Financial Fraud

Financial Fraud (15)

Saturday, 07 July 2012 05:11

You Know That I'm Not Easy Featured

Inside the Mind of a Pathological Narcissist, an Emotional Fraudster

Hey. Recognize me? I am the person who rebuilt your self-esteem, the one who became your soul mate. We were so compatible, you and I, we seemingly had everything in common. We feasted, entertained, and had meaningful and deep conversations among us. Our time together was a matter of urgency, with not a moment to waste. We needed to be together, constantly and continually. I called you repeatedly, sometimes 15 times daily. I built you up when you were down, and offered confidence when you doubted. I sparked your interest when you were bored and breathed excitement into your daily routine.

We slept together on our first date, careless and carefree, looked each other in the eyes that morning, and laughed through the afternoon at our careless abandon. I made you feel needed, wanted, protected, necessary, loved, and euphoric. I listened to you, sparked your interest, felt your pain, and made you feel alive. I was your inspiration and your role model, the one you aspired to emulate, the one who made you glow.

I brought you into my family, thrust my son upon you, and you felt alive. He bonded with you quickly, so much so that you nearly appeared to be his natural father. To the world, we were a real family, and I convinced you that you were a great father. My boy adored you, worshipped you, and emulated you. I made sure that you and he quickly adapted to each other and cared deeply for one another.

I made you feel young again, in love, carefree and passionate. We enjoyed much fun together early in our relationship. We danced, ate, partied and drank, all in the guise of love and seduction. I appeared to care, and learned to mimic your emotions. I observed you carefully, and mirrored your feelings, always careful to reflect back an empathic and supportive mate. Our sexual abandon made you feel wonderful and creative, and I complied with every one of your wishes, knowing how important this act was to you. You were exhilarated at my youthful imagination and energy. I mimicked compassion, caring, affection, emotion and tenderness, and reflected back your needs.


Category: Financial Fraud
Monday, 10 October 2011 22:53

A Matter of First Impression

In a matter of first impression in Puerto Rico, and applying Delaware law, District Judge Gustavo Gelpi dismissed all the claims against 11 defendants, all of whom were the most senior executives at Westernbank, formerly Puerto Rico’s second largest bank. Westernbank, a $10 billion bank with hundreds of branches scattered throughout the island, was closed by the FDIC in 2010 for reasons unrelated to the lawsuit. 

The derivative lawsuit, brought by a shareholder of the bank, alleged that the majority of the board of directors and senior management purposely ignored the warning signs of a massive, $200 million structured fraud initiated against the bank’s asset based lending division by a significant client of the bank. The shareholder claims included breach of fiduciary duties as officers and directors of the bank, waste of corporate assets, unjust enrichment, Sarbanes-Oxley violations, and violations of numerous Puerto Rican statutes.

Attorneys Carlos F. Concepcion, Manuel A. Rodriguez and Scott A. Burr, and Forensic Investigator and CPA Francisco Gomez, assisted the Special Litigation Committee of the board of directors in determining the viability of multiple derivative claims initiated against the bank’s officers and directors.

The investigation involved a review and analysis of over 100,000 documents related to the fraud and interviews of nearly 40 bank officials, directors and officers with knowledge of the events leading to the fraud. The Committee’s report, a nearly 200 page single-spaced report detailing its factual and legal analysis, was ultimately filed with the court along with the Committee’s motion to terminate or otherwise dismiss the case. The factual investigation also required detailed analysis of Westernbank’s internal control systems and their remediation that resulted from nearly a dozen third-party reports and analysis.

Category: Financial Fraud

The overwhelming amount of fraud occurring and uncovered in South Florida, including mortgage, banking, securities, and regulatory fraud demands at least a cursory analysis of the personalities and behavior that typify these fraudsters. Stanford, Rothstein, Freeman, Tolz, etc., are merely the tip of a very large iceberg penetrating South Florida.

I am often asked to explain, or even justify, criminal behavior, not merely for the sake of curiosity, but to prevent being swindled by these schemers. We believe that if we can understand the criminal mind, we can identify their attributes and prevent from getting swindled. Unfortunately, the pathology of crime is far more complex than we dare imagine.

There are two ways of preventing a fraud from occurring. One technique is quantitative, and involves the use of sophisticated due diligence to ferret out the fraud or any inconsistencies in the fraudster’s “stories”. These quantitative techniques take the form of pre-investment financial due diligence, background checks, verification of financial history with third-party sources, current customer verification, etc. These quantitative techniques are typically performed before investments are made and throughout the history of the investment. Unfortunately, very little of these techniques are actually performed, witness the Madoff scandal. Here, very little, if any, investigative due- diligence was ever performed, and even when it was, the SEC summarily dismissed it.

