FraudBytes

Affinity Fraud--A Radio Interview

noreply@blogger.com (Aaron) — Fri, 17 Feb 2012 16:03:00 +0000

Check out this radio segment (Segment 2) where Mark talks about affinity fraud.

Catching up on fraud in the news

noreply@blogger.com (Aaron) — Fri, 17 Feb 2012 13:36:00 +0000

Olympus Scandal Leads to Arrests: Seven employees have been arrested in conjunction with the alleged financial statement fraud at Olympus. Whether those arrests will lead to criminal punishment remains to be seen:

Under Japanese securities laws, the men arrested Thursday could each serve up to 10 years if found guilty. But convictions for white collar-crime have been rare in Japan, and courts have been known to hand down suspended sentences even in egregious cases.

Alan Stanford's Ties to Soc Gen Probed: Stanford is alleged to have used a Swiss bank account with Societe Generale as a slush fund through which he bribed regulators and auditors. Soc Gen is also being accused of having had knowledge of Stanford's dealings and to have profited thereby. From the article:

“SG Suisse had a special, extensive, symbiotic and nefarious relationship with Stanford from which it greatly benefited,” the lawsuit says, alleging that by December 2008, bank officials “realized the Stanford Entities were insolvent,” and the bank wanted its money bank.

What Do I Have Against Lance?

noreply@blogger.com (MZ) — Mon, 13 Feb 2012 18:20:00 +0000

I was told by a friend that someone asked him what I have against Lance. Maybe others have also wondered that. Before I get to that, let me comment on some other news in pro cycling.
First, you probably know that Jan Ullrich was finally sanctioned for and admitted to blood doping as a pro cyclist. VeloNation and other news outlets reported Friday that Jan has apologized for his mistake. To this I say: "Great job Jan! Way to quit living the lie!! I hope you go on to have a life filled with peace and joy!"

The VeloNation article has this interesting statement: "Ullrich’s statement will be welcomed by those who want transparency in the sport, even if it shows that he was one of many riders of that era who didn’t follow the anti-doping rules." I guess I fall into that category, one who wants transparency (and honesty) in the sport. I have to wonder: is there anyone who doesn't want transparency in cycling? I guess those who are cheating don't want it. Also, maybe those who want to believe pro cycling is clean also don't want to know their heroes are corrupted.

So this brings me to the question of what I have against Lance. Actually, I don't have anything against Lance as a person. I was his biggest fan at one point in his career before so much evidence came out that he had cheated. I love both his books but I doubt I will read them again because there is too much evidence of his doping for me to accept the lies in the books. If he were to confess and come clean, he would be a huge hero again in my book. In other words, in my view, there is no accomplishment that justifies fraud. Period.

So if I don't have anything against Lance, why do I wish the truth would come out about his doping? It is fraud and lies that I despise and truth that I love. Fraud is a lie that takes something from others. When a top athlete wins by cheating, he takes away the win from the top person who was clean. When a fraudster sells books and promotes his life and even good causes based on a lie, he continues to live the lie and is taking from others. When someone becomes a hero based on a lie, he fools others and eventually they lose a bit of respect and trust for humanity. Yes, I believe fraudsters even take a bit of respect and trust that people have in humanity.

A fraudster in sport (or business or politics, or law or accounting, or wherever) also makes it so anyone who wants to be competitive feels pressure to cheat as well. It's fraud that I despise, not Lance per se. Here is a quote from VeloNation that discusses this perspective:

In July 2010 (Ullrich's) former mentor Rudy Pevanage said that (Ullrich) tried to race clean for some time, but was unable to match the pace of others using banned substances.

“At T-Mobile everything stopped after 1998 and I can say that our team was really clean in the years after the Festina Affair,” he told l’Equipe. “But, slowly, looking at the results, we realised that we were lagging behind the other teams, especially the Spanish and the Italians.”

He added that he remained convinced that Ullrich was physically stronger than Lance Armstrong, but the German was unable to match the American in the Tour. He described the latter's metamorphosis after cancer as “so extraordinary.”

Given what Lance did before his "metamorphosis," it's likely he never would have won any Tour de France titles and someone else, probably Ullrich, would have won if the field was clean. Even so, I think Jan is a much bigger winner than any athlete who won seven times but was living a lie to do so. Jan has confessed the truth and I hope he is feeling much better about life than he did while living the lie. The truth about Jan is out and he isn't lying more to keep his ill gotten gains. Yes, it would have been nice if he would have confessed years ago but better late than never.

I salute Jan. I was never a fan of his but now I am definitely a fan. That one confession makes him a hero in my book. Not as much of a hero as if he would have raced his whole career and had mediocre results but stayed clean but a hero nonetheless.

Jan has freed himself from living the lie, just like Tyler and Floyd. I would salute Lance if he were to also admit to what he did. Instead, I'm guessing he will fight to ensure that the evidence collected in the government's fraud investigation is sealed and never comes out. If he really has nothing to hide, the evidence should be released. Nothing could be damning if he didn't cheat. If he has nothing to fear then let the truth come out.

You might ask "How can I be so sure Lance doped?" It really doesn't take a rocket scientist to see through this one. He's had four teammates who said they know he doped. Not to mention his closest friend, George Hincapie, is reported to have said he doped. He's had drug experts say there is no question he doped. He's beaten all the top racers who have been shown to have doped and most of his teammates have also been implicated in doping. I could go on but in the end some might say: "But there is a chance he is telling the truth." I agree. However, it's about the same chance that Bernie Madoff was lying when he finally admitted to running a Ponzi scheme. It's roughly equal to 1 over infinity. Not something to bet on in Vegas...

Unfortunately and tragically for Lance, I don't believe he will ever come clean. He will likely go to his grave living one of the greatest sporting lies in history. He is counting on the likelihood that his fans will stay in the dark and live in denial because they don't want the truth to come out. Eventually this lie will catch up with Lance. If it isn't destroying any remaining character he has in his soul, it eventually will. That's sad. It's sad to see any soul live a lie. It reminds me of Gollum in Lord of the Rings. Everyone living a lie is like Gollum until they confess. A sad and pitiful sight...

I guess it's more fun for some to believe in Santa Claus than it is to acknowledge he is a fairy tale...not for me. I despise lies and fraud and feel like this world has way too much of both. The liars and fraudsters are fighting hard to take from others, I think we need more people fighting for truth. That is the passion that makes me applaud people like Jan Ullrich, David Millar, Floyd Landis, Tyler Hamilton, Frankie Andreau and the many other cyclists who have quit living the lie.

At the heart of my attitude toward fraud is that fraud comes from the father of lies. On the other hand, when someone quits living a lie and confesses, they are following The Truth. There is no better reason for fraudsters to come clean than that. When they do, they will get all my admiration. I hold nothing against them as a person only what they are doing to others and themselves as they live their lies.

Go Jan and all the others who are free from living the lies of the past! The Truth does indeed make us free!

Lance Armstrong Investigation: Skeptics at ESPN

noreply@blogger.com (MZ) — Sat, 11 Feb 2012 05:23:00 +0000

I just read a thought piece at ESPN about the Lance Armstrong investigation being suddenly dropped this past week. The author offers several thoughts on how this may have happened and is generally pretty skeptical that it wasn't--at least--a political move in the Obama administration. If so, we definitely have some corrupt politicians IMO...Check out the article, it's short but worth the time.

Lance Armstrong Investigation: Petition Opened

noreply@blogger.com (MZ) — Sat, 11 Feb 2012 01:35:00 +0000

I received an email today that informed me about a petition on the White House website asking for President Obama's administration to look into and comment on the reason that the Justice Department dropped the Lance Armstrong investigation. The petition (click here to go to the petition) requires 25,000 signatures. Last I checked it only had about 100 signatures so it has a way to go. If you're interested in finding out more about why this investigation was closed, you might want to take a minute to sign the petition and pass this link on to friends who also might be interested.

