Thursday, October 23, 2014

Insider Trading: Employing Mob-like Tactics to Realize Tremendous Profits

An article from earlier this year on fortune.com said that “more than half of the best-known white-collar inmates… are in prison because of insider trading.” What causes people to risk being one of the next infamous white-collar inmates by committing insider trading? For most people it’s because of the unbelievably high profits. But just how profitable can insider trading be, and how do people get away with it?

Tuesday, October 21, 2014

Uncovering Pharmaceutical Fraud


In a previous post, I mentioned a research paper that was published in The Lancet that made claims that a certain vaccine caused autism. The idea went viral, and the amount of vaccinations decreased, which resulted in many children suffering needlessly with the measles and other preventable diseases. Claims in the paper were eventually proven false, and The Lancet retracted the paper. However, although there may not be a causal link between vaccines and autism, there does appear to be alleged fraudulent activity occurring on the side of the pharmaceutical companies to cover up and enhance the results of their vaccines.

A recent Huffington Post article discusses three court cases filed by whistleblowers against Merck, a pharmaceutical company, saying that they “fraudulently misled the government and omitted, concealed, and adulterated material information regarding the efficacy of its mumps vaccine in violation of the FCA [False Claims Act].” One of the court cases describes Merck’s misconduct as follows:

Tuesday, October 14, 2014

Doping in Sports and Financial Statement Fraud


I just read an interesting article titled: "Instead of punishing dirty cyclists, should we reward the clean?" The idea is to certify pro cyclists who are willing to be thoroughly tested for doping. The tests would go beyond what is currently used to look for drugs and involve many mechanisms to detect doping.

Friday, October 3, 2014

Connections Between the Big Banks and Holder's Justice Department: No Wonder There Aren't Criminal Cases

Eric Holder (from The Guardian)
A story in The Guardian discusses connections that Eric Holder and Lanny Breuer have with a law firm, Covington & Burling, that represents several big banks. The Guardian article gets key information from an NPR story including this connection between Holder and Breuer and the big banks:

Wednesday, October 1, 2014

How the Atlanta Teaching Scandal was Uncovered

A recent article in Business Insider shed some light on how a teaching scandal in Atlanta was uncovered. The scandal involved teachers who were changing their student’s answers on a standardized test so that their students could score higher and the school district and teacher could get better funding and bonuses. (See more about the scandal at these previous posts: Teaching by Example: Fraud in Public Schools and More on the Cheating Scandals in Public Schools.)


Friday, September 26, 2014

Don’t Get Scammed: Tips on Avoiding IRS Scam

I recently saw an email from someone who received a phone call from a woman claiming to be from the IRS. The woman claimed that she was calling because he (the person who received the call) was the target of a criminal investigation. She went on to say that he needed to give her the name of a lawyer that he wanted to represent him and that she could put him in touch with one if needed. Luckily, in large part because the woman on the phone didn’t speak very coherent English, he knew it was a scam. However, some people aren’t so lucky.

Tuesday, September 23, 2014

Should Legal Penalties for Research Misconduct be Similar to Those for Fraud?

Research misconduct (when research is falsified or plagiarized) has historically been dealt with internally, but Richard Smith thinks that should change. In The New Scientist, Smith argues that “Research misconduct degrades trust in science and causes real-world harm. As such, it should be a crime akin to fraud.” False research essentially causes people to believe in something that is incorrect, which can affect their actions—not unlike the way that financial statement fraud can change people’s investment decisions. Smith gives several reasons why research misconduct should be illegal and discusses how it should be treated in our society.

Thursday, September 11, 2014

Reporting Fraud: An Uphill Battle, Especially in China

We often hope to see the people committing fraud receiving punishment. Unfortunately, this is not always the case. A recent New York Times article by Floyd Norris reports that Kun Huang spent two years in a Chinese prison – not because he committed fraud, but because he detected it. The consequences for reporting fraud are not generally quite as severe as they were for Mr. Huang, but they do often include ridicule and other challenges for many whistleblowers. While reporting fraud is an uphill battle, especially in China, it is definitely one that is worth fighting.

Wednesday, August 20, 2014

Lance Armstrong Investigation: Can A Tiger Change Its Stripes?

It has been about a year and a half since Lance Armstrong publicly admitted to doping.  In this article, Armstrong tells his side of the story and in the second installment, victims of Armstrong's lies tell their stories.

In the article, Armstrong tells about the slippery slope that he found himself on.  All of the fraud and issues that have come to light were spawned from one lie: the refusal to tell the truth about doping.  Regarding his adamant denials of ever doping, Armstrong reportedly said:

"I was good at playing the part," he admits now. "After the 850th time, it's not like I'm going to say, 'Matt, you seem like a nice guy, I'm going to be honest with you.' Once you say 'no' you have to keep saying 'no.'

"If this stuff hadn't taken place with the federal investigation, I'd probably still be saying 'no' with the same conviction and tone as before. But that gig is up."

It seems that too often, the heart of a huge scandal such as this one is a small lie.  There is a lesson to be learned there.  We must live and act with integrity at all times, otherwise we might find ourselves on the same slippery slope that Armstrong and so many others have found themselves on.

Armstrong has promised to be completely transparent as he continues to reveal more about his doping scandal.  He even suggests that he will write another book detailing his demise.