The second technique, the subject of this article, is far more complex and qualitative. It involves understanding and profiling the criminal pathology as a means of detecting potential firestorms later. This subtle technique involves profiling the types of personalities that might be inclined to commit criminal fraud.



Category: Financial Fraud
Wednesday, 02 February 2011 17:25

Jackson's Institutional Incompetence

Miami-Dade County's Jackson Memorial Hospital is Adrift in a Sea of Incompetent Executive Management

The utter contempt that Jackson Memorial Hospital’s managing board, the Public Health Trust, and the Miami-Dade County Commission, have displayed for the residents of Miami-Dade County and the Jackson health system has reached a new high.

The Miami Herald reports, here, that the treasurer of Jackson Health System’s governing board noted this week that cash is getting “dangerously low” and that major cost cuts may be needed. Currently, Jackson will likely end the month of January with only 16.7 days of cash on hand. Hospital’s median day’s cash on hand is closer to 90 days cash, making Jackson’s days cash on hand ratio abysmal, and a true operating emergency.

Additionally, Jackson experienced a 7 percent drop in patient revenue, a material and significant decrease to any business entity. The impact on Jackson, though, is pronounced, given its already weakened financial condition and its primary mission of serving the uninsured.

Jackson’s real problems are the result of institutional ignorance and complacency. This author was briefly involved in the nomination process to sit on the Public Health Trust, and met with a panel of Miami-Dade County commissioners, Florida legislators, Public Health Trust members, and other important local politicians.

Category: Financial Fraud

Current financial reporting practices often produce fictional and sometimes aberrant statements that are misleading if not outright fraudulent.  For example, consolidated financial statements are traps for the unwary, hiding and masking transactions through Byzantine group structures and idiosyncratic consolidating techniques.

Consolidation procedures require that inter-group transactions be eliminated when the financial statements of the group are consolidated, on the theory that this procedure eliminates transactions between the group that are not at arm’s length and which may in fact be shams. But consolidation accounting has another, less obvious yet insidious result – it purposely conceals and buries subsidiary information within the group's consolidation, hiding both the enlightening and damaging aspects of subsidiary performance within the whole.

Consolidation accounting purports to represent the economic activity of a group of legally separate and unique entities under the fictional mantra of the group, relying on economic form over legal form and financial substance. They conceal data that might normally be available to users of financial statements, and may serve to hide data from shareholders and creditors that is damaging or otherwise disparaging.

Data not found in unconsolidated financial reports mysteriously appear in consolidated statements under the guise of economic substance, yet bear little relation to real-world substance and the individual, disaggregated accounts of the subsidiary. This theory of aggregation is contrary to the norms found in GAAP – that of full disclosure and careful consideration of an entity’s viability as a going concern.

Prevailing consolidation techniques ignore the legal and financial implications that the aggregated assets and liabilities are neither owned nor made available to the group. This group mentality encourages users and readers of financial statements to view the entities of the consolidated group as virtual branches of the parent, again creating a dangerous fiction rendering the financial statements less meaningful. The grandest of these fictions, though, is the assumption engendered by consolidation accounting that profits and losses of the subsidiary entities will pass through to the parent entity through dividend payments.

Category: Financial Fraud
Tuesday, 31 August 2010 22:08

Earnings Management: An Academic Primer

Our financial reporting system is under siege as never before. Corporations are under intense pressure from shareholders to meet or exceed earnings targets. Globalization continues to relentlessly compress profit margins. The response from many companies has been dramatic: radically reduce expenses by slashing services, wages and benefits, raise prices whenever possible, and employ accounting gimmicks and sleight-of-hand to manipulate earnings whenever these measures fall short.

These gimmicks, some quite elaborate, have resulted in a string of accounting failures and corporate scandals. Accounting failures have become rampant and more pervasive, undermining the credibility of the accounting profession and the inherent reliability of the financial reporting model as an evaluative tool in shaping investor confidence and awareness.

The financial statements, which include both quantitative and qualitative information, purport to transmit the financial data of an entity or group of entities into a prescribed format that stakeholders of that entity can use as a means of evaluating the financial health and viability of that entity. Financial statements must be able to accurately and faithfully convey the economic substance of a transaction, over a period of time, and as of a given date.