Lance Armstrong Investigation: More to the Story

noreply@blogger.com (MZ) — Tue, 07 Feb 2012 17:54:00 +0000

Several news outlets (including NPR, VeloNation and CyclingNews) are reporting that the decision to drop the criminal charges against Lance Armstrong came as a big surprise to several federal agencies that were working on the case. The word is that the other agencies believed they had a solid case against Lance. You have to wonder what motivated the individual at the US Attorney's Office who allegedly made this decision on his own, Andre Birotte, to take this action. Was Birotte given a donation like the UCI received a donation?! Here are some quotes to consider:

“Sources who know about the case say that within the agencies involved in the investigation, the FBI, the FDA, the US Postal Service, there is surprise, even shock and anger about the US Attorney’s decision,” he said on today’s NPR sports news. “Those agencies reportedly only got about a half hour notice that the decision was going to be announced. And this was after there had been indications that prosecutors were preparing to indict Armstrong and others on federal crimes, including mail fraud, drug distribution, wire fraud, witness tampering.

“Those indictments were said to be coming soon, maybe even next month. One source said there were absolutely no weaknesses in the case. On the other hand, I was told by a person with knowledge of the decision that the US Attorney didn’t agree there was sufficient evidence of federal crimes. The person also said that while this announcement came quickly, the US Attorney Andre Birotte Jr. struggled with the decision.”

Time will tell whether Andre Birotte's motive and reasoning for dropping the case comes to light.

Contador Ruling: Stripped of Tour de France Title

noreply@blogger.com (MZ) — Mon, 06 Feb 2012 16:06:00 +0000

VeloNation is reporting that the Court of Arbitration in Sport (CAS) has ruled on Alberto Contador and, to my surprise, they found that his doping violation will hold. What this means is that he is stripped of one of his Tour de France titles, a Giro d' Italia title and several wins in other races. Contador was given the full two-year ban. It appears that justice is sometimes served in pro-cycling!

The SEC's Record with Large Ponzi Schemes: Not So Hot

noreply@blogger.com (MZ) — Mon, 06 Feb 2012 01:47:00 +0000

I've been listening to Harry Markopolos's book, "No One Would Listen: A True Financial Thriller" (I recommend it by the way) and have been surprised at how much of the book is devoted to criticizing the SEC. From Harry's account, the SEC totally dropped the ball and was incompetent, corrupt or both in how it handled the Madoff case. I personally think he has a pretty good argument and that the SEC has managed to avoid serious consequences even though the Madoff case was a tragedy that they could have prevented.

Well, now that the Stanford Ponzi scheme is being tried, we are learning that the SEC also dropped the ball with Sir Charles. It may be that the SEC really doesn't understand Ponzi schemes or that they are underfunded, undereducated, understaffed and under-incentivized. All we know for sure is that they appear to be underperforming. Reuters has an article that talks about how Sir Charles was able to keep the SEC at bay for so many years while he built his Ponzi empire, complete with retail offices in the U.S. I recommend it for further insight.

One claim by Markopolos is that the SEC staff are all basically looking for a job in industry to make more money. As such, when they go to investigate a firm, they also ask for a job application. The Reuters article seems to add a second witness to this claim as it describes a former SEC investigator by the name of Barasch and his role in helping Stanford stay out of the SEC's crosshairs:

Barasch was told at the time by an SEC ethics officer that he was legally precluded from representing Stanford. Barasch went to work for Stanford anyway. In a later investigation of the failure to catch Stanford earlier, the SEC Inspector General asked Barasch why he did so. His reply, according to the Inspector General's report: "Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines."

FBI agents and prosecutors also uncovered evidence that on at least two occasions Barasch sought confidential information regarding the SEC's probe of Stanford during his brief representation of the banker, Justice Department officials said in court records and a press release.

In agreeing to pay the fine, Barasch denied any misconduct, settling the matter "to avoid the expense and uncertainty of protracted litigation," his attorney, Paul Coggins said.

Another claim by Markopolos is that the SEC seemed to avoid taking on the Madoff case because it was too large and complex. Instead, they went after cases that Harry describes as fleas while the elephant (Madoff) was running free. This Reuters article also seems to bear this out in the following quote:

In 1997, 1998, 2002, 2004, and 2005, according to internal agency records seen by Reuters, examiners for the SEC recommended that the agency investigate Stanford. In three of those instances, Barasch, at the time an SEC official in Ft. Worth, personally overruled the examiners' recommendations, according to those records. Those decisions helped the Ponzi scheme to continue unabated for several additional years, costing investors additional billions of dollars, according to a report by the SEC's Inspector General.

Barasch told the SEC Inspector General that he made those decisions because he was not sure the SEC had the statutory authority or jurisdiction to investigate. He blamed his superiors and a broader culture within the SEC for pressuring the staff not to pursue complex and difficult cases, according to the Inspector General report.

Apparently, Barasch was able to help Stanford both while he worked for the SEC and after he went to work for Sir Allen (i.e. Stanford) himself. Sounds like a bad case of a corrupted fraud investigator. I have a feeling I will be reading another book in the future about how the SEC dropped the ball in the Stanford Ponzi scheme too, costing thousands of people billions of dollars.

Lance Armstrong Investigation: What Did We Learn?

noreply@blogger.com (MZ) — Sat, 04 Feb 2012 18:06:00 +0000

As you've probably heard, it was announced yesterday that the Grand Jury investigation that involved Lance Armstrong's alleged criminal activity on the U.S. Postal Service cycling team has been closed without any charges. When this investigation first opened, I remember talking with a friend about what would come of it. I thought at the time that the most likely scenario was that we would learn a lot more about Lance and that his reputation would be seriously damaged but that it was unlikely that he would find himself in jail. I never totally thought it was impossible that Lance would end up in jail but I thought it was a very long shot (like half court at the buzzer). After all, if they couldn't find his blood or urine with drugs in it then it would probably be hard to make the charges stick.

In my view, Lance's record has become extremely tainted from the news of the past two years. If you believe the saying that where there is smoke there is fire, then you have to observe all the smoke that came from this investigation and conclude there must be something causing it. The following points are what I think are some of the biggest stains on his record that came from this investigation. As I look at the list, I have to believe that those who followed the investigation will likely have lost most, if not all, respect for Lance (unless they are in complete denial and hero worship). Here is my summary (with links to the top posts on the topic) of the most interesting, and in many cases the most damaging, tidbits to come out from this investigation:

Several of Lance's former teammates ruined their reputations by saying they doped and he did too. This includes former teammates who Lance fans despise because they lied so long about their own doping including Floyd Landis and Tyler Hamilton but it has been reported that even his closest friend, George Hincapie, also gave similar testimony. In addition, the editor of Bicycling Magazine, Bill Strickland, also said that he has come to the conclusion that Lance doped. As for Floyd and Tyler, they gave a lot to make these statements and it's not obvious that they gained much from it. They also gave incredible details in their claims that both add credibility to their testimony and also have helped anti-doping officials understand how pro cyclists are successful at hiding their crimes (e.g., micro dosing of EPO).

We now know that Lance admitted that he lied when he said that he cut of interactions with the most infamous doping doctor in pro cycling, Michele Ferrari. Lance now says that the meetings that came after Lance said he quit meeting with Ferrari were because they were close friends.

An analysis of Lance's teammates when he raced the Tour de France shows that most of them have been linked to doping. A quote from a guest post by Mark Fellows on this blog summarized it this way: "In the end, of (Lance's) teammates that were Tour riders, six appear pretty clean or have not been convicted at this point; 10 have been caught doping or admitted to doping and 6 have relatively strong ties to doping or have had strong suspicions of doping. That makes 16 out of 22 that have either been convicted or have strong ties to doping."

