SEC Alleges That KPMG Auditors Ignored Red Flags

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The Securities and Exchange Commission has alleged that two KPMG auditors, Kevin Hill and Rosemary Meyer, ignored fraud red flags during their audit of U.S. Foodservice Inc., a subsidiary of Ahold NV. It is further alleged that the auditors violated the rules of professional conduct during their audit.

It is alleged that Hill and Meyer found evidence of improperly recorded revenue, but the auditors did not act on this information. It is further alleged that white-out was used to cover markings on working papers that referred to audit exceptions identified related to vendor payments. Continue reading

Former Business Owner Gets 7.5 Years in Prison

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Steven E. Whiting, the former owner of Badger Die Casting, Inc. was sentenced today to 90 months in federal prison. He will also serve three years on supervised release and pay $921,000 in restitution. Whiting was convicted by a jury in May 2005 of ten counts of criminal conversion. He was convicted for spending employees’ health insurance premiums on personal items, leaving the employees without health insurance coverage.

Testimony in the case against Enron executives

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The former CEO of Enron Broadband Services, Kenneth Rice, has testified that Jeffrey Skilling wanted him to mislead Enron’s board of directors. At a meeting between Rice and Skilling (former head of Enron) in May 2001, Skilling suggested that Rice should compile a presentation that was in line with analysts’ expectations. Analysts expected Enron Broadband Services to perform well long-term, but Rice says that the business unit was actually spending $100 million per quarter and producing little business.

Rice is one of 16 executives affiliated with Enron who have pleaded guilty to crimes related to Enron’s collapse. Rice pleaded guilty in July 2004 to securities fraud, and parted with $13.7 million in cash and property. That property included a Ferrari and a Colorado vacation home. He also agreed to help prosecutors with cases related to Enron. His net worth has dropped from $25 million to $10 million since pleading guilty, and he is awaiting sentencing.

RadioShack CEO lied about his credentials

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The chief executive officer of RadioShack Corp., David Edmondson, lied about his academic credentials. The quote from him is that he “clearly misstated my academic record.”

Edmondson previously represented that he had a bachelor of science degree, but is now admitting that he might have something called a “ThG diploma”, which has fewer requirements than a bachelor’s degree. He apparently cannot provide proof of either degree.

Edmondson’s resume reflected a bachelor’s degree in psychology from Pacific Coast Baptist College in San Dimas, California. The school has never offered a psychology degree, however.

Another Ponzi Scheme: 12daily-Pro.com

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Last year a website called 12daily-Pro.com offered participants a 12% daily return on membership fees. The money was supposedly to be earned from viewing advertisements on the internet: 12 ads per day. After viewing the ads, members would be paid based upon how much they invested in “upgrades”.

The FBI and SEC are currently investigating this company for allegedly offering a Ponzi-like scam. Simply put, a Ponzi scheme is a fraud that promises a “return” on invested dollars, but really only pays old investors with the money of new investors. No “returns” are ever generated.

12dailyPro is an “autosurf” website, that promises people money just for viewing pages on the internet. On this particular site, a membership is free, but upgrades in increments of $6 are required in order to receive cash from the program.

The site is run by Charis Johnson, through a North Carolina company she owns called LifeClicks LLC. The main payment processor for the site, StormPay.com, has frozen all funds while the investigation is pending.

Legal fees in the KPMG case

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Milberg Weiss Bershad & Schulman, the New York law firm that helped get a class-action settlement with the accounting firm KPMG LLP is offering an unusual fee arrangement for outside lawyers. In exchange for persuading clients to join the class and drop their individual suits, the Milberg firm is offering outside attorneys a piece of their $30 million fee.

Milberg helped broker a $225 million settlement for clients who were sold fraudulent tax shelters by KPMG. The accounting firm offered them as legitimate investment strategies, but they later admitted wrongdoing and paid $456 million to the government in restitution. 17 former KPMG tax professionals have been federally indicted.

Michael Avenatti, the attorney for two clients who declined to participate in the class action, says Milberg should have gotten at least $500 million in any settlement.

This case is unusual because lawyers in class action suits rarely offer to share their fees with attorneys for non-class plaintiffs. However, if too many non-class plaintiffs proceed with their cases, KPMG can back out of the class settlement. This possibility may be the reason that Milberg is inviting more plaintiffs to join the class action.

60 Minutes Story About Waste in Iraq

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60 Minutes ran an interesting story tonight, focused on the alleged abuse of funds for rebuilding Iraq by a company named Custer Battles. The story indicated that the company was paid tens of millions of dollars to provide services it was not qualified to provide, and in fact did not provide.

One example: A contract that called for Custer Battles to deliver a certain number of trucks. Some of the trucks were towed in, as they did not run. Company officials allegedly stated that the contract did not specify that the trucks must be in working condition.

Read the transcript of the story here.

Refco: Enron All Over Again?

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I’m having flashbacks to Enron. Enron, Enron, Enron. Well, it looks like Refco could have been 2005’s Enron, but on a smaller scale. Not too small, though. Refco raised $583 million in its public offering in August. In October, the company filed for bankruptcy protection.

Refco was the largest independent U.S. commodities broker. But it appears that the balance sheet was pumped up via hidden debt of $430 million. Prior to the IPO the balance sheet showed $50 billion of assets and $150 million of equity. Too bad the hidden debt wipes out all that equity and leaves the company with a negative net worth.

Does this say anything about Sarbanes-Oxley?

Milwaukee police officer charged with taking bribes

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City of Milwaukee police officer Steven Wesolowski has been charged with a felony of misconduct in public office. It is alleged that Wesolowski took bribes to fill out bogus vehicle titles at the city’s impound lot. He is accused of taking $250 to certify that 5 salvage vehicles were safe, even though he never examined the vehicles.

AIG Settles for $1.6 billion

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American International Group Inc (AIG) has finalized a settlement of $1.6 billion for allegations of accounting fraud. The settlement will be split almost equally between the Securitites and Exchange Commission (SEC) and the State of New York.

Civil fraud charges were brought against AIG by New York Attorney General Eliot Spitzer and the New York State Insurance Department. The SEC hadn’t yet filed charges, but is expect to file and settle all charges soon. Continue reading