New SEC Guidance Regarding Errors To Be Reported on 10-Ks

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The Securities and Exchange Commission has issued guidance for companies that need to correct errors for prior period financial statements. At issue is materiality. While an error in one year may not be material, a build-up of similar errors over time may create a total error that would distort results materially if the error was corrected on current year financial statements.

A $10 million dollar error in each of 4 years may have been immaterial in each of those years, but the resulting $40 million total error could be material to this year’s financial statements. Two approaches have been used to deal with this situation:

  • Rollover approach (also called current period approach or income statement approach) – The error is quantified in terms of its effect on the current year income statement.
  • Iron curtain approach (also called the cumulative approach or balance sheet approach) – The error is quantified in terms of the cumulative amount by which the current year’s balance sheet is misstated.

Both approaches have drawbacks, so the SEC instructs accountants to determine whether or not an error is material based upon the larger result from these two approaches. In the first 10-K filed after this bulletin, companies must correct balance sheet errors by recording the culuative effect on the financial statements. (Instead of just restating prior year financial statements.)

Scam Busting: Why pick on MLMs?

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In researching multi-level marketing (MLM) opportunities, I found some common threads that bothered me. MLMs are generally legal, while pyramid schemes are generally illegal. Yet if the MLM business opportunities are legal, why would I be interested in researching them and calling them scams?

Even though these “businesses” may not directly violate any laws, they have common elements which disturb me. The first is their focus on recruiting new distributors. The MLMs achieve their legitimacy by having a bona fide product, but once someone becomes an independent sales representative, the focus moves to recruiting other distributors.

While reps may generally agree that a profit can be made simply by selling the products of the MLM, the real money is made in recruiting and encouraging those recruits to purchase packages of products. What started off as a low cost investment (most companies have minimal sign-up fees) can easily become a costly venture.

The second big reason I have focused on the MLM businesses is because of the deception that I perceive in the companies. It is a common practice to parade around a copy of a very large commission check earned by someone in the upper echelons of the selling ranks. No mention is made of how long it took the person to get to that commission level, what type of recruiting had to be done, what a normal commission check is like, or what expenses the salesperson inccurred in connection with that commission check.

Participants are encouraged to not think critically about the information presented to them. Quick decisions without full information are encouraged. Without the full picture, a potential recruit can’t fully evaluate the MLM opportunity.

Bank of America sends Matthew Shinnick to jail

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Is this a fraud committed against an innocent citizen, or what?

Clark Howard highlighted this story on his website. Matthew Shinnick went to Bank of America to verify the validity of a check he received for someone who bought two bikes from him through CraigsList. The bank said that the account the check was drawn upon was valid, so Matthew cashed the check.

BoA employees then called the police to arrest Shinnick, because the check was actually a fraudulent check drawn on a legitimate account number. Matthew had no idea that his buyer presented him with a bad check, which is why he went into the bank to inquire about the check in the first place. He ended up spending the night in jail, and had to spend $14,000 in legal fees to clear his name.

Matthew asked BoA to cover his legal fees because this situation occured due to their error. The bank refused to pay the legal fees, and now Clark Howard is urging customers to close their BoA accounts, since the bank clearly does not care about its customers.

Clark Howard talked to bank officials, and they still refused to pay the legal bill. Clark even offered to pay $7,000 of the fees if the bank would also pay $7,000. They refused the offer.

Clark’s listeners have reported withdrawing $20 million from their Bank of America accounts so far.


Cingular Wireless files suit against a company involved in the H-P pretexting case

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On Friday, Cingular Wireless filed a lawsuit against CAS Agency Inc. in U.S.District Court in Atlanta. Cingular claims that the company fraudulently accessed the records of one of its cutomers during the [tag]investigation [/tag]of the Hewlitt-Packard board of directors information leak.

Specifically, Cingular says CAS Agency illegally accessed the records of CNET reporter Dawn Kawamoto, one of the reporters who wrote about discussions among members of H-P’s board.

Also included in the lawsuit are 100 unidentified companies and 100 “John Does” who have attempted to obtain and sell customer records. This lawsuit follows the Verizon Wireless lawsuit filed on Thursday against 20 unidentified people who fraudulently obtained their records in cnnection with the H-P [tag]pretexting[/tag] scandal.

Ex-CEO of Comverse arrested in Africa

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Kobi Alexander, the former CEO of Comverse Technology was arrested in the African republic of Namibia and is going to be extradited to the United States. Alexander is a citizen of both the U.S. and Israel, and has been missing for the last month, after he failed to show up for a hearing in federal court.

