Posts Tagged ‘Fraud’

According to an Associated Press story published in both the Chicago Tribune and Peoria Journal Star, a federal judge allowed a motion to sell some, but not all, of Rita Crundwell’s assets.  According to the AP story, the affected assets are four properties in Illinois, one property in Florida, and a $2.1 million motor home.  Her large horse ranch, Meri J, in Beloit, Wisconsin is not affected.  The horse ranch is being operated by federal marshals.

Quoting from the story:

Rita Crundwell has pleaded not guilty to a single count of wire fraud alleging she stole from the small northern Illinois city to pay for a lavish lifestyle and create one of the nation’s foremost horse-breeding operations.

Prosecutors allege that since 1990, the 58-year-old Crundwell stole more than $53 million from Dixon, where she oversaw public finances as the city comptroller since the 1980s. They say she diverted the money to an account she had set up for personal use and misled city officials.

Prosecutors say her scheme unraveled only when a co-worker filling in for Crundwell while she was on an extended vacation stumbled upon the secret bank account. Her arrest stunned tiny Dixon, a small city along a picturesque vein of the Mississippi River about a two-hour drive west of Chicago in Illinois farm country.

Photos of the luxury motor home were uploaded to the HorseForum.  I’m reposting them for readers who have never seen the interior of a motor home valued at $2.1 million.


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Ligia Baciu

Sorry, I just can’t resist this one.  Several California news outlets are reporting that Ligia Baciu, 35, has been arrested on several charges related to her alleged fraudulent activities at Sweet Life Enterprises.  She is due to be arraigned today.  Allegedly, she stole over $230,000.

I can’t help but wonder if she ever mouthed Ralph Krambden’s line from The Honeymooners, “How sweet it is.”  I also wonder if James Taylor in similar circumstances might have sung, “How sweet it is to stealing from you.”

According to CBS Los Angeles,

Prosecutors allege she used the stolen money to buy an engagement ring, pay for fertility treatments [emphasis added], put a down payment on an Audi, as well as paying for car insurance, groceries and other goods at Costco, Deputy District Attorney Marc Labreche said.

CBS Los Angeles had this description after interviewing  Deputy DA Labreche and hearing his allegations:

Baciu, who was responsible for the company’s credit card accounts, allegedly began stealing from the company in February 2008, Labreche said.

She managed to conceal the theft by ordering bills from the credit card companies that she could manipulate to make it look like the expenses were from various other employees, Labreche alleged.

Baciu was laid off from her job in October 2009, but allegedly kept using the credit cards. Her replacement in accounting uncovered the alleged theft in January 2010, Labreche said.

Sweet Life Bakeries, with 251-500 employees, is a subsidiary of Fresh Start Bakeries.

Thanks to Going Concern for the tip.

Debit and credit – – David Albrecht

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Now I’ve seen everything.

I’m quoting from the Minneapolis StarTribune and the Shakopee (MN) Patch.  On April 25, 2012, Paul Walsh reports in “Business teacher’s boss sticks up for him in fraud sentencing; he’s fired anyway,” and Lisa Baumann reports in, “Accounting Chair at Minnesota School of Business-Shakopee Sentenced for Fraud,” that Joseph W. Traxler (64) has been sentenced to a five year prison term after pleading guilty to committing an $8 million fraud.  He was also ordered to pay more than $5 million in restitution.

After leaving the company where he committed the fraud, in 2009 Traxler moved on to the Minnesota School of Business in Shakopee, where he became accounting department chair.  He started a forensic accounting program at the school, and was teaching the fraud course.  By doing so, he disproved the old adage, ‘those who can’t do, teach’.  He not only could do, but he was popular and considered a very good teacher.

Quoting from Baumann:

Minnesota School of Business (MSB)-Shakopee’s accounting department chair was sentenced Tuesday to five years in prison for his role in defrauding banks to the tune of roughtly $8 million …

Joseph W. Traxler, 64, was senior vice president and chief financial officer for the Centennial Mortgage and Funding Inc. mortgage company in Bloomington in 2007 and 2008. Traxler, of Bloomington, was sentenced in federal court in Minneapolis.

