June 23, 2024

Two More Massive Investment Frauds Reported

Capital Vaporized By Hedge Fund Fraud

How many more frauds are lurking out there?   Two more large cases of investment fraud by hedge fund managers were reported today by The Wall Street Journal.

In the latest round of financial-fraud allegations to erupt, two money managers have been accused of misappropriating at least $553 million, and using it to fund a lifestyle of lavish homes, horses and even an $80,000 collectible teddy bear.

The two men, Paul Greenwood, 61 years old, of North Salem, N.Y., and Stephen Walsh, 64, of Sands Point, N.Y., were arrested by Federal Bureau of Investigation agents and face criminal charges of conspiracy, securities fraud and wire fraud by the U.S. Attorney for the Southern District of New York.

Court documents list several companies as being controlled by the two men, including WG Trading Co. and WG Trading Investors LP in Greenwich, Conn., and Westridge Capital Management Inc., based in Santa Barbara, Calif. They owned Westridge with another individual, prosecutors say.

Westridge Capital managed $1.8 billion in assets, the firm told the SEC in an adviser-registration filing in January. It oversaw a total of 20 accounts primarily for institutions including pension funds, charitable foundations and hedge funds, according to the filing. It lists Messrs. Walsh and Greenwood as principals since 1999.

Alleged victims include Carnegie Mellon University, which had invested more than $49 million, and the University of Pittsburgh, which put in more than $65 million, court records show. The Iowa Public Employees Retirement System said it had invested about $339 million, or 2% of its portfolio. The Sacramento County Employees’ Retirement System in California said on its Web site that it had invested $89.9 million, or 1.6% of its total fund.

The case marks the latest in a series of scandals, topped by Bernard Madoff, who authorities say admitted in December to masterminding a $50 billion Ponzi scheme. Other cases include R. Allen Stanford, a Texas financier who has been accused by the Securities and Exchange Commission of an $8 billion fraud involving certificates of deposit, and Marc Dreier, a prominent New York lawyer charged in an alleged $400 million hedge-fund scam.

If proved, the latest case “will be the biggest direct hedge-fund fraud we’ve seen,” according to Chris Addy of Montreal-based Castle Hall Alternatives, which provides risk-assessment services for investors in hedge funds.

Separately, another alleged fraud began unfolding Wednesday when the U.S. attorney charged hedge-fund manager James Nicholson with securities and bank fraud in U.S. District Court in Manhattan. Prosecutors don’t have a clear idea of the size of the alleged loss, saying only that as much as $900 million could have been invested with his firm.

Is Anything Safe?

Investors have to be wondering if there is any safe place left to invest their capital.  Stocks are down 50% and there seems to be another major investment fraud reported almost daily with total losses well over $100 billion and counting.

Large investment losses, loss of confidence and a weak economy restrict investment and risk taking which further impede economic recovery.  It looks like it’s time to take Will Rogers advice and be more concerned with return of capital rather than return on capital.

Diogenes Would Have No Luck In Washington

Mission Impossible

Somewhere around 300 BC,  the Greek philosopher Diogenes walked the streets of Greece carrying a lamp in the daylight looking for an honest man.  History does not tell us whether or not Diogenes ever found his honest man, but he would have little luck were he to conduct the same exercise today in Washington.

If there is an honest man in Washington, the Obama administration cannot seem to find him.  Many recent candidates for high level positions have not paid taxes or have enriched themselves representing special interest groups.  Now we are told that the administration’s Chief of Staff, who became very wealthy shortly after entering politics, was the recipient of large undisclosed gifts.  Can someone who has received large gifts be independent when the donor later asks for special favors?

Rahm’s Rent Is Just The Tip Of Ethics Iceberg – New York Post

NEWS broke last week that Rahm Emanuel, now White House chief of staff, lived rent- free for years in the home of Rep. Rosa De Lauro (D-Conn.) – and failed to disclose the gift, as congressional ethics rules mandate. But this is only the tip of Emanuel’s previously undislosed ethics problems.

One issue is the work Emanuel tossed the way of De Lauro’s husband. But the bigger one goes back to Emanuel’s days on the board of now-bankrupt mortgage giant Freddie Mac.

