14 Nov

Why Roddy Boyd’s Ethics Failure Matters

The long-running Overstock.com fraud story probably isn’t of interest to most of my readers. But when you’ve got a company that manipulates its financials to turn losses into profits and the executives profit handsomely from manipulating the stock and the company’s lunatic CEO harasses and stalks critics, you can see why a fraud investigator might want to tune in.

The Cohodes/Overstock Donation Debacle

Earlier this week I wrote about Roddy Boyd and his Southern Investigative Reporting Foundation (SIRF), and the shenanigans surrounding his receipt of $329k of Overstock.com stock from Marc Cohodes. Marc is a short seller who lost a lawsuit brought by Overstock against his company Rocker Partners for its very public criticism of the company and its CEO, Patrick Byrne.

In 2017, Marc mysteriously made up with Byrne and became a very vocal pumper of Overstock’s stock after taking a substantial long position.

In December 2017, Cohodes offered Roddy 5,000 shares of Overstock.com stock, and Roddy took it and sold it for $329,000.  Marc was buying Roddy’s silence on Overstock, and both of them knew it, whether or not it was explicitly stated between them.

Roddy confirmed that in June 2018: Read More

12 Nov

How NOT to Do Investigative Journalism

A decade ago, I was really into blogging about companies that were perpetrating frauds on consumers and investors. Nobody paid much attention to me, but I enjoyed digging into company financials and exposing the actions of dishonest executives. It fit nicely with my fraud investigation work.

One of the companies that interested me was Overstock.com. The company was prone to cooking the books, and they were headed up by an unbalanced CEO named Patrick Byrne who was fond of conspiracy theories.

There’s only so much you can write about a company repeatedly manipulating its financials and the SEC inquiries that follow. I stopped writing about them in early 2010, until things got interesting again in 2017.

Marc Cohodes, a fairly well-known short seller who had criticized the company massively (and ended up on the losing end of a big lawsuit by Byrne), suddenly switched sides.  Cohodes went long Overstock on May 2017, hyped the company at a Grant’s Interest Rate Observer conference in October 2017, said Byrne was now his friend, and had all the negative information about him wiped from Byrne’s Deep Capture website. Sam Antar did an excellent write-up about how Byrne and Cohodes got so chummy. In fact, they were so chummy that Cohodes was trying to get others (such as Antar) to stop writing negative things about Overstock and Byrne. Read More

11 Nov

Fraud Investigation Myths

It’s fun to talk about myths related to fraud investigations and forensic accounting. People get wrong ideas about what I do for a living, so let’s set the record straight on a few of the myths:

  1. Any accountant can do a fraud investigation. No, the art and science of a fraud investigation is different than traditional CPA services. Experience with fraud methods, investigative techniques, and presenting the results of investigations are necessary. A forensic accounting engagement isn’t the same thing as financial statement audit or preparing a tax return. It takes different skills.
  2. A forensic accountant will help me get my money back. Nope. I find where the money went. An attorney helps get the money back. Sadly, most victims of fraud don’t get their money back. People don’t steal to save. They steal to spend. So when they are caught, there is no pile of money that can be given back to the victim.
  3. This is an “easy” investigation. Even when a project seems straightforward, many details need to be cross-checked and explanations to be ruled out. There is also a certain amount of due diligence that I have to do before I can render an expert opinion. Also, when something is “easy” for me to do, it’s likely because I have more than two decades of experience doing fraud investigations.
  4. Software will do the fraud investigation. Software packages provide a lot of help with my projects. But investigations still require the eyes of a human to direct the work and interpret the results. I don’t simply push a button and end up with valid results. There is  still lots of legwork required, whether that is preparing data for the software, reconciling data that was processed by the software. or working with the data after the software does its thing.
  5. The client can do the fraud investigation and I can just check the work. If a good fraud investigation could be done by anyone, we wouldn’t need experts like me. Oftentimes, checking the work of a civilian takes more time and effort than doing the investigation myself. I can appreciate that clients want to save money, but most of the time there is only limited assistance that a client can provide in a fraud investigation.
  6. All forensic accountants are equal. Nope. Forensic accountants have different approaches to cases, skill levels, methods of investigating, and ways of presenting the results. It is wise for clients to talk to a few experts before making a choice. You want to find something that you think you can work well with. And most likely, after talking to a few fraud investigators, you’ll get a feel for who knows what they are talking about and who doesn’t.
08 Nov

How to Investigate a Cash Business

Closely-held businesses often create problems in divorces, as they need to be valued for the property division and the income needs to be evaluated for support purposes. It can be difficult to examine the income of a business that transacts with its customers primarily in cash. However, there are ways to verify whether the income being reported is reasonable.