While most of Lance's teammates were, at least, strongly linked to doping, we also now know that most of Lance's competitors have also been either caught or strongly linked to doping. Thus, it appears that Lance was the best on a team that doped and beat the best athletes in the world who doped too. This means Lance truly was way, way, off the charts of any human being or he was a very gifted athlete who had a very good doping program. Given Lance's strong but not off the charts performances prior to his cancer, it has to make you lean toward the latter explanation.

One potential explanation for Lance's ability to pull off such an incredible feat is also one of the most amazing stories that came out during the investigation. This story came from a Sports Illustrated article on Lance that claimed they have evidence that Lance used an experimental drug known as HemAssist to achieve his superhuman results in the Tour and allowed him to beat his competitors who later were found to be dopers. That would be one way he could avoid detection. Anyone wonder if he had a supply of HemAssist that got him through seven tours but when there was no more left he retired...I imagine we won't find out what is truth and fiction in regards to HemAssist.

Regarding using weird substances, we do know that one of Lance's teams was found using an extract from cow blood known as Actovegin. The team admitted using the substance but, after about a year and when the issue wouldn't seem to go away, the team claimed the substance was used by a mechanic who had diabetes, not by any of the tour riders. "Oh, that makes more sense. Why didn't you tell us earlier!"

I could go on about other dirt on Lance's record that was exposed over the past two years including the "donations" Lance made to the UCI after he allegedly failed a doping test or the 1999 EPO tests that experts say show he clearly doped but that were later thrown out on a technicality. In addition to dirt on Lance, the investigation has shed new light on pro cycling and its governing body, the UCI, for me. Revelations on such things as the pro-cycling mafia or the widespread doping in the pro peloton have made it so I've lost interest in what are alleged accomplishments by athletes and more interested in what they are doing to change the sport and clean it up.

In the end, this case reminds me of O.J. Simpson's criminal trial. We know O.J. was acquitted but only those who still believe in Santa Claus are likely to think he was innocent. It's amazing what the best legal team money can buy can sometimes do for you. In this case, it's probably similar to the best pharmaceuticals that money can buy: the mirage of worldly success.

I have to wonder how long Lance will be paying his high power legal team given this quote from the New York Times:

Although Armstrong no longer faces the prospect of criminal prosecution, Travis T. Tygart, the chief executive of the United States Anti-Doping Agency, said that his organization would continue to investigate him.

“Unlike the U.S. Attorney, USADA’s job is to protect clean sport rather than enforce specific criminal laws,” Tygart said in a statement. “Our investigation into doping in the sport of cycling is continuing and we look forward to obtaining the information developed during the federal investigation.”

Maybe this case will resemble the O.J. Simpson trial in more than one way. O.J. was let off in criminal charges since they couldn't prove the case beyond any reasonable doubt. However, in civil cases where only a "preponderance of evidence" is needed, he was eventually found guilty.

In any case, I subscribe to the belief that when there is this much smoke, it's hard not to conclude that there is a serious fire causing it...

Stanford Trial: Two Friends Become Enemies

noreply@blogger.com (MZ) — Sat, 04 Feb 2012 15:59:00 +0000

The NY Times discusses how the trial regarding the alleged Ponzi scheme run by R. Allen Stanford will pit Stanford against his long-time friend and CFO of Stanford Financial Group before it collapsed, James M. Davis. It's a classic example of the Prisoner's Dilemma. Here are some excerpts:

Mr. Davis...is now the chief prosecution witness against Mr. Stanford. He will testify that he witnessed and participated in a $7 billion Ponzi scheme set in motion and directed by Mr. Stanford from a bank on the island of Antigua.

“It’s very similar to an organized crime or Mafia case,” said Adam Gershowitz, a professor of criminal law at the University of Houston, “where you have friends who go back years and have worked together for years and one turns on the other to save his own skin.”

Mr. Stanford’s lawyers have already told the jury that Mr. Davis’s story is a lie. ...The case could well come down to who the jury decides was really the mastermind of what prosecutors described as an international crime that defrauded nearly 30,000 investors from 113 countries over more than 20 years and corrupted the highest levels of the government of Antigua.

Mr. Stanford and Mr. Davis always made an odd couple. Mr. Stanford was known to have a fiery temper, to berate employees and occasionally to throw glass ashtrays at meetings. He had multiple mistresses and spent lavishly on them, on his cricket team and stadium, and he had a taste for mansions, yachts and private jets.

Mr. Davis was known by employees as soft-spoken and gentlemanly, an executive who was quick to give a congratulatory hug and who opened business meetings with prayers. His passion outside of work was to teach Sunday school at a Baptist church in Baldwyn, Miss.

Doping in Cycling: Some News that Caught My Eye

noreply@blogger.com (MZ) — Mon, 23 Jan 2012 17:06:00 +0000

Today has two strange stories about cyclists who have been linked to doping that I just couldn't resist commenting on...
The first one is a story about a 19 year old Cat 3 amateur who rides for a feeder team in France. It's a sad story to hear this young guy is risking his future health as a Cat 3. If he can't become a Cat 2 racer without taking 12 doping substances he might want to look for other career options, assuming he has some. A friend suggested that cycling races ought to be categorized by IQ and let this guy race against the likes of Riccardo Ricco and other brilliant dopers...

The second story is about the infamous steak eater, Alberto Contador. As you know Contador was found with a banned substance in his blood during the Tour de France and he is blaming a tainted steak on this violation. Clenbuterol is known for helping produce lean muscle mass. Today's article says Contador has gained over 16 lbs. since last-year's Tour de France. That's a massive amount for any cyclist, let alone a climber who wins by being light and strong. I expect Contador to hold another press conference to explain that when you quit eating steak accidentally tainted with clenbuterol, extra weight goes on quickly...

Another Link Dump

noreply@blogger.com (Aaron) — Fri, 20 Jan 2012 19:25:00 +0000

Here are a few more links to keep you up to date on the latest fraud-related news:

Trial Set for Financier Accused in Decades-Long Ponzi Scheme--Despite continuing excuses from his lawyers, Allen Stanford's trial is set to begin next week. Amazingly, it has taken three years to get to this point.

Panel Clears Accounting Firms in Olympus Fraud--An unofficial panel of experts has declared KPMG and E&Y free from responsibility for the Olympus Fraud. The firms aren't yet in the clear, as Japan's Financial Services Agency is conducting a separate investigation and the firm may be subject to sanctions by Japanese regulators. However, investigations that absolve auditors of responsibility in a financial statement fraud seem to be extremely rare, so maybe this is a positive sign (or maybe the panel has some incentive to give audit firms a clean bill of health so Olympus can retain an audit firm and avoid delisted from the Tokyo Stock Exchange).

Mets Owners Can Look Forward to Trial During Spring Training--The case against the Mets owners continues to march toward trial and a settlement looks increasingly unlikely. Looks like we'll be revisiting the issue in March, when we will likely see a jury scrutinize the Mets owners' dealings with Bernie Madoff.

Mozilo Tied to Loan to Top Lawmaker--The lack of investigations into improprieties related to the housing crisis has been surprising, to say the least. Angelo Mozilo already agreed to a $67.5 million settlement with the SEC related to civil fraud and insider trading charges. This latest report suggests that lawmakers may have received preferential treatment from Mozilo when obtaining loans from Countrywide.

Contador Investigation: Expect Alberto to be found Innocent

noreply@blogger.com (MZ) — Thu, 12 Jan 2012 01:22:00 +0000

VeloNews is reporting that WADA lawyers have threatened to walk out of the Alberto Contador hearing which is supposed to rule this week whether the Spaniard will be found to have violated doping rules. Contador has a lot riding on this ruling (no pun intended) since the rule states that any clenbuterol found in his system is a violation that will cause him to lose his Tour de France title and ban him for up to two years. As we've covered on Fraudbytes previously, Contador claims he got the steroid from eating tainted beef during the tour.

The VeloNews article is short and highlights several claims by an anonymous source that Contador has biased the arbitration process in his favor. If you're interested in why WADA is so frustrated by this hearing, I'd recommend reading the article.