Emanuel is a multimillionaire, but lived for the last five years for free in the tony Capitol Hill townhouse owned by De Lauro and her husband, Democratic pollster Stan Greenberg.

During that time, he also served as chairman of the Democratic Congressional Campaign Committee – which gave Greenberg huge polling contracts. It paid Greenberg’s firm $239,996 in 2006 and $317,775 in 2008. (Emanuel’s own campaign committee has also paid Greenberg more than $50,000 since 2004.)

To be fair, Greenberg had polling contracts with the DCCC before – but each new election cycle brings its own set of consultants. And Emanuel was certainly generous with his roommate.

Emanuel never declared the substantial gift of free rent on any of his financial-disclosure forms. He and De Lauro claim that it was just allowable “hospitality” between colleagues. Hospitality – for five years?

Some experts suggest that it was also taxable income: Over five years, the free rent could easily add up to more than $100,000.

Nor is this all that seems to have been missed in the Obama team’s vetting process. Consider: Emanuel served on the Freddie Mac board of directors during the time that the government-backed lender lied about its earnings, a leading contributor to the current economic meltdown.

The Federal Housing Enterprise Oversight Agency later singled out the Freddie Mac board as contributing to the fraud in 2000 and 2001 for “failing in its duty to follow up on matters brought to its attention.” In other words, board members ignored the red flags waving in their faces.

The SEC later fined Freddie $50 million for its deliberate fraud in 2000, 2001 and 2002.

Meanwhile, Emanuel was paid more than $260,000 for his Freddie “service.” Plus, after he resigned from the board to run for Congress in 2002, the troubled agency’s PAC gave his campaign $25,000 – its largest single gift to a House candidate.

That’s what friends are for, isn’t it?

Now Rahm Emanuel is in the White House helping President Obama dig out of the mess that Freddie Mac helped start.

The president’s chief of staff isn’t subject to Senate confirmation, but his ethics still matter. Is this the change that we can depend on?

Early Results On “Stimulus Package” – Greed, Corruption & Stupidity

The US Senate and House of Representatives is busily putting together a stimulus package that should cost $825 billion.  The massive spending package, all conducted with borrowed money, will be spread over a wide variety of programs designed to “stimulate the nation back to prosperity”.   All of the debate on the stimulus package seems to center on how the money should be spent.  No one is debating whether we can afford this massive spending.  There has been no intelligent discussion or analysis of whether the stimulus will work, despite the historical evidence that it won’t (See Stimulus Plan Condemns Us To Further Wealth Destruction.

Most Americans seem optimistic that the stimulus plan will work and that the money will be wisely spent.

Let’s look at some early returns for an idea of how $850 billion will be spent.

Politicians Asked Feds to Prop Up Ailing Bank

Two Illinois congressmen urged the Treasury in October to avoid taking any regulatory action against a struggling bank in their state, illustrating the aggressive efforts some politicians are taking to help hometown lenders during the bank crisis.

“This is a disturbing parallel to precisely some of those things that made the savings-and-loan debacle into a political scandal as well as a financial scandal,” said William Black, an associate professor at the University of Missouri-Kansas City, who was a bank regulator in the S&L crisis.

Regulators didn’t think National Bank of Commerce qualified for a cash injection because its financial condition was so perilous. On Oct. 22, Ronald G. Schneck, an official of the bank’s federal regulator, the Office of the Comptroller of the Currency, told the bank it should “act as if capital replenishment funds will not be received,” according to the letter by Reps. Davis and Gutierrez.

Instead, on Nov. 6, OCC officials told the bank it wouldn’t be getting any TARP money. They said the Treasury had decided “to not grant assistance to restore to the Bank to an adequately capitalized status,” according to a document reviewed by The Wall Street Journal.

An OCC spokesman said: “While we don’t comment on TARP applications, it should be noted that the amount needed to recapitalize the bank was far in excess of what was allowable under TARP’s capital purchase program.”

The US Treasury did the right thing when they refused to invest more money in this failing bank.  What thought process lead these 2 congressmen to believe that they would be spending money wisely by investing taxpayer money in a Zombie bank?

Political Interference Seen in Bank Bailout Decisions

Troubled OneUnited Bank in Boston didn’t look much like a candidate for aid from the Treasury Department’s bank bailout fund last fall.