Although Minnesota School of Business-Shakopee officials declined to comment to Patch on the matter Wednesday morning, MSB officials issued a statement later in the day saying Traxler was terminated on Wednesday.

He had joined the staff of MSB-Shakopee in 2009 and had been teaching classes, including one on fraud. Under Traxler’s direction, the school began offering a Forensic Accounting Program in January – designed to provide students with the knowledge, technical skills and professional habits to pursue a career helping businesses detect and prevent fraud.

It is no secret that many in business are challenged ethically and legally.  If anything, business professors are much less ethical than the typical business professional.  I’ve seen some auditing profs who were real stinkers.

I should add that for me, it is important to live an honorable life.  I recognize that many choose to live a life with occasional dishonor.  Education is about the student, not about the professor.  I have seen far too many professor colleagues who either have forgotten this, or never learned it.

Debit and credit – – David Albrecht

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Al Lewis, Dow Jones Newswire columnist (Al’s Emporium) and blogger (Tell It to Al), poses an interesting notion to the Sunday edition of the online Wall Street Journal.  He says that the easiest way to understand Wall Street scandals and implosions is to attribute them to the work of psychopaths, or psychos   He might have a good idea.

Psychos on Wall Street”  is a good read, in part because Lewis shines the light on one of my favorite people, Sam Antar.  Sam’s cousin, Eddie Antar, had a company called Crazy Eddie’s.  Crazy Eddie’s sold electronics in the Northeast.  Eddie starred in some over-the-top televised commercials. Together, Sam and Eddie orchestrated a series of frauds, victimizing insurance companies, suppliers and eventually stockholders.  Their securities fraud was the largest of the 1980s.

Back to Sam in a minute.  First, a discussion of psychopathy.  A diagnosis of psychopathy is, as I understand it, more of a judgment call than a scientific test.  If a person exhibits a sufficient number of symptoms, then he/she can be diagnosed as a psychopath.  These symptoms include:  disregard for the rights of others, a total lack of empathy and remorse, selfishness, insensitivity, dishonesty, aggressiveness, impulsiveness, irresponsibility, and pleasure seeking.   A psychopath is not controlled by a sense of right or wrong, and frequently preys on fellow humans.

I’ve looked over several checklists used in psychopath identification, and I’m sure that I’ve worked with at least one psychopath in most places I’ve been employed as a professor.  In business, they frequently end up in charge.  This is not to say that every business boss is a psychopath, but probably a lot are.

Lewis cites Sherree DeCovny (a former investment broker) as saying that at least 10% of the professionals on Wall Street are psychopaths.  This is where my friend Sam Antar re-enters this story.

Lewis quotes Sam Antar as admitting he is a psychopath. And Sam Antar estimates that 80% of the professionals on Wall Street are psycho.  “It’s a bunch of crooks dealing with other crooks.”

I’ve had enough conversations with Sam to know that he probably was (and still is) a psychopath.  I’ll never forget his description of the mindset of someone committing fraud.  Other people are marks to be exploited.  Good people, he calls them, with a sense of right and wrong.  Having no such sense himself, when he was younger he had no qualms about stealing from them. Stealing from them was fun.  Sam viewed good people as deserving of being stolen from.

For some unknown reason, Sam says he respects me.  He thinks I have the visibility to warn other good people (and my students) to always remain vigilant of people like him. Being wary of others is the key to protecting yourself.  And once you spot a fraudster (aka psycho), do whatever is needed to eliminate the threat.

Yes, I think Wall Street is populated by psychopaths.  And like at the Bates hotel, there is always a vacancy for the next victim.

Debit and credit – – David Albrecht

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This tears me up, it absolutely rips me.   Ernst & Young lost extremely sensitive data while auditing Regions Bank (15th largsst). I consider this a significant data breach.