Financial information presented in these statements must be capable of accurate comparison to financial statements of other entities. These other entities may or may not be within the same industry as the target company, and the financial statements must convey the economic substance of the transaction rather than merely the economic form of it.

Category: Financial Fraud
The bankruptcy examiner’s report in the bankruptcy of Lehman Brothers is a portrait of accounting manipulation and fabrication that stands next to Enron as the epitome of structured financial statement fraud.

Anton Valukas, of Jenner & Block, discovered Repo 105 while investigating Lehman’s collapse and detailed its use in his report, here. Repo 105 was the artful term used to denote the accounting device through which Lehman manipulated and managed its financial statements, which involved temporarily removing billions of dollars of assets from Lehman’s balance sheet at the end of each quarter.  This gimmick reduced Lehman’s leverage ratios, which were crucial to maintaining its required favorable ratings from the principal ratings agencies, and ultimately, to maintaining investor and counterparty confidence.

Lehman ultimately failed for a variety of reasons, including its increasing inability throughout the crisis to securitize and distribute its subprime mortgage originations and its countercyclical growth strategies of using its own balance sheet to acquire assets for long-term investment. These proprietary investments were principally concentrated in three areas: commercial real estate, leveraged loans and private equity. Most of these asset areas would soon implode as the financial crisis expanded.

These countercyclical investment strategies “consumed more capital, entailed more risk, and were less liquid than Lehman’s traditional lines of business.” Ultimately, as the result of these investment strategies, Lehman desperately needed to raise cash, was unable to sell most of these highly illiquid investments at desirable prices and was forced to turn to massive accounting manipulation to temporarily reduce its balance sheet “solely for the purpose of the firm’s public financial reports.”

Category: Financial Fraud
Friday, 12 February 2010 05:00

Screaming Fraud at Every Turn

Scott Rothstein's mess appears to deepen, as the largest Ponzi scheme ever attributed to a US lawyer increasingly appears to involve the law firm partners.

The wreckage of the law firm appears to have ensnared many of the partners, as the Miami Herald reports, here. The lawyers for the bankruptcy trustee, Charles Lichtman and Paul Singerman, allege that many transactions involving the partners were fraudulent and seek to recoup those amounts on behalf of the creditors and the bankruptcy estate.

Examples of alleged fraudulent activity by the partners include:

  1. The movement of firm funds over the past four years through "the systematic trading of checks with the law firm and payment of third parties with law firm funds".
  2. $475,000 in loans to partner Russell Adler, who purchased a New York apartment with his wife, just two months before the collapse of the Ponzi scheme.
  3. Partner Stuart Rosenfeldt charged $1 million of jewelry to his firm-issued American Express card to pay for 72 pieces of jewelry for his wife, including home furnishings, clothes, vacations, restaurant meals, exotic reptiles, etc.
  4. Rosenfeldt also transferred at least $690,000 in purported loans or salary payments to his wife on 30 separate occasions.
  5. Many of the partners received hundreds of thousands of dollars in bonuses in 2008, and immediately contributed the funds to the GOP presidential nominees John McCain and Sarah Palin.
  6. Rosenfeltd and partner Steven Lippman "typically deposited their [law firm] loan checks and then quickly turned around and disbursed the money back to the firm".
  7. Rosenfeldt also used some of his "$9 million in loans to write a check for $61,500 to Kendall Sports Bar", in which Rothstein had in interest with club owner Stephen Caputi.
  8. The law firm loaned Lippman almost $9 million, who wrote checks to third parties, including Kendall Sports Bar, directly to Rothstein, to Banyon, the largest Rothstein investor, and to Albert Peter, a business partner of Rothstein's.


Category: Financial Fraud
The Florida Bar has initiated investigations of 35 of Scott Rothstein's partners, investigating trust account misdeeds and misappropriations.

The Miami-Herald has reported, here, that Florida Bar investigators are focusing on the equity and non-equity partners of the failed firm, which served as the foundation for Scott Rothstein's $ 1 billion Ponzi scheme, one of the largest in Florida history, and whether any of the partners misappropriated client trust funds or otherwise lied about the status of those funds.

That the investigation has turned to Scott Rothstein's former partners is unsurprising, given the massive nature of the Ponzi scheme that unfolded at their feet. Without concrete evidence of complicit behavior, investigators are likely wielding the only tool at their disposal: the trust accounts and the annual certifications that occur when lawyers renew their Florida Bar memberships. The highly technical focus on these largely perfunctory certifications is evidence that investigators have been unable to directly tie partners or other attorneys to the massive, $1 billion Ponzi scheme, and are seeking creative, if technical, links that tie these attorneys to the fraud.