Lance Armstrong Investigation: LiveStrong Brought to Light

noreply@blogger.com (MZ) — Mon, 09 Jan 2012 16:59:00 +0000

Outdoor Magazine published an extensive article on Lance Armstrong's LiveStrong Foundation today. I know they have been working on this for a while since the author, Bill Gifford, first contacted me in May 2011. Interestingly, I received several phone calls from investigative reporters around the same time--undoubtedly because they found these posts of interest.

As far as I can tell, Gifford's article is the first one to hit the press. His article notes why this may be the case by saying:

At least two other major publications have done serious reporting on Livestrong—that is, they started to. In both cases, Livestrong lawyers succeeded in shutting down the stories before they were published. They applied the same pressures to Outside, blitzing my editors with pissed-off e-mails, phone calls, and, eventually, a five-page letter from general counsel Mona Patel complaining about “Mr. Gifford’s conduct, professionalism, and method of reporting.” One of my crimes was a failed attempt to get a source to talk off the record, an ordinary journalistic practice. All of which now makes me wonder if I missed something.

I recommend reading the article if you're interested in LiveStrong and Lance. For those who want to get a flavor of the article, here are a few highlights that summarize the main conclusions:

The header summarizes it well as follows:

If Lance Armstrong went to jail and Livestrong went away, that would be a huge setback in our war against cancer, right? Not exactly, because the famous nonprofit donates almost nothing to scientific research. Bill Gifford looks at where the money goes and finds a mix of fine ideas, millions of dollars aimed at “awareness,” and a few very blurry lines.

Gifford begins by describing an angry, threatening phone call he got from Lance and, as Gifford notes, LiveStrong's "$320,000-a-year" CEO, Doug Ulman. Apparently, Lance and Ulman called to berate his work because Gifford tweeted about Lance in a way that they found offensive. (I have yet to receive any of these calls and some reporters who have called me have been surprised. I'll let you know if I do!) After reviewing the 60 Minutes expose' on Three Cups of Tea, Gifford turns to the crux of the issue with LiveStrong:

Others noticed an annoying tendency: whenever questions about doping arose, Armstrong and his supporters changed the subject to his cancer work, a tactic that the bicycling website NY Velocity called “raising the cancer shield.” After the 60 Minutes segment on Armstrong aired in May—complete with damning claims from ex-teammate Tyler Hamilton that Armstrong had cheated—Armstrong’s lawyers denied the allegations and quickly invoked Livestrong in his defense. In their one legal brief to date, they blasted the feds over alleged leaks to 60 Minutes that, they said, were intended to legitimize “the government’s investigation of a national hero, best known for his role in the fight against cancer.”

But what did that fight amount to? Did Livestrong actually do much to eradicate cancer, or did it exist largely to promote Lance? If and when any indictments came down, would his good deeds help him escape conviction or jail time? It seemed likely that this theme could come up. Barry Bonds’s lawyers recently asked for probation instead of prison time as punishment for the baseball star’s 2011 Balco conviction, citing his “significant history of charitable, civic, and prior good works.”

Gifford ultimately admits that after visiting LiveStrong he could not find any hard evidence of serious wrongdoing. As noted earlier, he also wonders if he missed something because of the way he was threatened by Lance's forces. Even so, this paragraph summarizes his search for the possibility that Lance was using LiveStrong as a personal piggy bank:

The financial records appear to back up Armstrong’s assertion, and if there’s a more nefarious reality behind the curtain, it may take someone with subpoena power to bring it to light. In addition to Novitzky’s investigation, the IRS examined the foundation’s 2006 returns, although Livestrong officials say it was a routine review.

As alluded to in the summary quoted above, Gifford does find, however, that LiveStrong doesn't provide funding for cancer research. He notes that the erroneous belief that LiveStrong does support research is perpetuated by Lance and others. He provides many examples to support his claim that "Armstrong and his supporters help perpetuate the notion that they are, in fact, helping battle cancer in the lab." While it once did provide some, limited, research funding, it has now evolved into what Giffords calls a "hip marketing agency" when he says:

I found a curiously fuzzy mix of cancer-war goals like “survivorship” and “global awareness,” labels that seem to entail plastering the yellow Livestrong logo on everything from T-shirts to medical conferences to soccer stadiums. Much of the foundation’s work ends up buffing the image of one Lance Edward Armstrong, which seems fair—after all, Livestrong wouldn’t exist without him. But Livestrong spends massively on advertising, PR, and “branding,” all of which helps preserve Armstrong’s marketability at a time when he’s under fire. Meanwhile, Armstrong has used the goodwill of his foundation to cut business deals that have enriched him personally, an ethically questionable move.

“It’s a win-win,” says Daniel Borochoff, head of the American Institute of Philanthropy, a watchdog group. “He builds up the foundation, and they build up him.”

...(Lance's) comeback (in 2007) also saw Livestrong’s final evolution from a research nonprofit into something that looks more like a hip marketing agency. Rather than funding test-tube projects, it was deploying buzzwords like leverage, partnering, and message.

This is still a bit vague so you're probably wondering "if LiveStrong isn't using money to fund research, what exactly is it using the funds for?" Gifford goes on to analyze how LiveStrong funds have been spent in recent years. Here are some good quotes:

(T)he foundation’s financial reports from 2009 and 2010 show that Livestrong’s resources pay for a very large amount of marketing and PR. During those years, the foundation raised $84 million and spent just over $60 million. (The rest went into a reserve of cash and assets that now tops $100 million.)

A surprising $4.2 million of that went straight to advertising, including large expenditures for banner ads and optimal search-engine placement. Outsourcing is the order of the day: $14 million of total spending, or more than 20 percent, went to outside consultants and professionals. That figure includes $2 million for construction, but much of the money went to independent organizations that actually run Livestrong programs. For example, Livestrong paid $1 million to a Boston–based public-health consulting firm to manage its campaigns in Mexico and South Africa against cancer stigma—the perception that cancer is contagious or invariably fatal.

Livestrong touts its stigma programs, but it spent more than triple that, $3.5 million in 2010 alone, for merchandise giveaways and order fulfillment. Curiously, on Livestrong’s tax return most of those merchandise costs were categorized as “program” expenses. CFO Greg Lee says donating the wristbands counts as a program because “it raises awareness.”

This kind of spending dwarfs Livestrong’s outlays for its direct services and patient-focused programs like Livestrong at the YMCA, an exercise routine tailored to cancer survivors available at YMCAs nationwide.

Gifford then describes other major expenditures such as legal fees and marketing costs.

Livestrong spends as much on legal bills as on these two programs combined: $1.8 million in 2009–10, mainly to protect its trademarks. In one memorable case, its lawyers shut down a man in Oklahoma who was selling Barkstrong dog collars. Meanwhile, “benefits to donors” (also merchandise, as well as travel expenses for Livestrong Challenge fundraisers) accounted for another $1.4 million in spending in 2010.

There’s still a research department, but now it focuses on things like quality-of-life surveys of cancer survivors. During my visit, I was plied with glossy reports and brochures, which are cranked out by the truckload. The foundation’s 2010 copying-and-printing bill came to almost $1.5 million.

But Livestrong’s largest single project in 2009—indeed, the main focus of Armstrong’s comeback—was the Livestrong Global Cancer Summit, held in Dublin in August. The summit ate up close to 20 percent of the foundation’s $30 million in program spending that year.

To kick things off, Livestrong hired Ogilvy, the famous advertising firm, to create a global cancer-awareness campaign leading up to the summit. Cost: $3.8 million. It spent another $1.2 million to hire a New York City production company to stage the three-day event. Then it paid more than $1 million to fly 600 cancer survivors and advocates to Dublin from all over the world—the U.S., Russia, Bangladesh, and 60 other countries. The former president of Nigeria even showed up.

I think this quote summarizes what many people might be wondering when they read this:

“You wonder,” AIP’s Borochoff says. “If they just gave the money to cancer research, would it generate as much great publicity for Lance Armstrong?”