Unless you subscribe to the Birmingham News, you probably missed this.   Russell Hubbard reports on January 31, 2012, that, “Regions Says Employee 401k Data Lost When Auditor Ernst & Young Mailed Flash Drive and Code Key Together.”  Info Security Magazine provides additional information.

Ernst & Young mailed the data from one of its offices to another.  The envelope contained an encypted flash drive with employee personal identity and 401K data, and a sheet of paper containing the decryption key.  During transit the envelope was ripped open.  At the destination, the flash drive was gone, but the decryption key remained.

There are three documents that ProfAlbrecht is trying to obtain:  (1) letter from Ernst & Young to Regions Bank explaining the incident, (2) letter from Regions Bank to its to its employees explaining the incident, (3) letter from Ernst & Young to employees.

Hubbard reports that Ernst & Young regrets any inconvenience and concern that Regions employees might experience.   Both Hubbard and Info Security Magazine quote one of the Ernst & Young letters as saying, “… we deeply regret that this incident occurred,”

EY regrets that the incident’s consequences but not having caused the incident.  I strongly dislike such non-apologetic apologies.

Regions has a reputation for lock-down tight data security.  Unfortunately, Ernst & Young doesn’t.

I wonder if Ernst & Young will get fired over this incident.

I’ll report more on this in the future.

Debit and credit – – David

David Albrecht

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Michael Douglas, Academy Award winner and star of Wall Street and several other motion pictures, has answered the call to public service.  He is featured in a new FBI public service announcement video in which he calls on citizens to report securities fraud and insider trading.


Thank you very much, Michael Douglas.

Transcript of public service video:

Hello, I’m Michael Douglas. In the movie Wall Street I play Gordon Gekko, a greedy corporate executive who cheated to profit while innocent investors lost their savings.

The movie was fiction, but the problem is real.

Our economy is increasingly dependent on the success and the integrity of the financial markets. If a deal looks too good to be true, it probably is.

For more information on how you can identify securities fraud, or to report insider training, contact your local FBI office. Or submit a tip online at tips.fbi.gov.

Thank you.

Debit and credit – – David


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Inject a bit of information technology into everyday life, and you can increase productivity.  Inject it indiscriminately and there is a control problem.

A year ago, I wrote about the security problem associated with high tech photocopiers in, “A Control Problem.”  Today I’m writing about the RFID chip embedded in new credit cards and bank cards.

RFID is the acronym for radio frequency identification.  When radio waves of a specified frequency bounce off whatever contains an RFID chip, it returns information embedded on the chip (At least, I think that’s how it works).  It’s very useful for paying tax on tollroads, or for tracking items during shipment.

As reported by Bob Segal, credit card companies are now embedding RFID chips into traditional plastic credit cards.  When such a card is within range of a specialized RFID reader, it reads key data off the credit card, such as card holder name, card number, expiration date, and security code.  Such information can easily be used to create a duplicate credit card which in turn can be used practically anywhere by anybody.  Protection is available, if you take it.

David Fordham of JMU reminds there is protection in the form of special lined wallets and plastic credit card sleeves with embedded metal flaking.  New credit cards sent through the mail should contain such sleeves, but I don’t remember seeing one.

I never cease to be amazed at how well the media can exploit the Fear, Uncertainty and Doubt Factor (FUD) with the uninformed general public rather than straightforward information delivery. And how beautifully some fast-buck artists exploit the public’s fear.

This issue was widely publicized several years ago when the state department began issuing the RFID passports. The big question I have is: “Why is there anyone still around who doesn’t have the wallet with the foil built into it?” My neighbor across the street, who is a perennial Luddite, was all up in the air about this a few months ago, so I went over to Dollar General and got him one of the new wallets with the foil lining. For $2.98 plus tax. Sheesh.

My credit union has a stack of the RF-protection sleeves free for the taking sitting in a box by the door.

