowing it through municipal bonds while awaiting some sort of miracle to bring manufacturing back to their communities.
“Washington, D.C., Aug. 18, 2010 — The Securities and Exchange Commission today charged the State of New Jersey with securities fraud for misrepresenting and failing to disclose to investors in billions of dollars worth of municipal bond offerings that it was under funding the state's two largest pension plans.
According to the SEC's order, New Jersey offered and sold more than $26 billion worth of municipal bonds in 79 offerings between August 2001 and April 2007. The offering documents for these securities created the false impression that the Teachers' Pension and Annuity Fund (TPAF) and the Public Employees' Retirement System (PERS) were being adequately funded; masking the fact that New Jersey was unable to make contributions to TPAF and PERS without raising taxes, cutting other services or otherwise affecting its budget. As a result, investors were not provided adequate information to evaluate the state's ability to fund the pensions or assess their impact on the state's financial condition.
New Jersey is the first state ever charged by the SEC for violations of the federal securities laws. New Jersey agreed to settle the case without admitting or denying the SEC's findings.
"All issuers of municipal securities, including states, are obligated to provide investors with the information necessary to evaluate material risks," said Robert Khuzami, Director of the SEC's Division of Enforcement. "The State of New Jersey didn't give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation."
Elaine C. Greenberg, Chief of the SEC's Municipal Securities and Public Pensions Unit, added, "Issuers of municipal bonds must be held accountable when they seek to borrow the public's money using offering documents containing false and misleading information. New Jersey hid its financial challenges from the very people who are most concerned about the state's financial health when investing in its future."
The SEC's order finds that New Jersey made material misrepresentations and omissions about the under funding of TPAF and PERS in such bond disclosure documents as preliminary official statements, official statements, and continuing disclosures. Among New Jersey's material misrepresentations and omissions:
Failed to disclose and misrepresented information about legislation adopted in 2001 that increased retirement benefits for employees and retirees enrolled in TPAF and PERS.
Failed to disclose and misrepresented information about special Benefit Enhancement Funds (BEFs) created by the 2001 legislation initially intended to fund the costs associated with the increased benefits.
Failed to disclose and misrepresented information about the state's use of the BEFs as part of a five-year "phase-in plan" to begin making contributions to TPAF and PERS.
Failed to disclose and misrepresented information about the state's alteration and eventual abandonment of the five-year phase-in plan.
The SEC's order further finds that New Jersey failed to provide certain present and historical financial information regarding its pension funding in bond disclosure documents. The state was aware of the under funding of TPAF and PERS and the potential effects of the under funding. Furthermore, the state had no written policies or procedures about the review or update of the bond offering documents and the state did not provide training to its employees about the state's disclosure obligations under accounting standards or the federal securities laws. Due to this lack of disclosure training and inadequate procedures for the drafting and review of bond disclosure documents, the state made material misrepresentations to investors and failed to disclose material information regarding TPAF and PERS in bond offering documents.
The SEC's order requires the State of New Jersey to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. New Jersey consented to the issuance of the order without admitting or denying the findings. In determining to accept New Jersey's offer to settle this matter, the Commission considered the cooperation afforded the SEC's staff during the investigation and certain remedial acts taken by the state.”
Some of the problems New Jersey had were in regard to the improper training of employees. Of course many times managers will look the other way when overly aggressive employees are achieving great sales results even though representations are puffery and sometimes just a big lie. Issuing mortgages to people who have no jobs might be the best example of employees being too aggressive to sell a product and managers happy to look the other way.
Now if the municipal bond industry is as fraught with fraud as the mortgage industry then many cities and states and even the nation may have some dire times ahead. Since most areas of America have no industrial base there is no way for governments to raise large amounts of money except by borrowing it through municipal bonds while awaiting some sort of miracle to bring manufacturing back to their communities.
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