Alexander is the co-founder of Comverse, a telecommunications company in New York. He and two other former executives have been charged with [tag]conspiracy[/tag] to commit [tag]mail fraud[/tag], conspiracy to commit [tag]wire fraud[/tag], and conspiracy to commit [tag]securities fraud[/tag]. These charges related to their alleged plan to manipulate [tag]stock options[/tag].

The FBI issued a warrant for Alexander’s arrest on July 31. He reportedly was living openly in Namibia, a country which has an active Israeli expatriate community.

Enron Executive Sentenced to Prison

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Andrew Fastow, former CFO of Enron, was sentenced to six years in federal prison today. Following his prison term, Fastow is required to serve two years of full-time community service.

Fastow reached a plea deal in early 2004, in which he agreed to plead guilty to two counts of conspiracy to commit fraud. That deal included a recommended prison sentence of 10 years, but Judge Kenneth Hoyt had discretion to sentence him to less time. Continue reading

Milwaukee Alderman Proposes Allowing Himself to Carry a Gun

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Milwaukee Alderman Michael McGee (Jackson) has drafted an ordinance to allowed all alderman to be designated Peace Officers, and allow them to carry guns. This would include himself.

Recall that McGee/Jackson is without a driver’s license, due to the fact that license #1 was revoked because of an unresolved traffic incident. License #2 was revoked when it was determined that he got #2 with a false name, in order to get around the revocation of #1.

McGee/Jackson has also had numerous run-in with the legal authorities, including an incident in front of a Blockbuster Video where he got arrested for disorderly conduct. He publicly referred to the police officers involved in the Frank Jude Jr. beating “faggots”.

He’s been accused of physically abusing his mistress, which he denies. (But he also denied having a “romantic” relationship with her, and her new baby was proven to be his with a paternity test.) Additionally, McGee/Jackson has at least two different Social Security numbers.

Do we really want a guy like this carrying a gun?

Scam Busting: The Development of Charles Ponzi’s Pyramid Scheme

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Ponzi demonstrated to himself that he could achieve astronomical profits with the postal reply coupons, a far better return on investment than interest paid by the banks or profits created in the stock market.

His investment pitch included the mention of the International Reply Coupons, as he was depending upon the legitimacy of the U.S. Postal Service to bolster his image. However, Ponzi was careful not to give away too many details of his plan, lest potential investors would become skeptical or steal his idea and start companies of their own. Continue reading

A Tour of New Orleans and the Damage Left by Hurricane Katrina

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On Friday, I took a tour of New Orleans. Specifically, we took the Hurricane Katrina tour offered by Grayline Tours. Before I went to New Orleans, I was told by several people that the devastation is at a level that you cannot even imagine. That pictures and video footage cannot fully convey the damage.They were right.

It was amazing to see the buildings heavily damaged, and not even cleaned up or repaired at all in the last year. We saw water lines on many buildings, which showed exactly how high the water went. If you were lucky, it was only a few feet. If you were like most, it went up between six and twelve feet. Continue reading

Painter Thomas Kinkade is being investigated for fraud

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Allegations of [tag]fraud[/tag] have been raised against “Painter of Light” Thomas Kinkade and his executives. The allegations that they induced investors to open art galleries and then ruined them financially are being investigated by the FBI.

To date, at least six former Thomas Kinkade Signature Gallery owners have filed civil suits against Kinkade. They claim they invested tens of thousands of dollars each, but that policies set up by Kinkade Co. drove them out of business. They said they had limited edition itgems that they couldent sell, they were forced to open stores in saturated markets, and that they were undercut by discounters who offered identical pieces at reduced prices, which they were prohibited to match.

The claims against Kinkade include allegations that he used Christianity to persuade them to invest in independent stores that only sell Kinkade’s works. They say he used the “Christian hook” to get them involved, but Kinkade denies this.

Former dealers have said that the FBI asked them to provide copies of certain information about their contracts with Kinkade, including dealer agreements, retail sales policies, and training materials from “Thomas Kinkade University”.

A spokesman for Kinkade Co. said, “The Thomas Kinkade Co. asserts that there is no legitimate grounds for a [tag]federal investigation[/tag] of any kind.” However, earlier this year an arbitration panel awarded $860,000 to two former owners of Kinkade galleries after they made similar allegations.