Some of the ways that the income of cash businesses can be examined and verified include:

1. Find out the normal mark-up or profitability of the product or service being sold, and see how recently reported figures of the company compare. Read More

06 Nov

Multi-Level Marketing is Not a Legitimate Business Model

One of the common defenses of multi-level marketing is that it is a legitimate business method that has been around for a long time.

I’ve also been told that if it was illegal, it would have been shut down. Some companies that were widely touted as “legal” or “legitimate” MLMs, such as Advocare, HAVE been shut down or prohibited from using the MLM model. Who knows the rhyme or reason to that.

But neither the length of existence nor the lack of law enforcement action means something is legitimate or not a fraud. Remember Enron? Remember Bernie Madoff? These and others have been in business for a long time, and turned out to be complete frauds. Read More

04 Nov

FTC Sues Nerium: Illegal Pyramid Scheme

Last week the FTC announced a lawsuit against Neora (formerly known as Nerium), alleging that it is an illegal pyramid scheme. Couple this with the recent end to AdvoCare’s multi-level marketing method of business at the hands of the FTC, and people like me (who think MLMs are abusive pyramid schemes) have a bit of hope.

More specifically, the FTC suit goes after Nerium under the parts of the FTC Act that prohibit unfair or deceptive practices and false advertising. The company was known as Nerium from 2011 to 2019. In February 2019, the company changed the name to Neora. It is suspected that the name change was because the Nerium name was connected to so many complaints and lawsuits.

The current suit says that “unlike a legitimate multi-level marketing business,” Nerium’s compensation plan emphasizes recruiting new “brand partners” (BPs) over the sale of products to consumers outside of the company. (Note to FTC: This is what all MLMs do. They ALL focus on recruiting, and the actual retail sales are pathetic for several reasons.) The FTC says the business model makes it unlikely that distributors can make money selling products in response to legitimate demand from third parties. Read More

28 Oct

Ways to Hide Income and Assets in Divorce

While it is common for one spouse to have control over the money in a marriage—be the major breadwinner, manage spending, and maintain control of financial documentation—family lawyers and their clients can increase the chances of finding hidden assets during a divorce by being aware of some of the schemes used to hide money.

Understanding the common schemes that may be used to hide assets and income can help the spouse in the lesser financial position protect himself or herself in the divorce; and, by knowing about these schemes, you can look for signs and hopefully limit the success your client’s soon-to-be-ex-spouse will have with them. Some of the more common schemes used to hide money in divorces include: Read More

24 Oct

Calculating Income Using the Net Worth Method of Proof

In divorce cases, forensic accountants can use the “net worth method of proof” to calculate income. This is used to search for hidden or unreported income. Rather than simply taking a spouse’s word for it that his or her income is X, we can do an analysis like this to try to verify the claimed income.

This method of proof is one part of a lifestyle analysis, in which we are analyzing the party’s lifestyle and determining if that lifestyle matches the income that is being reported. This video explains the process of completing the net worth analysis.

22 Oct

Lifestyle Analysis in Divorce Cases (Second Edition)

The second edition of Lifestyle Analysis in Divorce Cases: Investigating Spending and Finding Hidden Income and Assets, published by the American Bar Association, is available now for pre-order.

The first edition of the book (published in 2015) was such a hit that the ABA asked me to do a second edition. I have updated the material from the original book, and have added about 25% new material. The new material includes more case examples, information on the new tax law that took effect for 2018, and further development of topics.

Some of my favorite new material includes: Read More