Cooking the Books: Financial Statement Revisions

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In the current issue of Forbes magazine, accounting watchdog Francine McKenna has written an article about the SEC’s failure to take a hard line on accounting fraud in public companies. Despite all of the high profile accounting frauds uncovered in the past decade, the Securities & Exchange Commission appears to be focusing its efforts on going after Ponzi schemes rather than accounting fraud. Francine reports that of the 735 enforcement actions brought by the SEC in 2011, only 89 were related to fraudulent or misleading accounting and disclosures by public companies.

Some people say that Sarbanes Oxley has been doing its job relative to increasing prevention and detection of accounting fraud, but evidence of that is almost non-existent.  Auditors would have the public believe that auditors are being more effective in finding and reporting fraud, but the evidence does not back this up. Continue reading

Green Mountain Inventory Buildup: Fraud or Mismanagement?

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gmcr green mountain coffee roastersSam Antar, former CFO of Crazy Eddie (massive fraud in the 1980’s) has been systematically uncovering fraud at Green Mountain Coffee Roasters (NASDAQ: GMCR) for years. In spite of this, investors continue to run up the price of the stock, believing the hype and the numbers put out by management.

Yesterday, Sam exposed even more about the potential fraud, targeting suspected inventory manipulation that could fraudulently inflate GCMR’s earnings. The overstatement of inventory improperly inflates earnings, and Sam surmises that Green Mountain may be doing exactly that. Continue reading

Herbalife: Important or Not Important?

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Questions posed to Herbalife earlier this year by David Einhorn sent the stock price down quickly. Einhorn simply wanted to know about customers… actual consumers of the Herbalife products.

One has to assume Einhorn has done lots of research on multi-level marketing. And he knows the real deal. Herbalife’s customers are the distributors. Corporate doesn’t care much if the products get to a real customer after that. They’ve already made their sale and collected their money.

Multi-level marketing has very little to do with selling the product, and relies almost exclusively on continual recruitment of new distributors. But the product is important to make the MLMs not look like pure pyramid schemes. Continue reading

Similarities Between Herbalife and Pyramid Scheme BurnLounge

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In March, the Federal Trade Commission entered an order against multi-level marketing company BurnLounge, prohibiting the company and its founders from making certain misrepresentation and requiring them to disclose certain things in the future. Over the last few months, the heat has been on Herbalife, after short seller David Einhorn asked some important questions on a conference call. (Don’t let HLF tell you the questions were elementary or not important. They are very important.)

There is no doubt that Herbalife has had much financial success over the years. It is the largest publicly traded MLM, and its stock price has increased greatly since 2007. But are there things to be worried about? If you know something about multilevel marketing, the answer is YES. Continue reading

Fortune on Herbalife and David Einhorn

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Two weeks ago the big news was Herbalife’s earnings call, and questions asked by David Einhorn. Stephen Gandel, senior editor at Fortune Magazine wrote a great article on the Herbalife questions and their significance. I was quoted relative to the issues of distributors and recruiting:

It’s not clear Einhorn has already placed his bets against Herbalife, but it seems likely he would do so before tipping his hand, even slightly. Einhorn only asked three questions on the conference call, so it’s not clear why he thinks the company’s shares will fall. But Tracy Coenen, a forensic accountant, who has been following Herbalife for a few years, says that from Einhorn’s questions it appears he is concerned about Herbalife’s growth. Continue reading

Take Shape For Life and Medifast: Court Filing Explains Pyramid Scheme Allegations

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This week, response briefs were due from the defendants in the case of Medifast v. Barry Minkow, Fraud Discovery Institute, Robert FitzPatrick, Tracy Coenen, and Sequence Inc. I was dismissed from Medifast’s SLAPP suit (see information on the lawsuit here), and my brief  in the Medifast appeal can be found here. The brief of Minkow and Bob FitzPatrick was also filed this week, and sheds some light on the allegations that Take Shape For Life (TSFL) and Medifast are offering a pyramid scheme to distributors (called “health coaches”).

The entire brief filed on behalf of Minkow, FDI, and FitzPatrick is found here (10MB file). Below I highlight some of the most relevant (and most interesting) portions, particularly the bits regarding the allegations that Medifast’s multi-level marketing business is a pyramid scheme or endless chain recruitment scheme. Continue reading

Sam Antar on Green Mountain: Inventory Changes Signal Trouble

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Sam Antar Crazy Eddie CFOSam Antar, former CFO of Crazy Eddie, a massive fraud in the 1980s, has been following Green Mountain Coffee Roasters (GMCR) for a long time. He has pointed out red flags of fraud over and over, and the current problem is with the level of inventory. Sam has noted that the inventory of Green Mountain has grown to “toxic levels,” even when the company was beating revenue and earnings targets.

Here’s a recent interview in which Sam details the inventory issue at Green Mountain, along with a few other criticisms of management. Continue reading

A New Look at Herbalife

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Yesterday the stock of Herbalife (NYSE:HLF) dropped 20 percent when David Einhorn of Greenlight Capital began asking questions during the company’s earnings call. Herbalife is a multi-level marketing company which sells vitamins. The company describes itself:

We pursue our mission of “changing people’s lives” by providing a financially rewarding business opportunity to distributors and quality products to distributors and customers who seek a healthy lifestyle. We are one of the largest network marketing companies in the world with net sales of approximately $3.5 billion for the fiscal year ended December 31, 2011. As of December 31, 2011, we sold our products in 79 countries through a network of approximately 2.7 million independent distributors. Continue reading

Groupon’s Latest Accounting Problem

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On Friday, the market eagerly awaited the release of Groupon’s (GRPN)10-K, detailing results for the year ended December 31, 2011. Shares were up 3.84% during regular trading hours, but dropped as much as 8% (eventually settling at -5.93%) in after hours trading when the company announced its figures were not as good as reported in February.

Revised Numbers

Some news sites are billing this as a restatement, although it would appear to be more of a revision to the numbers, as the original numbers were simply cited in an earnings release and the financial statements weren’t actually issued until Friday. Continue reading

Auditor Rotation Won’t Make Audits Better

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Last week, CFO Magazine published an article online about CFOs opposing the potential proposal by the  Public Company Accounting Oversight Board (PCAOB) requiring companies to switch auditors every 5 to 10 years.  More than 625 comment letters, many from CFOs, controllers, chief accounting officers, and audit committee chairs,  have been submitted to PCAOB since the organization raised the issue of mandatory auditor rotation in August.

The PCAOB is suggesting that forcing companies to change auditors every few years will make the audits better. They say that a new accounting firm would equal a fresh set of eyes, and therefore a more skeptical audit. Continue reading