The Treasury had said it would give money only to healthy banks, to jump-start lending. But OneUnited had seen most of its capital evaporate. Moreover, it was under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives’ use.

Nonetheless, in December OneUnited got a $12 million injection from the Treasury’s Troubled Asset Relief Program, or TARP. One apparent factor: the intercession of Rep. Barney Frank, the powerful head of the House Financial Services Committee.

Treasury Secretary nominee Timothy Geithner, testifying Wednesday at his Senate confirmation hearing, acknowledged “there are serious concerns about transparency and accountability…confusion about the goals of the program, and a deep skepticism about whether we are using the taxpayers’ money wisely.”

“It’s totally arbitrary,” says South Carolina Gov. Mark Sanford. “If you’ve got the right lobbyist and the right representative connected to Washington or the right ties to Washington, you get the golden tap on the shoulder,” says Gov. Sanford, a Republican.

Several Ohio banks received funds after Ohio’s congressional delegation complained bitterly about the treatment of Cleveland-based National City Corp., which regulators forced into a merger rather than provide with cash. And in Alabama, the state’s top banking official says a windfall there — five banks are slated to receive funds — is testament to the influence of two powerful Alabama lawmakers who sit on key congressional committees.

Rep. Frank, besides heading the Financial Services Committee, has longstanding ties to OneUnited, and recalls having had a deposit account at a predecessor bank in the 1960s.

Later that month, Rep. Frank was intimately involved in crafting the legislation that created the $700 billion financial-system rescue plan. Mr. Frank says that in order to protect OneUnited bank, he inserted into the bill a provision to give special consideration to banks that had less than $1 billion of assets, had been well-capitalized as of June 30, served low- and moderate-income areas, and had taken a capital hit in the federal seizure of Fannie Mae and Freddie Mac.

On Oct. 27, the FDIC and Massachusetts bank regulatory officials, alleging poor lending practices and executive-compensation abuses by OneUnited, slapped it with a strong enforcement action, a cease-and-desist order. Among other things, the officials told the bank to get rid of a 2008 Porsche for executives.

Mr. Frank said he didn’t try to interfere with the regulatory process. “We have never told the regulators that they should ease up on them or not order them to do this or that,” he said.

He cites the bank’s status as the state’s only financial institution owned by African-Americans.

The free market should have been allowed to work in this case and this poorly run bank with its overpaid executives should have been closed.  Instead, based on Mr Frank’s parochial interests and ties to this corrupt institution, OneUnited receives $12 million from the taxpayer.  It would be interesting to know how much in political contributions Mr Franks received from OneUnited.

Even at a time of an unprecedented national crisis, our politicians cannot take the high road and look at the situation from a standpoint of the National interest.  The US itself will be just as bankrupt as OneUnited if we attempt to bailout every failed business entity in the country.  If the nation survives this crisis, it will be in spite of the actions taken in Washington.

In an incredibly ironic statement on the stimulus plan, Democratic Senator Inouye of Hawaii stated that “We must respond to this crisis with all the weapons at our disposal.  If we fail to act, the situation will almost certainly worsen, and the American people will continue to pay a heavy price.”  With clueless fools like Senator Inouye voting to spend trillions of taxpayer dollars to help us, we will be lucky to survive as a nation.  The Senator clearly does not see that the government and the Fed caused the financial meltdown.  He clearly does not see that the government is only going to make the situation far worse by trying to reflate the asset bubble.  Most of all he clearly does not see that he is putting the nation on the road to financial destruction by burying us in more debt.

My take on the stimulus plan is that the money will be largely wasted by keeping alive Zombie business entities that are poorly run by overpaid executives.  Money to the losers will only serve to hurt the successful.  The successful should not have to subsidize those who fail; this type of wealth shifting will  make us all equally poor.  Much of the stimulus money spent will be based on political connections, self interest and self dealing.   The economic situation will worsen as borrowed money is spent foolishly.  The only sure result of the stimulus package will be to put the sovereign credit of the United States at further risk.

Satyam’s Phony $1 Billion – How They Did It

One would think that with the number of business frauds, Ponzi schemes and other financial deceptions exposed over the last decade that auditors would have a more skeptical and cautious attitude.

The Satyam case is particularly perplexing when considering one of the major fraud aspects of the case.  Satyam reported cash balances of approximately $1.11 billion when in fact they had 94% less, or only around $66.6 million.