Still, the metal lining isn’t a perfect defense. Credit cards are at risk of having information being intercepted when removed from the protective wallet. A poacher could camp out near any check out kiosk and steal the information.

There’s a similar problem with the potential for pregnancies from sex. Some sort of barrier, like condoms, works effectively in preventing sperm from reaching the egg. However, failure to use a condom (happens all the time) can result in unwanted pregnancy. I think the same danger exists here. The metal sleeves can prevent identity theft, if only they are used.

Thanks to Bob Jensen of AECM for the alerting me to the danger, and to David Fordham for attempting to allay my fear.

Debit and credit – – David Albrecht

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The 2011 AICPA Accounting Competition is now accepting entries.  Last year I reviewed the submitted videos from the finalists, and thought they were very impressive.  Copied from the website:

The 2011 AICPA Accounting Competition asks college students to flex their fraud and forensic skills in advising a client on a major overseas expansion. The top three teams strut their stuff in Washington D.C., and the one that does the best job keeping the project on track — and on the right side of the law — gets a very legal $10,000.

The schedule:

Call for entries Aug. 29-Sep. 30
Judging Sep. 30-Oct. 11
Submissions Oct. 11-Nov. 7
Public voting Nov. 14-21
Judging Nov. 21-23
Finalists Announced Nov. 23
Presentations and Judging Dec. 16
Champions announced Dec. 17

This is an excellent competition with great rewards.  I recommend all accounting students consider entering.

Debit and credit – – David Albrecht

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The Pittsburgh Post Gazette yesterday reported that former BDO Seidman partner George Mark, 51, was sentenced to probation and fined $30,000 for cheating on his taxes.  According to the paper, Mark claimed $90,000 in bogus travel expenses.

Mark’s crime came to light as a by-product of an investigation into a $37 million fraud at Le-Nature’s, a Pennsylvania company.  A conviction for bogus tax deductions is often called low-hanging fruit.

I’m guessing he was a suspect in the Le-Nature’s fraud, and so far they can only hang tax evasion on him.  It is natural to suspect him because if he would commit fraud for himself, it is reasonable to suspect that he would commit fraud for others if they paid him a lot of money.

Mark avoided jail time because of his record of charitable giving.  Baloney!  Fraudsters frequently make charitable donations, just in case they get caught.

Auditors, it is said, should be held to a higher standard because they serve the public interest and have a fiduciary responsibility.  Why does the profession attract so many who hold themselves to a lower standard?

In related news, on August 1, the PCAOB fined and banned former E&Y auditor for falsifying audit work papers.  From PCAOB Release No. 105-2011-005:

By this Order, the Public Company Accounting Oversight Board (“Board” or “PCAOB”) is (1) barring Peter C. O’Toole, CPA (“O’Toole” or “Respondent”) from being an associated person of a registered public accounting firm, and (2) imposing a civil money penalty in the amount of $50,000 against him.  The Board is imposing these sanctions on the basis of its findings concerning Respondent’s violations of PCAOB rules and auditing standards in connection with the improper creation, addition, and backdating of audit documentation prior to a Board inspection.

We need some sort of public humiliation for guys like these.

Debit and credit – – David Albrecht

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This summer I am working in the area of fraud.  If all goes well, perhaps someday there will be three or four baby articles cooing to be picked up and read.  Why fraud?  It’s more recognizable as accounting than either learning effectiveness or social media.

So I set out to learn as much about fraud as I could.  There are dozens and dozens of articles, both practitioner and academic.  Finally, I came across Tracy Coenen’s most wonderful book, Essentials of Corporate Fraud.

Before settling on a researchable issue, I like to get a handle on the big picture.  So, I put together some ideas from Tracy’s book, my prior knowledge base, and some of the articles, and came up with “The Big Picture of Fraud.”