Category: Financial Fraud
Monday, 14 December 2009 06:25

Miami Earns Its Reputation as Fraud Capital

South Florida is awash in illegal money, and even federal investigators can no longer ignore this area as the center of corruption.

Miami continues to uphold its well-earned reputation as being the capital of vice and corruption, as the Herald writes, here. Miami is the epicenter of Medicare corruption, yet again, and has become the focus of federal efforts to reduce fraud. According to the Herald, Medicare "paid $520 million to Miami-Dade healthcare agencies for treating diabetic patients, more than what the agency spent in the rest of the country combined". Think about that, Medicare spent more in Miami-Dade than the rest of the country!

The Herald noted that the county is home to just 2% of the nation's diabetic patients eligible for Medicare. The assessment that Miami-Dade represents a disproportionate amount of medicare and health-care fraud throughout the United States has, incredibly, taken federal investigators decades to reach. But, there's more: 1) "Miami-Dade providers accounted for over half of the $1 billion paid out nationally in 2008 for the treatment of homebound patients with diabetes and related illnesses"; 2) "The county's percentage of diabetics is lower than the rate of in other Florida areas with heavy elderly populations; 3) "No other part of the country…comes close to Miami-Dade, which is dubbed the nation's healthcare fraud capital; 4) "Medicare spends more than $15 billion on all home-care services nationwide, with one of every $15 spend in Miami-Dade"; 5) "Medicare's average cost for each home healthcare patient with diabetes runs $11,928 every two months…that's 32 times the national average cost of $378".

Category: Financial Fraud
Tuesday, 08 December 2009 07:36

The Failure of Crowds

Allen Stanford's Ponzi scheme is a stark reminder of our collective inability to discern wisdom from crowd behavior, especially when making financial decisions.

The Miami Herald published an expose, here, of Allen Stanford's final, desperate days to prop-up Stanford International Bank, in Antigua. Stanford Bank had sold $7 billion worth of fake certificate of deposits to unsuspecting investors, including the Libyan government, which was defrauded of nearly $140 million. The well-researched story, covering nearly 2 full-spread newspaper pages, details Stanford's increasing desperation and failed attempts to attract additional investors to his Ponzi scheme in its final days.

In searching for a theme, a unifying theory of Stanford's fraud, it became apparent that there was none. Stanford's fraud was brilliant for its massive scale, its sheer audacity and the garish opulence of Stanford's monthly personal expenditures, but sophisticated it was not. In fact, Stanford's scam was frighteningly simple: as long as sufficient investors were lured into depositing their savings at Stanford International and the stock market continued to escalate, Stanford and his group could continue to live extravagant lives of leisure and deception. The fraud would continue as long as inflows of funds, or investors providing new sources of cash, exceeded outflows of funds, or investors redeeming their certificate of deposits. As in Bernie Madoff's fraud, which likely occurred for 3 decades, Stanford's fraud, which occurred over a decade, would collapse as soon as this dynamic was inverted, or outflows representing redemptions exceeded investor inflows.

Category: Financial Fraud
Saturday, 28 November 2009 19:50

Rothstein's Onion Peeled Back

The many layers of Scott Rothstein's Ponzi scheme continue to be peeled back, revealing a tangled web of Madoff-like feeder funds, alleged co-conspirators, and vast sums of money being transferred throughout the world.

The Miami Herald reports, here, that Rothstein moved money to Venezuela, Switzerland and Morocco, and used dummy Delaware corporations to disguise his ownership stakes in real estate holdings and other assets. The Miami Herald also reports, here, that a feeder fund may have contributed close to $2 billion to Rothstein over a 2 year period.

Unfortunately, the media's focus has been on Rothstein's opulent living arrangements, including fancy cars, boats, condominiums, watches and mansions. These assets, as dramatic and sensationalistic as they are, represent but a miniscule portion of total contributions by investors. Even assuming that Rothstein accumulated $100 million in trinkets, baubles and cars, that still leaves the vast portion of the money unaccounted for. For those of us unaccustomed to wealth, it is incomprehensible to understand how difficult it is to spend vast sums of money on tangible goods and assets. No, most of the investors' funds were not spent on Rothstein's junkets, but were likely dissipated throughout the world in a flurry of wire transfers, and are quite likely parked in exotic locales that have poor regulatory structures or banking laws.

Category: Financial Fraud