Gifford also explores Lance's claim that when he returned to cycling it was for cancer funding, not for personal gain. He notes:

Although Armstrong had told Vanity Fair he would be racing for free, he actually pocketed appearance fees in the high six figures from the organizers of both the Tour Down Under and the Giro d’Italia. An Australian government official told reporters that the money was a charitable donation, but Lance himself admitted to The New York Times that he was treating it as personal income.

Gifford discusses Lance's many business deals with Nike, Radio Shack and others and notes the role LiveStrong plays in those deals. He says:

In a sense, Livestrong and Lance are like conjoined twins, each depending on the other for survival. Separating them—or even figuring out where one ends and the other begins—is no small task. The foundation is a major reason why sponsors are attracted to Armstrong; as his agent Bill Stapleton put it in 2001, his survivor story “broadened and deepened the brand … and then everybody wanted him.” But the reverse is also true: Without Lance, Livestrong would be just another cancer charity scrapping for funds.

In one particular case involving the Haiti earthquake victims, Gifford found the following disturbing account:

Not all the money goes where Livestrong says it goes, however. In January 2010, after the devastating earthquake in Haiti, Armstrong made a personal video statement: to help earthquake victims, Livestrong would give $125,000 each to the charitable organizations Doctors Without Borders and Partners in Health, which it subsequently did. RadioShack also hopped on board, soliciting $538,000 in customer donations for the Haitian cause. According to Livestrong, it gave $413,000 of the RadioShack money to Partners in Health. And the foundation’s 2010 tax form shows a $458,000 donation to the group. But $333,000 of that had been previously allocated to a separate hospital project in Haiti that “had nothing to do with the earthquake,” says a spokesperson for Partners in Health. That means Livestrong used the RadioShack earthquake donations to cover its prior hospital pledge.

Another questionable action by Lance and Livestrong includes his sale of the Livestrong website. Gifford notes:

Most people are unaware that there are two Livestrong websites. Livestrong.org is the site for the nonprofit Lance Armstrong Foundation, while Livestrong.com is a somewhat similar-looking page that features the same Livestrong logo and design but is actually a for-profit content farm owned by Demand Media.

We've discussed this before at this link so I won't review it again here. I will say that I believe it potentially reveals Lance's moral compass and how he views Livestrong. Donors should ask if the foundation is a way to build power and wealth or a way to fight cancer.

In the end, I think the following quote sums up what many unbiased and informed donors to Livestrong ought to be thinking about Livestrong:

“It’s going to have a huge impact,” says Michael Birdsong, a former Livestrong supporter, now disillusioned, who estimates that he has given $50,000 to Livestrong over the years. “Who wants to support a foundation that was founded by a cheater? Not only a cheater, but a person who lied about it.”

Unfortunately, fraud leaves a wake of pain and suffering, even when the fraud perpetrator tries to do something good so as to either salve his conscience or to hide his true character.

Happy New Year and A Few Links

noreply@blogger.com (Aaron) — Tue, 03 Jan 2012 23:39:00 +0000

Happy New Year! While I've never really been one for New Year's resolutions, I do intend to post more often over the next year. In the meantime, I've been collecting links to write about on FraudBytes and I've fallen a bit behind. In an effort to purge my queue, here are a few articles worth reading:

The Lasting Shadow of Bernie Madoff--Three years later, many are still hurting from the fallout of the collapse of Madoff's Ponzi scheme.

Former Madoff Employee to Admit to Guilt--Madoff's former controller admits to, "falsifying the company's records and making phony submissions to government regulators."

S.E.C. Files Suit to Recoup Losses in Stanford Case--The SEC has sued the SIPC in an effort to get the SIPC to reimburse losses of investors in Allen Stanford's Ponzi scheme.

Financier in Fraud Case Is Declared Fit for Trial--Allen Stanford appears to have tried to fake or exaggerate amnesia in order to avoid trial. A federal judge has declared Stanford fit for trial. When your best legal defense is essentially, "I got hit on the head and forgot," I would say things aren't looking too hot for Stanford.

Authorities Seize Documents in Raid on Olympus in Tokyo--Japanese officials are getting more involved in investigating the alleged fraud at Olympus. Meanwhile, Olympus appears to be attempting to take actions that will minimize reform.

Pyongyang Myth-Builders Step It Up--North Korean officials have quite the task on their hands in turning Kim Jong Eun into a quasi-deity in the minds of the North Korean people. If the legends of Kim Jong il are any indicator of what we can expect, we will probably be hearing soon about Kim Jong Eun's amazing sporting feats, among other incredible ventures.

Doping in Cycling and the Mafia

noreply@blogger.com (MZ) — Thu, 01 Dec 2011 22:44:00 +0000

The head of the World Anti Doping Association (WADA), David Howman, gave an interview in New York City that gives some insights into the difficulty of battling doping in cycling and other sports. Here are some of the meatier quotes from an article on CyclingNews, along with my comments:

"We, WADA, were set up because every sport and every government had a different rule. I think things have improved considerably because now there is one set of rules covering everything, and I think that the gaps to the cheaters has narrowed quite considerably," he told Cyclingnews. "On the other hand, the cheaters that are really clever are now cleverer, or they're getting more help, and that's a challenge."
That 'help', Howman made clear, is coming from mafia-style criminal rings who have moved from selling hard drugs such as heroin, into the markets of steroids and performance enhancing drugs, where higher mark-ups and minimal police intervention means that the financial rewards can be far greater.

Mafia-style criminal rings are now helping athletes cheat by selling steroids, EPO, HGH, etc! According to this interview, the mob can make more money selling EPO than they can selling heroin.

How long such activity has been going on is unclear but Howman estimates that there have been at least five years in which the problem has escalated. In the last 12 months WADA has launched into collaboration with Interpol, sharing information – a bold move considering that the anti-doping agency's budget was frozen for 2012 and that their further investigations and hard work has lead to greater knowledge of sport's murky underworld.

Interestingly, the last 12 months or so includes the time frame when Jeffrey Novitzky's team has been working on its investigation into Lance Armstrong's doping allegations.

Last month Howman bluntly told a conference in Paris that only the 'dopey dopers' were being caught, pointing out that the number of suppliers and doctors who have been caught remains low.

Only dopey dopers get caught is a sad comment that explains how the peloton can be using these products and nobody gets caught until someone does something stupid like leaving a bunch of syringes in the hotel trash can.

"I think you've got to address the major issue, and sport has to look at this. Is organised crime moving into sport or not? Sport would like to say surely it's not but we now know that through match fixing and everything that goes on with betting that that's what goes on in the underworld. We know that the mafia-organised crime is making more money from pushing steroids than it is through pushing heroin."

Is he saying the Mafia is supplying drugs to athletes and betting on their customers?! Imagine if they decide to throw a big event by supplying tainted drugs. Let's say the 2012 Tour de France. Assume Contador is up by 5 minutes going into the final week of the Tour and the Schleck brothers are in 2nd and 3rd, about one minute between each other and another five minutes to the fourth place rider, Levi Leipheimer.

The odds in Vegas are that Contador will walk away the winner. If you want to bet on Levi you can get great odds (50:1). The mafia decides to bet on Levi and fix the game on the last week by giving Contador's team and Andy Schleck's team some EPO mixed with a virus that takes 7 - 10 days to go away. Levi, who was ten minutes down at the beginning of the final week, ends up running away with the race as Contador and both Schleck brothers abandon with this wicked virus. It would make for some drama but I think pro sports of all types just got a lot less interesting to me...

Regarding how long Contador's case is taking, Howman said:

"I'll feel more comfortable talking about that when it comes to a conclusion but what I'll say is that no case should take this long," Howman admitted.
"But when you've got cases where you've got lawyers who want to make sure that every piece of evidence is put through a court and you've got a court that allows that, then instead of having a case where it's 30 pages long you've got one that's 3,030 pages long."

