Auditor Liability in Market Meltdown?


It should come as no shock to anyone that lots of fingers are being pointed related to Wall Street’s meltdown, and specifically related to the banking industry. And auditors are likely to find themselves the targets of lawsuits. Auditor malpractice is often hard to prove, but in this case, I think there will be several victories against the auditors. Continue reading

Cynthia Cooper’s book – Extraordinary Circumstances: The Journey of a Corporate Whistleblower


cooper.jpgCynthia Cooper, WorldCom whistleblower, is releasing her book in just few days. Extraordinary Circumstances: The Journey of a Corporate Whistleblower is her story. If it is anything like the speech I heard her give a few years ago at the Association of Certified Fraud Examiners Fraud Conference, it will be fantastic.

Unlike other so-called whistleblowers of the Enron, WorldCom, and Tyco era… Cynthia is the true hero. She stood up for what she knew was right and she suffered for it. Make no mistake that she was in danger as she and her team attempted to get to the bottom of accounting shenanigans at WorldCom.

Publishers Weekly writes:

In Cooper’s thorough and efficient narrative about the fantastic collapse of telecommunications giant WorldCom there are two distinct themes: her insider’s view of the corporation’s widespread wrongdoing and the life experiences that led Cooper to becoming a courageous whistleblower. Cooper, former vice president of WorldCom’s internal audit department, is most successful with the former. She brings us into the boardrooms, the backrooms and, somehow, into the heads of key players as some struggled with and others embraced the deceptions that would bring WorldCom down.

I’ll be reviewing the book in the next couple of weeks and can’t wait to share my thoughts.

Pyramid Scheme Alert Reflects on 2007


Multi-level marketing will go down in history as one of the great frauds of our times. It deceptively wraps its harmful scam with the real needs and desires of people today – additional income, stay home with the family, independence, entrepreneurship, high income without high investment or training, and a group that will help you succeed. MLM is an Enron story, glossy and exciting to those who invest. But in the end, it causes massive harm, employs sophisticated deception, and it is corrupting our government.

MLM is an American-based “sales ” scam, and has spread to more than 70 other countries, just as Nigeria has spread its famous “bank account” scam worldwide. Continue reading

FDI Responds To Herbalife: “Enron Was On The NYSE Also”


According to the November 5, 2007, Herbalife (NYSE:HLF) response to the Fraud Discovery Institute (FDI) report, the company states: “We have confidence in our direct-selling business model, our integrity and transparency as a NYSE-listed company and the fundamentals of our business.”

Asks FDI’s Barry Minkow, “Have Herbalife forgotten the imputed credibility of being on the New York Stock Exchange lost its value when another, well-known NYSE company failed – specifically, Enron? There was not one word about the 24-page expert analysis of the Herbalife that challenges the very core and foundation of its business fundamentals and business model. Continue reading

Jeffrey Skilling of Enron fame asks for a new trial


Jeffrey Skilling, the former CEO of Enron is appealing his federal conviction and arguing that his 24 year sentence is unconstitutional. In May 2006, Skilling was convicted of 19 counts of fraud, conspiracy and insider trading in the Enron case. The former chairman of Enron, Kenneth Lay, was convicted of many counts in the same trial, but died several weeks afterward.

The appeal cites many arguments, including:

  • Not moving the trial out of Houston was unfair to Skilling, as the community was outraged and “thirsting for vengeance”
  • The jury selection process was flawed
  • The 24 year prison sentence is not consistent with federal sentencing guidelines and statutes
  • The an executive shouldn’t be held liable for defrauding an employer when his acts are intended to benefit the employer

In December, Skilling asked for bail while his appeal was pending. The Fifth Circuit, which will hear the appeal, denied bail but suggested that some of the conviction counts may be reversed.

Enron Executive Sentenced to Prison


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

Conspiracy of Fools: Moments Before Enron’s Bankruptcy


As I’ve mentioned several times before, Conspiracy of Fools by Kurt Eichenwald has been a fascinating read. He dug so far into the details of the demise of the company and its executives.

The company was in a downward spiral, and a merger with another energy company, Dynegy, was seen as the only way for the company to survive. Dynegy injected some cash into the company, but immediately thereafter, Dynegy executives started finding out about Enron’s true financial picture. Undisclosed debt and secret related party transactions put the merger in jeopardy.

Finally, Dynegy called off the entire deal. It was clear that Enron’s only option was bankruptcy. Ray Bowen, treasurer of Enron, raced to a telephone.

He had to move fast. Some $400 million was sitting in accounts at Citibank, which would now be owed far more than that in the bankruptcy. The bank might seize the money as its own. Bowen needed to move it. Enron owed basically nothing to Goldman Sachs. That’s where it would go. He dialed the number for Mary Perkins, the assistant treasurer.

“Pull every penny we’ve got out of Citibank and wire it over to Goldman Sachs,” he said. “Do it now.”

McMahon immediately called the ratings agencies to let them know. Standard & Poor’s was the first to downgrade the company. Its debt was now rated at junk levels. Trading in Enron shares was suspended. When it resumed, the price plummeted 75 percent, to just above one dollar.

Computer-support technicians at Enron watched as the commands went through. Millions and millions of dollars were moving out of Enron’s bank accounts. They had no doubt what was going on. Someone was stealing all of Enron’s cash.

One executive made a decision. He had to stop it. He telephoned the first reporter he could think of.

Conspiracy of Fools: Did Skilling Read Before He Signed?


While Enron and Dynegy executives were trying to work out the details of their pending merger, William McLucas, one of Enron’s outside lawyers began questioning Jeff Skilling about the Southampton partnership and LJM. These were two of the several entities that put large amounts of money into the pockets of Enron executives.

Skilling claimed he knew nothing about the fact that Andy Fastow, Enron’s former CFO, received $35 million from LJM in the prior two years. Fastow had told the Enron board of directors that Skilling had approved each deal done by LJM. Skilling denied it.The attorney brought out an approval sheet for an LJM deal named Margaux. The sheet had Skilling’s signature on it.

“You signed this one,” McLucas said. “There is a list of questions with answers, and you signed it.”

“Now, wait a minute,” Skilling shot back. “My signature doesn’t mean I’ve reviewed these questions independently and satisfied myself the answers are right.”

McLucas crossed his arms. “What does it mean, then?”

Skilling pointed at the signature page. “Right here, I saw Causey and Buy already signed,” he said. “The fact that they signed it was good enough for me to sign without reviewing the same facts again.”

So was Skilling just trying to get out of responsibility for that deal, or did he really not examine the terms of the deal before he approved it?

Conspiracy of Fools: Chewco was not separate from Enron


Chewco, one of the special purpose entities (SPE) that Enron used to enhance its financial statements, was under examination by the Arthur Andersen accountants. Specifically, they came across a letter that indicated that six million dollars from JEDI (another SPE) would fund a reserve account.

This was the proof of a secret side agreement used to get the Chewco deal closed. The six million dollars had been placed in a reserve account to secure a portion of the money provided by Barclays Bank. Enron could argue all it wanted that Barclays’s cash was really equity and not a loan. It didn’t matter anymore. Chewco had been constructed with exactly three percent independent equity. With six million dollars secured, Barclays did not have that cash at risk. Even assuming Barclays’s money was equity, Chewco was short the three percent by at least six million dollars.

There could no longer be any question. The accounting failed. Chewco was not a valid special-purpose entity. It was Enron.

And that it how it came to pass that Enron was going to have to recognize losses from these entities on its own financial statements. The entities were really not independent, so their financial results were Enron’s financial results. The vehicles that Enron executives used to move losses off Enron’s financial statements failed.