Marketing Fraud: Why Multi-Level Marketing Pyramids and Financial Ponzis are Ignored By Law Enforcement

pyramidDear Colleagues, Consumers and Pyramid Scheme Alert Supporters,

A new essay recently posted on the False Profits Blog addresses a question many of you  have raised.

Why are multi-level marketing pyramids and financial ponzis able to ensnare so many people today? What is the power behind this Main Street epidemic?

This question goes beyond the lack of law enforcement, the failure of the FTC and SEC, or the difficulty of grasping “exponential expansion.”

Read moreMarketing Fraud: Why Multi-Level Marketing Pyramids and Financial Ponzis are Ignored By Law Enforcement

Sachdeva and Koss Corp.: The Indictment, the Clothes, and the Auditors

handcuffsThe case of the alleged theft of at least $31 million by Sue Sachdeva from Koss Corp. (NASDAQ:KOSS) carries on. Last week, Sachdeva was charged with 6 counts of wire fraud. Experts are saying this indictment came much faster than usual, as the Feds usually spend much more time thoroughly investigating cases. They’re speculating that a guilty plea is going to come quickly, and the indictment was the first step toward that.

The indictment is interesting. Not only did she use company funds to pay her American Express bill as we had heard, she’s also been accused of getting cashier’s checks from a bank account belonging to Koss, writing Koss checks to Petty Cash and keeping the funds, and using Koss traveler’s checks for personal purposes.

Read moreSachdeva and Koss Corp.: The Indictment, the Clothes, and the Auditors

Accountants Who Focus on Fraud

Milwaukee Journal Sentinel
By Rick Romell

Tracy Coenen was a criminology major at Marquette University when a class on investigating financial crimes sparked her interest in forensic accounting – a field she had never heard of until then. She started taking business courses, eventually securing an MBA and the skills necessary to become a certified public accountant.

What does she do? Forensic accountant with her own business, Sequence Inc.

And just what is a forensic accountant? “It is someone who specializes in investigative work dealing with numbers. Typically you see forensic accountants having one of a few different types of focus. There’s a focus on fraud – finding it, preventing it. There can be a focus on litigation, where companies are suing each other and arguing about the numbers and need someone to sort them out. There can be a business valuation focus, where the accountant is looking to put a dollar figure on a business, and there can be a focus on insurance claims, both fraudulent insurance claims as well as insurance claims that just are large and need sorting out by numbers people.”

Read moreAccountants Who Focus on Fraud

The Move to IFRS: All About Greed

ifrsProfessor David Albrecht wrote a great piece today about the push to move from U.S. GAAP (Generally Accepted Accounting Principles) to IFRS (International Financial Reporting Standards). His conclusion? The push to switch is motivated purely by greed.

Accounting standards exist so that financial statements have some uniformity. Users of financial statements outside of the companies producing the numbers are able to compare financial statements and understand what the users mean because standards have … standardized… financial statements.

Read moreThe Move to IFRS: All About Greed

Usana Health Sciences Knows it Products are Being Sold Illegally in China

Almost three years ago, Barry Minkow and Fraud Discovery Institute released a report on Usana Health Sciences (NSDAQ:USNA), listing ten red flags of fraud he and his team (which included me) uncovered about the company. The report criticized the company’s business model, essentially calling it a pyramid scheme in which recruiting is the focus (rather than the actual sale of products) and pointing out how little money Usana distributors actually make.

For example, the company touts average income of $802.62 per North American distributor per month. But that’s very misleading. The income is very top-heaving, meaning a select handful at the top of the pyramid make a lot, and almost everyone else makes nothing. Further, this is gross income, not net. Associates have to pay all their business expenses out of this, leaving them with much less at the end.

Read moreUsana Health Sciences Knows it Products are Being Sold Illegally in China

Koss Corp.: Commit the Fraud and Cover It Up

moneydrainI’ve been talking here, at, and to the media about the massive fraud at Koss Corp. and how I think it may have been committed and covered up. The time has come to get more specific about how I think it happened, and why I think the auditors did not find it.

Disclaimer: I have no inside knowledge of the situation at Koss. I have never worked for or with them, and I have never worked for or with Grant Thornton, the auditors. I haven’t seen anything other than what’s been released publicly by the press. I am merely speculating.

The contention has been made that the auditors should have found this fraud, as they are required to consider fraud in planning and performing their audits. Further, the fraud is at an estimated $31 million (my guess is it will end around $50 million), which is clearly material to Koss.  “Material” generally means it’s big enough to matter to the overall financial picture of the company. With annual sales hovering around $40 million a year at Koss Corp., $31 million (or more) stolen over a 5+ year period is certainly material.

So how did the auditors miss it? That’s easy. Three simple steps by Koss VP of Finance Sue Sachdeva could prevent the auditors from encountering evidence pointing them to the fraud.

Read moreKoss Corp.: Commit the Fraud and Cover It Up

Accountants Cite Lessons Learned in Koss Scandal

Eric Decker –

How could one corporate executive make more than $30 million in unauthorized transactions over four years without anyone else on the company’s leadership team or its third-party accounting firm being aware of the embezzlements?

That is among the questions law enforcement investigators are asking as they sort through the criminal allegations facing Sujata Sachdeva, former vice president of finance and secretary of Milwaukee-based Koss Corp. Sachdeva’s employment was terminated by the firm in December, and investigators have confiscated more than 22,000 items as evidence, including high-end women’s clothes and bags.

Read moreAccountants Cite Lessons Learned in Koss Scandal

Koss Corp. Fraud: Defending Grant Thornton? No.

fraudI have been criticized for “defending” Grant Thornton, the auditors of Koss Corp, which has suffered a fraud loss of at least $31 million at the hands of the company’s Vice President of Finance, Sue Sachdeva. In fact, my comments relating to this case are not a defense of Grant Thornton, in the least. They are meant to point the finger squarely at Koss management, which is wholly responsible for this fraud.

I’m not saying that Grant Thornton did a bang-up job when it comes to Koss. I couldn’t possibly know that without knowing exactly how the fraud was carried out (Koss still hasn’t said) and without seeing GT’s workpapers and taking a good look at what they actually did. What I am saying is that audits have so little usefulness and are so awful at detecting fraud, that it’s a given that a woman like Sue Sachdeva would easily be able to get away with a massive theft.

Read moreKoss Corp. Fraud: Defending Grant Thornton? No.

Medifast Continues to Mislead Shareholders

UPDATE: On February 17, 2010, Medifast Inc. filed suit in US District Court, Southern District of California, alleging defamation, violation of California Corporations Code, and unfair business practices. On March 29, 2011, Judge Janis Sammartino dismissed all of Medifast’s claims against me in her ruling on my anti-SLAPP motion.

This week multi-level marketing expert Robert Fitzpatrick released his second report in the last year on Medifast (NYSE: MED) and their Take Shape For Life multi-level marketing division. The report highlights how little money the company’s “health coaches” actually earn from selling the products, and makes it clear that the real money (if there is any) is in recruiting new marks into the scheme.

Following the release of FitzPatrick’s first report last year, Medifast management came out with bizarre statements. The most recent version of their statement was included in a 10-Q filed with the Securities and Exchange Commission on November 9, 2009:

Read moreMedifast Continues to Mislead Shareholders