The big picture of fraud. Each arrow points from who is perpetrating the fraud to who is being defrauded. (c) Albrecht

Although some think insiders are able to wreak the most damage on a corporate business, I disagree.  In one of the largest frauds in history, Bernie Madoff stole $50 billion USD from investors in a classic ponzi scheme.  In the decade from 2001 to 2010, investors typically reacted by lopping an average of 25% from the capitalized value of companies announcing financial restatements.  Many organizations spend much more on IT security to protect the company from outsiders than they spend on fraud prevention activities.

You might ask, do companies intentionally steal from outsiders such as insurance companies, suppliers, customers, and investors?  The answer is that some do.  Jonathan Marks of Crowe Horwath writes,

Sam E. Antar was welcomed into a life of crime at age 14 when he became a stock boy in the family business, Crazy Eddie, Inc. From the beginning, he was involved in cash skimming and overstating insurance loss claims. Antar says he never questioned the business methods of the famous consumer electronics retailer. As the CFO and a crafty CPA, Antar cooked the books of Crazy Eddie for many years – skimming profits, evading taxes, laundering cash, and committing securities fraud – until the company collapsed in 1987.

Antar’s illicit activities were abetted by the Crazy Eddie culture, which promoted fraud from within and made clear that no money should go to the government. Cash sales were routinely skimmed, and frontline employees were paid in cash to avoid taxes.

I’ll write more later this week.

Debit and credit – – David Albercht

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Over on the the AECM listserv, several of us are fans of Ed Ketz (Penn State prof) and his Accounting Cycle column at SmartPros.  For example, when Bob Jensen passes along the link to Ketz’s latest editorial, he always labels it “Ketz Me If You Can.”  Tom Selling (Accounting Onion), sometimes calls his editorials, “The Betz From Ketz.”  For my part, I occasionally feature Ketz on these pages, saying to myself, “Letz Getz Ketz on this.”

Today, Ed Ketz published an absolute must read editorial on his Accounting Cycle, “NY v. Ernst & Young: Who Cares Whether Lehman Brothers Followed GAAP?

Ketz starts off by saying that Ernst & Young intends to fight the civil lawsuit alleging fraud in the Lehman Brothers case.  I’ve noticed the same thing.  In anticipation of a trial, E&Y has petitioned to have the case heard in federal district court instead of a New York state court.  Based on pretrial statements, E&Y has repeatedly mentioned that Lehman Brothers was following GAAP, so technically no rules were broken.

Ketz notes that the current case is very similar to the 1960s Continental Vending case (US v Simon 425 F.2d 796).  In this case three auditors from Lybrand, Ross Brothers, and Montgomery were charged with criminal fraud.  Ketz writes:

While agreeing with the facts presented by the federal prosecutors, the defendants relied on a number of expert witnesses, all of whom stated that the deficiencies mentioned above were not part of generally accepted accounting principles.  The trial judge issued directions to the jury that negated this perspective by maintaining that “the ‘critical test’ was whether the financial statements as a whole ‘fairly presented the financial position of Continental as of September 30, 1962, and whether it accurately reported the operations for fiscal 1962.”  The jury found the defendants (auditors)  guilty.  The auditors appealed, but the circuit court affirmed the decision.  The auditors then appealed to the Supreme Court, but it denied certiorari. [emphasis mine]

I think Ed Ketz’s analysis is sound.  Although we can’t foresee the judge’s rulings in this case, E&Y is at risk here.   Based on what I have read in the the Valukas report and the NY court complaint, it is my opinion that Lehman Brothers adopted its accounting practices with the intention to deceive investors and regulators.  As such, their accounting shenanigans are absolutely repugnant to me.  What’s more, I believe that E&Y auditors were aware of this motive, and blessed the accounting anyway.  Technically correct or not, Lehman Brothers intended for its financial statements to not fairly present the results of operations.  And E&Y opined that they did fairly present.

Will the jury be allowed to base its decision on the fairly presented issue?  Tune in later.

Debit and credit – – David Albrecht

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