"The appeal was based on the fact that the federation got it wrong in exonerating him, simple as that. He had the banned substance in his system, with no excuse and that was why we appealed. I'm hopeful that CAS will make the correct decision."

Well, I'm pretty sure we know what's going to happen with this case. Contador sure doesn't seem worried about it as he's been talking about competing in the Olympics this week. I might be wrong but if I was a betting man (which I'm not), I wouldn't be putting much money against Contador winning this case...

By the way, if you think Jeffrey Novitzky's investigation to pursue Lance Armstrong is a waste of money, you might consider whether you want organized crime to be involved in supplying doping products to both pro and amateur athletes. I think the progress they appear to be making in the past year in identifying who the parties are that are involved probably wouldn't have happened without Novitzky's team investigating what some pro cyclists have referred to as the "cycling mafia" along with the "boss" of the peloton...

Madoff and Watergate

noreply@blogger.com (MZ) — Thu, 24 Nov 2011 03:58:00 +0000

No, Bernie Madoff didn't play a role in the Watergate scandal (at least as far as we know) but it turns out that his Ponzi scheme may have been going way back then. If so, it will go down in history as not only the largest Ponzi scheme we know of but also the longest running scheme too (by far!). This new revelation is according to the guilty plea of 66 year old David L. Kugel who was apparently associated with Madoff even back when Richard Nixon was in the Whitehouse. Here are a few quotes:

This from Bloomberg:

David Kugel, a former trader at Bernard Madoff’s investment firm, pleaded guilty in federal court in New York to creating fake, backdated trades in a fraud scheme that began more than 30 years ago.
During his plea hearing today, Kugel, a former supervisory trader in the proprietary trading operation of Bernard L. Madoff Investment Securities LLC (aka BLMIS).. implicated two other former Madoff employees, Joann Crupi and Annette Bongiorno.
Kugel, 66, said he provided the two with historical price information that allowed them to create fictitious, backdated arbitrage trades during the decades that Madoff’s Ponzi scheme was under way. ...
“I provided history trading information to other BLMIS employees used to create backdated trades,” Kugel told U.S. District Judge Laura Taylor Swain in Manhattan. “Specifically, by the early 1970s until the collapse of BLMIS in December, 2008, I helped create backdated trades,” Kugel said.
Kugel, who is cooperating with prosecutors, pleaded guilty to six criminal counts, including falsifying trading and business records, and securities and bank fraud...
Bongiorno, who recruited investors and helped run Madoff’s investment advisory office, and Crupi, a keypunch operator, have denied the charges against them and are awaiting trial.
Kugel faces as long as 85 years in prison and fines of $11.75 million, said Swain, who agreed to release Kugel on a $3 million bond secured by $900,000 in cash and properties. ...

Separately, the Securities and Exchange Commission sued Kugel today over backdated trades in his own account at BLMIS. He allegedly withdrew almost $10 million in phony profits over the years. Kugel has agreed to settle the case and forfeit any gains from the scheme, the SEC said in a statement.
Today in court, Moore said Kugel also agreed to sell homes in Boca Raton, Florida and Sands Point, New York, as well as luxury vehicles and other assets purchased with funds from his Madoff accounts.

The Guardian had this to say about Kugel:

Kugel's cooperation and his claim that the fraud goes back to the 1970s will add further pressure on Peter Madoff, Bernard's younger brother and the subject of a separate inquiry. Peter Madoff had worked with his brother since at least 1970, when he left law school.

Picard is seeking to recover at least $226.4m from several Madoff family members including Peter, Bernard Madoff's son Andrew and the estate of Madoff's late son Mark.

Kugel would be the fifth former Madoff executive, including Madoff, to plead guilty to participating in the fraud. Five other former Madoff employees, include Daniel Bonventre, the firm's former chief of operations, have denied charges that they were co-conspirators and are awaiting trial.

I'm glad Mr. Kugel is cooperating and I don't feel bad that he has to sell some of his many homes and luxury cars. Unfortunately for him, he is very likely to receive a death sentence given his age and the likelihood that he will spend a decade or two in prison.

The Guardian comment about Peter Madoff reminded me few people are implicated in this case. It will be interesting to me to see if Bernie was clever enough to either keep his family out of his scheme or hide any trail to them. Time will tell...

Free Markets, Families and Regulating Fraud

noreply@blogger.com (MZ) — Sat, 19 Nov 2011 17:45:00 +0000

I’ve been reading several calls for prosecution of fraud on Wall Street lately. No, these aren’t coming from the Occupy Wall Street crowd. Instead, top economic and business commentators and scholars are noting the dearth of prosecution and the role this is playing in our economic challenges. This is a fascinating debate and I only have time to capture enough to spark your interest in hopes that you will check out some of the sources I post. For starters,

I’ve been interested for some time in the notion that many seem to ascribe to that if we want a free market then we don’t want regulation. This post by Barry Ritholz (who has been noted as one of the top 15 economic journalists) captures some great thoughts by leading free market economists on the role of regulation and prosecution of fraud. Here are a few quotes:

There is a widespread myth that free market supporters are against regulation or prosecuting fraud. In fact, Adam Smith – the father of free market capitalism – was for regulation of banks, and believed that trust is vital for a healthy economy. Because strong enforcement of laws against fraud is a basic prerequisite for trust, Smith would be disgusted by the lack of prosecution of Wall Street fraudsters today. Smith railed against monopolies and their corrupting influence. And Smith was pro-regulation, so long as the regulation benefited the little guy, as opposed to the wealthiest:

In addition to Adam Smith, Ritholz also notes that more contemporary free market economists are also for regulation and prosecution of fraud as a means to keep the free market working properly. Incuding Richard Posner, Alan Greenspan, Ludwig von Mises and even Friederich Hayek.

Here is a quote Ritholz attributes to Hayek:

There remains, however, one other kind of harmful action that is generally thought desirable to prevent and which at first might seem distinct. This is fraud and deception. Yet, though it would be straining the meaning of words to call them ‘coercion,’ on examination it appears that the reasons why we want to prevent them are the same as those applying to coercion. Deception, like coercion, is a form of manipulating the data on which a person counts, in order to make him do what deceiver wants him to do. Where it is successful, the deceived becomes in the same manner the unwilling tool, serving another man’s ends without advancing his own. Though we have no single word to cover both, all we have said of coercion applies equally to fraud and deception. … Liberty not only means that the individual has both the opportunity and the burden of choice; it also means that he must bear the consequences of his actions…. Liberty and responsibility are inseparable.

Another quote from Ritholz attributed to Mises:

Government ought to protect the individuals within the country against the violent and fraudulent attacks of gangsters, and it should defend the country against foreign enemies.

Interestingly, Ritholz notes that it is fraud combined with poor monetary policy that leads to bubbles in the economy such as we’ve experienced with the dot.com and real estate bubbles in the past decade or so. Ritholz then notes that the current administration has a terrible record for prosecuting fraud. He says:

Obama has prosecuted fewer financial crimes than any president in decades – less than Ronald Reagan, less than George H.W. Bush, less than Bill Clinton, and less than George W. Bush. The economy is worse than it has been since the Great Depression, if not before. See the connection?

Now to be fair, this connection is not necessarily a clear one. However, Ritholz is not alone in saying that the economy is being held back because fraud is not being prosecuted. He continues on his blog to discuss the differences between good and bad regulation and asserts that good regulation is critical to the operation of the free market. I tend to agree but only to a point.

Instead of a focus on regulation, I would say that trust must exist for the operation of a free market and trust can be obtained either by a good regulator/enforcer who prevents and punishes fraud or it can be obtained by self regulation. The best way to have trust is to have self-regulation by an ethical populace. Self-regulation has been described as “obedience to the unenforceable.” For example, Harvard's famous Professor Clayton M. Christensen refers to self-regulation and notes an essay written by the “Lord John Fletcher Moulton, the great English jurist, who wrote that the probability that democracy and free markets will flourish in a nation is proportional to ‘The extent of obedience to the unenforceable.’”