What makes this fraudulent reporting of cash balances so strange is how the auditors could possibly miss over a billion dollars.   Verifying cash balances is a routine step in the audit process.   In addition, routine “topside” analytical procedures are usually employed to verify that a large number on the balance sheet makes sense.

For example, if a company reports a cash balance of $1 billion dollars, does that cash balance look reasonable compared to the interest income reported?    A quick check on what rate of interest the company was earning should have resulted in determining if the interest income the company reported from its cash holdings was reasonable.  Perhaps Satyam fraudulently inflated the income earned on their phantom cash as well, in which case this procedure may not have lead to suspicion.  A routine financial audit is not conducted with the intention of discovering management fraud.

Verifying cash balances , however, is an entirely different matter.  Cash balances are easily verified by sending a balance confirmation request directly to the banking institutions in which the cash is held.   Cash confirmations are a simple and routine audit procedure.  A company holding over $1 billion in cash and conducting business worldwide would have accounts with many different banks.  The odds of having someone at many different banks intercept and falsify a bank confirmation is highly unlikely; so how did the auditors miss $1 billion?

The most plausible explanation is that the auditors did not comply with standard audit procedures.   Once the bank confirmations are prepared by the auditors, procedure requires that they be taken directly to the postal service by the auditors.  Instead, I suspect that a very cooperative and friendly staff at Satyam offered to take care of mailing the bank confirmations, thereby saving the auditor the extra effort of independently mailing the confirms.   This breakdown in a routine audit procedure most likely resulted in the bank confirms never being mailed to the banks. The confirmations were retained and fraudulently completed by Satyam, and then mailed back to the unsuspecting auditor.  The doctored confirmations examined by the auditors matched what the company said they had in cash and everyone was satisfied.

Result: simple audit rule violated and huge fraud goes undetected.

Madoff’s $50 Billion Only Exists On Customer Account Statements

Based on Bernard Madoff’s own estimation, he lost approximately $50 billion of investor funds.  Every since this disclosure, the biggest questions are where did the money go and how much of the $50 billion remains.

Bloomberg is reporting that Madoff To Reveal Assets by year end.

Investors looking to recoup some of the $50 billion they lost in Bernard Madoff’s alleged Ponzi scheme may get a better idea what the New York financial adviser has left when he is forced to reveal his assets to regulators.

Madoff, 70, must provide a detailed list of all investments, loans, lines of credit, business interests, brokerage accounts and other holdings to the Securities and Exchange Commission by New Year’s Eve, a federal judge ruled. Madoff’s foreign business units were given until Jan. 26 to provide a similar accounting.

A catalog of Madoff’s assets may reveal targets for angry investors including hedge funds and charities seeking the return of their funds.

This is a curious report.  Why would a federal judge ask Madoff to provide an accounting?  The SEC states that his records are in disarray and in any event, totally unreliable.   Is it to be expected that a man who lived by deception and lies for two decades is going to present an accurate report?  Where is the SEC, are they still not interested in this man’s operations?    It would obviously make more sense for an outside regulatory agency to produce a report on Madoff’s assets.

Nonetheless, regardless of who produces the report, I would not expect the Madoff funds to show very much in the way of assets due to the magic of compounded interest.   Consider the following scenario.   If Madoff had $2 billion in assets under management assets 20 years ago, the amount of this initial investment, compounded at 12% for 20 years would now be approximately $9.6 billion.   If Madoff took in another half billion per year over the next 20 years, to date that amount compounded at 12% would now be worth around $40.4 billion.   With other factors disregarded and a total principal investment of $11 billion, the investors’ account statements would now show $50 billion of assets.

We know that Madoff was not generating magical returns of 12% per year over 20 years, so the phantom gains of $39 billion in this example probably never existed.   In addition, withdrawals, huge fee payments to feeder hedge funds and losses on investments probably consumed much of the original principal invested.    A classic Ponzi scheme collapses when the amounts needed to be paid out cannot be covered by new investment monies, which seems to be the case here.

Madoff probably did not start his fund with the objective of becoming a Ponzi scheme.  He was probably drawn into it slowly as his warped ego would not let him admit to the world that he was not an investment genius.   Failure to cover previous losses or outperform the market going forward never allowed him to stop the deception once it started.  Indifference by regulators allowed the deception to continue.