In other words, when the populace regulates their behavior based on ethical and religious beliefs, trust can exist without much government regulation. Imagine an economy where everyone lives the golden rule and words and handshakes are always honored. A lot of occupations, including auditors, lawyers, fraud examiners, virus software developers, policeman, military, security guards, etc., etc. would be in much lower demand or eliminated altogether. Instead, economic efforts would be focused on productive pursuits and we would have a high standard of living with much less effort since we wouldn’t need to support all these regulatory mechanisms. However, as the family and society fails to produce a populace who are obedient to the unenforceable, a need for government regulation arises to punish fraudsters. As this need gets too big in a given economy then the opportunity arises for a more ethical society to step in and take over the economic opportunities because they can do so at a much lower cost.

This topic of trust in the economy and prosecuting fraud is the subject of another blog post by Ritholz. He quotes numerous economists and scholars and notes that our economy won’t recover until trust is restored and trust won’t be restored unless the government prosecutes and punishes the executives on Wall Street and in the financial industry who were involved in the mortgage meltdown.

This brings me to my last reference. If you are really interested in learning more about the role of fraud in the mortgage meltdown, I highly recommend listening to this excellent interview about how the banks committed fraud in the mortgage industry. You can download the MP3 file and listen to it, like I did, while exercising. It’s worth the time. I’ve read a few books on the mortgage meltdown and found this to be informative in addition.

In my opinion, (as I've mentioned on this blog before) the bottom line is that the American family is failing to produce a populace that is obedient to the unenforceable. As a result, there is a bigger need for other mechanisms to prevent, detect and prosecute fraud and other forms of economic corruption. Many are observing that the government seems to be headed in the other direction and allowing top executives to get away with their corrupt activity. This is a recipe for more hard times to come and potentially for a more righteous society to gain economic advantage. What is to be done? Strengthen families in the long run and build stronger mechanisms to prosecute and regulate fraud in the short run.

Update on Olympus: Potential Ties to Organized Crime

noreply@blogger.com (Aaron) — Fri, 18 Nov 2011 22:57:00 +0000

Not only is Olympus being accused of a massive financial statement fraud, the latest revelations suggest that the financial statement fraud involved companies with links to organized fraud. According to the NYT:

Japanese officials say that at least $4.9 billion is unaccounted for in a financial scandal at Olympus and are investigating whether much of that money went to companies with links to organized crime.

In a memo prepared by investigators and circulated at a recent meeting of officials from Japan’s Securities and Exchange Surveillance Commission, the Tokyo prosecutor’s office and the Tokyo Metropolitan Police Department, officials say they are trying to determine whether Olympus worked with organized crime syndicates to obscure billions of dollars in past investment losses and then paid them exorbitant sums for their services.

The article also contains some additional details about the nature of the alleged fraud:

At the heart of Olympus’s action is a once-common technique to hide losses called tobashi, which Japanese financial regulators tolerated before clamping down on the practice in the late 1990s.

Tobashi, translated loosely as “to blow away,” enables companies to hide losses on bad assets by selling those assets to other companies, only to buy them back later through payments, often disguised as advisory fees or other transactions, when market conditions or earnings improve.

The Japanese investigators’ memo chronicles Olympus’s efforts to pay off its previous losses through payments camouflaged as acquisitions and supposedly related advisory fees to buy companies that seemed to have little relation to its main business.

With the knowledge that this fraud may have been aided by organized crime, I wonder how far the link may have gone. In the Crazy Eddie fraud, the Antar family went to great lengths to perpetrate their fraud, including infiltrating the audit firm that was signing off on Crazy Eddie's financial statements. I'm wondering if we might learn of something of that nature with Olympus. If organized crime was involved, it doesn't seem like too much of a stretch to think that individuals within Olympus's audit firm, within Olympus itself, and within other organizations with ties to Olympus may have been influenced to ignore the shady dealings going on within Olympus.

Olympus is Accused of Massive Financial Statement Fraud

noreply@blogger.com (MZ) — Tue, 08 Nov 2011 22:05:00 +0000

The camera and electronics company, Olympus, is being reported to have engaged in a massive financial statement fraud. Reports are pretty ambiguous right now but this could be one of the largest financial reporting frauds we've seen in a long time. Here are some excerpts from the NY Times article today:

Olympus said Tuesday that more than $1 billion in merger payouts were used to hide years of losses on investments, an acknowledgment that is an abrupt about-face for the company, which had denied any wrongdoing in the wake of a widening scandal.
That revelation alone could make this one of the biggest accounting fraud cases in corporate history.
But in an extraordinary statement issued Tuesday, the company said the panel found that the money for mergers had in fact been used to mask heavy losses on investments racked up since about 1990.
The panel found that Olympus channeled money through several investment funds to “eliminate latent losses,” the company said in the statement, without elaborating...
The payouts in question involve $687 million in fees Olympus paid to an obscure financial adviser over its acquisition of the British medical equipment maker Gyrus in 2008. That fee amounted to roughly a third of the $2 billion acquisition price, a fee amount more than 30 times the norm.
The Federal Bureau of Investigation and the Securities and Exchange Commission in the United States are also investigating the Gyrus deal, according to people familiar with the matter.
Olympus also acquired three small companies in Japan for a total of $773 million, only to write down most of their value within the same fiscal year. Those companies ... had little in common with Olympus’s main line of business of producing cameras and other electronics.
At a news conference, the company’s new president, Shuichi Takayama, bowed deeply in apology. “It is true that there were inappropriate dealings,” he said. “Our previous statements were in error.” But he stopped short of acknowledging fraud at the company, and said that no money had flowed out of the company. He said Olympus was still investigating the case and was still unprepared to reveal the scale of past losses.

Like I said, things are a bit vague right now. I'm wondering if this involved misusing merger reserve accounting back in the 1990's. We'll be following this in the future to see what becomes of it. In many large fraud cases, the initial report of the magnitude turns out to be only a fraction of the total fraud. For example, I think WorldCom started at $3 billion being reported and grew to $11 billion. Time will tell with this case...

A New Madoff Interview

noreply@blogger.com (MZ) — Tue, 08 Nov 2011 01:11:00 +0000

60 Minutes Overtime aired a video recently of an interview with Ruth and Andrew Madoff discussing such things as the decision and process of turning Bernie in to the authorities, etc. Andrew and his mother also talk about Bernie and Ruth's failed effort to commit suicide. Crazy stuff for sure...Check it out here.

A Potentially Costly Combination: Deloitte, Taylor Bean and the PCAOB

noreply@blogger.com (MZ) — Thu, 20 Oct 2011 20:43:00 +0000

If you follow news affecting auditors, you may have noticed that the PCAOB made a very rare disclosure yesterday about one of the big four firms, Deloitte. The PCAOB said that Deloitte was previously sanctioned for not being skeptical enough to challenge statements made by management and that they still have problems with this.

Normally, the PCAOB tells the big audit firms what they did wrong and gives them a year to fix it with the threat that they will disclose their failures after a year if the firm doesn't fix it. Well, they decided Deloitte was still dropping this ball so they disclosed it publicly. Importantly, the timing of this ball dropping may have been very detrimental to Deloitte. Here is why...
Recently, we blogged about Deloitte being sued for over $7 billion for it's audits of Taylor Bean, a firm that was heavily involved in the mortgage meltdown. The lawsuit claims that Deloitte was both negligent and turned a willful blind eye. Unfortunately for Deloitte, this recent PCAOB disclosure seems to provide some fuel to ignite that claim.

But this isn't all. As it turns out, at least one of the audits that the PCAOB references in their disclosure sounds like it may have either been Taylor Bean or someone very much like them. Here are some quotes from a Washington Post article that probably make the attorneys at Deloitte very uncomfortable:

“The firm’s apparent failure to appropriately challenge management’s representations occurred in numerous areas,” the report by (the PCAOB) said.