Madoff’s $50 billion never really existed except on customer account statements.   Defrauded investors will now find this out come December 31st.

Rampant Corruption Symbol Of Empire’s Decline

Illinois Governor A National Disgrace

The latest example of horrendous corruption in government was the arrest of Illinois Gov. Rod Blagojevich.   Among the many charges brought against him by Federal prosecutors was that the Governor was attempting to sell a senate vacancy to the highest bidder.   Given the level of corruption we have witnessed in this country lately, I think it would be more appropriate for a vacant seat to be filled by an election rather than appointment.  The temptation by politicians to profit from their positions of power is obviously too great a temptation for many of them.

This latest brazen example of an elected public official betraying the power of his office and the trust of his employers (the voters) is all too common.  Even when captured with indisputable video and audio proof of their crimes, these criminal politicians have the audacity to deny their guilt and then attempt to continue in office as if nothing had happened.  The Illinois Governor is symptomatic of a society that has lost its moral compass.  Respect for the law is what makes a society civil.  When our highest elected officials commit criminal acts as a matter of routine it sets an example too easily followed by others.

Not Just An Isolated Example – Connecticut Governor Rowland Sent To Jail

Former Gov. John G. Rowland was sentenced to a year in prison and four months of house arrest Friday for selling his office in a corruption scandal.

Rowland, 47, pleaded guilty in December to a corruption charge, admitting that he sold his office for more than $100,000 in chartered trips to Las Vegas, vacations in Vermont and Florida, and improvements at his lakeside cottage. He resigned last summer amid a gathering drive to impeach him.

Through it all, Rowland maintained that he never did anything wrong and predicted the corruption investigation would never touch him.Rowland will become one of more than a dozen former governors to serve prison time and only the second in New England. The first was former Rhode Island Gov. Edward D. DiPrete, who was sentenced to a year in prison in 1998 for bribery, extortion and racketeering.

Rowland will become one of more than a dozen former governors to serve prison time and only the second in New England. The first was former Rhode Island Gov. Edward D. DiPrete, who was sentenced to a year in prison in 1998 for bribery, extortion and racketeering.

The real injustice here is that the Governor was subsequently let out of jail after serving only 10 months and then proceeded to get a high paying job with no difficulty.  Those without political connections have served far more time for far less crimes.  Obtaining a high paying job straight out of prison would seem to indicate that the Governor can still command a high price for his connections and past favors to various interest groups.

New York Governor Elliot Spitzer Resigns After Prostitution Charges

The former crime fighting district attorney, ex Governor later had the charges dropped.  Apparently the Governor still has friends in the law enforcement community.

Alaska Senator Ted Stevens Guilty On 7 Felony Counts- Senator Maintains His Innocence

Sen. Ted Stevens of Alaska, one of Congress’s most powerful Republicans, was convicted yesterday of lying on financial disclosure forms to conceal his receipt of gifts and expensive renovations to his house, just eight days before he faces voters in a tight reelection contest.

The 84-year-old lawmaker, the first sitting U.S. senator to go on trial in more than two decades, sat quietly as a jury foreman in federal court read the verdict after less than a day of deliberations: guilty on seven felony counts, each with a maximum penalty of five years in prison. The senator, who probably will face a less severe penalty under federal sentencing guidelines, left the courtroom without answering reporters’ questions.

In a statement issued by his office, Stevens maintained his innocence, accused Justice Department lawyers of “repeated instances of prosecutorial misconduct” and vowed to fight for reelection to a seventh full term.

This country’s pattern of civil and fiscal decline echoes the warnings issued by David Walker, of the Peterson Foundation, an organization that has been trying to educate America about the fiscal emergency we face due to reckless borrowing.

Walker compares our nation’s fiscal morass to the one that helped topple the Roman Empire. In one speech he argued, “Rome fell for at least four reasons, and please listen carefully: A decline in moral values and political civility at home, an overconfident and overextended military, fiscal irresponsibility by the central government and inability to control one’s borders. Does that sound familiar?”

Is this democracy at its worst with a betrayal by our elected leaders, or is it a failure equally shared by both the voters and its elected leaders?