Though Deloitte was alerted to the problems in spring 2008, a year later it had failed to fix them, according to the oversight board. It’s unclear whether the failings were subsequently addressed because the board’s more-recent findings remain confidential.

The audits at issue date from a period when the United States was sliding toward a financial crisis, and at least one was of a company involved in mortgage investments.

At that company, identified only as “Issuer E,” the oversight board accused Deloitte of failing to properly assess such matters as the value of mortgage-backed securities, the accounting for delinquent loans and the treatment of financial instruments known as swaps, a form of derivative.

This sounds like it very well could have been Taylor Bean and, even if it wasn't, I'm betting that the attorneys suing Deloitte are going to be drawing the parallel...

Widow of Mark Madoff Talks

noreply@blogger.com (MZ) — Thu, 20 Oct 2011 02:08:00 +0000

ABC News has an article about Mark Madoff's widow, Stephanie Madoff Mack, and her view of what Bernie did to her. Here are a few quotes I found interesting:

"He (Bernie) stood there in the corner at my wedding watching everyone dance, and he knew that everyone in that room was going to get screwed," said Mack.
Madoff Mack told Cuomo that if she saw her father-in-law today, she’d tell him “that I hold him fully responsible for killing my husband, and I’d spit in his face.”
Determined to make Madoff suffer even more for what he had done to his son, Mack wrote a letter to him describing the life he would forever be missing with his two grandchildren.
Instead of showing remorse, Madoff wrote back bragging about his new life in prison, telling Stephanie that he was treated as a celebrity.

All I can say is that Bernie Madoff is one very sick and sad excuse for a human being...It appears that he is totally oblivious to the immense pain he has caused to others, even those closest to him such as his son. What a pitiful life he lived.

Fraud in Amateur Sports

noreply@blogger.com (MZ) — Sat, 15 Oct 2011 14:48:00 +0000

Photo taken from KTLA.com

So, I was appalled to read about a marathon runner who caught a bus over the last six miles of the race and then waited until the 1st and 2nd place racers passed him before taking 3rd place with a personal record! I can just see this guy bragging about his PR to his friends at work! In my book, he's a bigger loser than the last place finisher who followed the rules. It gives a whole new meaning to the phrase "The biggest loser!"

This story reminded me of the pro and amateur cyclists who are out there doping even though they know it's against the rules (see this link for links to a few articles). I personally can understand the pros getting caught up in it more than I can the amateurs. A pro has all sorts of pressure to keep his contract and win and others are trying to take his job from him by doping better than he does.

Amateurs on the other hand, are supposed to be doing something they love and that keeps them fit. If they are racing to prove their self worth, something is really missing in that soul's life...Yet, we can read that it happens and some people believe more doping is happening among amateurs than among the pros.

I hear people speculate all the time about amateurs who are doping. For example, sometimes masters cyclists are known to race all over the region and dominate the races but then they skip Masters Nationals. Why would they do that? The speculation is that it's because at Masters Nationals, they test for doping. When you sign up for the event it notifies you that they test. I believe that this fact pattern and speculation paints a pretty dark cloud over these amateurs. Clean racers can't help but wonder why someone who travels all over the region and wins will then skip the one, most prestigious race of the year, which also happens to be likely to test the winner for doping. It leaves a bad aura on all the races and leads to questioning of anyone who is riding strong. Not a healthy situation in my book...

So what can be done? I've recommended an amendment to the Utah Cycling Association's (UCA's) rules to institute drug testing at some of the UCA races this year. I doubt these changes will take place but I would love to see them. Here is my recommendation:

Require every UCA category winner (e.g., Pro 12, Cat 3, Masters 35+, etc.) to submit a urine sample which may or may not be tested for doping. Also, require every UCA race to drug test some number (e.g., 5) of the category winners.

The goal of this proposal would be to help deter the doping among pro and amateur cyclists that we can read about in the news. I've heard that the cost to analyze a urine sample for doping is not that high (e.g., $200). Whatever it is, I would be willing to pay a higher entry fee to institute drug testing in more amateur races.

There undoubtedly are some who don't race because they don't want to compete against those who cheat. On the other hand, some racers may quit coming if they know they will be tested. I personally think this will improve the amateur races and help send the message that cheating is not tolerated.

Just as business and the economy is ruined by greedy fraudsters, sports and competition are ruined by cheaters of all types!

Avoiding Consumer Fraud [Guest Post]

noreply@blogger.com (Aaron) — Mon, 10 Oct 2011 20:51:00 +0000

“You’ve just won $10,000! Act now! This opportunity won’t last long!” Every day, millions of consumers run into ploys like this one, and some of these people fall victim to the scam. Americans lose hundreds of billions of dollars to consumer fraud every year.

Victims of mass market fraud could potentially lose their life savings and/or have the need to file for bankruptcy. Con artists can find these innocent people through the internet, by telephone, email, and even post mail. People easily get tricked into trusting these scams and give out money or their very valuable personal information.

What is Consumer Fraud?

Consumer fraud occurs when a seller knowingly misleads a consumer by misrepresenting or failing to reveal an important fact. This may seem very straight forward, but it is quite difficult to prove fraudulent acts at times. To prove that fraud has occurred, a person much show all of the following: false representation, knowledge of untrue facts and statements by the defendant, intention of deception, true belief of those statements by the victim, and real damages as the result of the false representation.

Identify Consumer Fraud

While proving consumer fraud can be difficult, it can be quite easy to avoid the fraudulent act in the first place. With the right information, identifying potential consumer fraud can be simple. There are four types of fraud you should be aware of to avoid falling victim to their scams.

Mail – Americans over 65 account for 26% of all mail fraud victims. This percentage is greater when the fraud offers prizes or sweepstakes (60%). These types of scams work most often when victim is ignorant of fraudulent acts through mail until after they have already sent in money or personal information.
Telemarketing – So called “boiler room” sellers use high pressure sales techniques over the phone on unsuspecting consumers. Typically, these scams will use mystery phone charges, request money for a nonexistent charity, or use some other lie to gain the trust of the victim and unknowingly commit the fraudulent act.
Door-to-Door – Phony home repair companies, magazine subscription salesmen, or students raising money for a nonexistent school project could come to the victim’s door asking for a hand out. Not only could these solicitors ask for money, but they could also request access to the victim’s home to commit other crimes like theft.
Internet – This is the easiest way for scammers to solicit money and/or information from victims because there is easy access to a greater number of people when compared to the other options. Deceptive internet sales or companies, emails from what may seem like an official website asking for personal information and hackers working their way into your computer are just a few ways these people can try to take money and information.

Avoid Consumer Fraud

If you get an email, phone call, or other notification for a prize or lottery, the following tips can help you detect possible fraudulent acts. If the offer has one or more of the following characteristics, you should probably not respond.

The name of the company is listed online as a scam.
The organization doesn’t have a website and cannot be found through a search engine.
The offer (email, telemarketer, etc.) requests bank account information, credit card numbers, driver’s license or passport numbers, your mother’s maiden name or other personal information.
The offer says that you have won a prize, but you did not enter a competition represented by the same company.
An email says you have won a lottery. There are no legal lottery organizations that notify winners by email.
The return address for the email is from yahoo, Hotmail, or other free email account.
The prize promoters require a fee paid in advance. Any administration, processing, taxes, or other fees are deducted from the winnings in legitimate lotteries.
The company requires you to travel at your own expense to receive your prize.
The offer sounds too good to be true. Don't trick yourself into thinking that you are the exception to the old mantra: if it sounds too good to be true, it probably is.

Avoiding fraud can be a lot easier if you know what you are looking for. There are many trustworthy companies out there that will do great things with the money you give them, but there are also many others who will do just the opposite. Whenever a stranger comes to your door or you get a piece of junk mail, just make sure you keep these warning signs in mind.

Amy Young is an author of finance articles published to help inform readers about credit resources available online.