Former teammate, Scott Mercier commented on the different reactions that Armstrong has received from fans, friends and onlookers:

"I think there are three camps in the U.S.: those that absolutely hate him and will never forgive him, those that overlook everything that he did and those that are a bit indifferent.

"I think he'll be forgiven but he needs to keep doing what he's doing. He's showing some humility, he needs to stop being [a jerk] and be nice. He has regrets. He's spoken about the bullying and I know he regrets that."

Although Armstrong has apologized, many of those who had been closest to him find those apologies hollow. (See image/quote below.)

Betsy Andreu, wife of former teammate-Frankie Andreu, has also found those apologies to be hollow.  She says:

"Everything that he's done, it's just the same Lance. He's talking about people and he's trying to deceive the public, and thinks that if he says sorry it's enough.

"But sorry is just a word. After everything he did to me, I extended an olive branch and he snapped it. That was a hard thing to do after all the lying and smearing of me."

So is he just the same Lance of always?

"I think he always will be," Betsy Andreu says. "He will fight and draw out the court cases as long as he possibly can.

"A tiger doesn't change its stripes. I really think he needs help and I hope he gets it. Maybe then he would stop the lying and could be on his way to healing. An authentic sorry means making amends, not just saying the words."


So the question remains, can a tiger change its stripes?  Can Armstrong really change and begin healing?

Wednesday, July 9, 2014

A Fraudster's Paradise

Sam Antar writes about society's vulnerability to fraud. Here are a few points that stood out to me.

On stiff punishments serving as a deterrent to fraud:
...white-collar criminals don't listen to the rhetoric of prosecutors. No white-collar criminal discovers ethical behavior and stops doing crime because another criminal ends up in prison. While white-collar criminals take precautions against failure, they do not plan on ever ending up in prison.
Sam implies that the expected punishment for fraudsters is no punishment. This suggests a need for stronger prevention and detection mechanisms. How about auditors?
Traditional financial statement audits of public and private companies are not designed to find fraud. What accounting firms call an “audit” of financial reports is really a compliance review designed to find unintentional material errors in financial reports by examining a limited sample of transactions.
In discussions I've had with auditors, I get the sense that most would like to do more to focus on fraud, but they feel like such a focus would be too expensive and would essentially price them out of the market. While I'm not completely satisfied with that explanation (e.g., firms could, at low cost, use computerized forensic tools to search for red flags), it suggests a need for either regulatory changes that require auditors to focus more on fraud or increased demand by investors for audits that specifically focus more on fraud. The latter is unlikely to occur as long as most investors continue to believe that audits are focused primarily on fraud.

In fairness to auditors, Sam's point about deficiencies identified via PCAOB inspections omits the fact that the PCAOB does not inspect audits randomly, but instead focuses primarily on the audits it believes have the highest risk of deficiencies. This means that even though 49% of E&Y's inspected audits had deficiencies, we would expect the actual rate at which deficiencies occur to be substantially lower. Even that lower overall deficiency rate may not be that informative about how effectively auditors conduct their audits. Still, that's primarily a distraction from Sam's main point, which is that audits primarily focus on unintentional errors rather than focusing on fraud.

If audits aren't particularly effective in preventing/detecting fraud, what about government agencies?
As a nation, we devote far more resources fighting blue-collar crime or street crime, than we do battling white-collar crime. For example, the NYC Police Department employs approximately 34,000 cops in uniform battling street crime. However, the FBI employs approximately 13,600 special agents, the IRS Criminal Investigative Division employs approximately 2,600 special agents, the SEC employs approximately 3,958 people, and the US Postal Inspectors Office employs approximately 1,500 postal inspectors. The NYC Police Department has more man power directly battling street crime than those four federal law enforcement agencies combined have fighting nationwide white-collar crime.
While it would be nice to have some estimates of the economic cost of white-collar vs. blue-collar crime, Sam's point still serves as a good illustration of the relative lack of funding oriented toward white-collar crime. Right now, the government seems to have outsourced most of the prevention and detection work to the private sector (e.g., auditors). Until standards or market forces change so that those parties increase their focus on fraud, we appear to be living in a fraudster's paradise.

Tuesday, May 27, 2014

BYU Radio Interview

Mark was interviewed on BYU Radio today and talked about Enron, auditing, Lance Armstrong, and other fraud-related topics.

The full show is here, with Mark's 27 minute interview starting just before the 31 minute point, or you can also listen to Mark's segment specifically here.

Friday, May 2, 2014

CBS Segment on Livestrong

Here's the video of a CBS segment where Mark was interviewed about Livestrong. The segment aired a little while ago, but this is the first time we've seen it available to view online. Mark's portion is less than half a minute starting around 6:15. Back up another 30 seconds before that to get the context of his comments.

Saturday, February 15, 2014

Fraud in the Detroit Bankruptcy and the Role of Investment Banks

I read an interesting analysis of what's happening in the Detroit Bankruptcy proceedings. In a nutshell, it appears to be another case where the investment banks were able to take out millions of dollars in fees as they structured deals that ended up crippling the economy. In this case, the deals may be considered fraudulent according to this analysis. This seems to be business as usual in the investment banking world for about two decades or more.

Enron and WorldCom were frauds that were fueled by investment bankers and ended up becoming the largest bankruptcies in history. The mortgage meltdown was also fueled by investment bankers and that led to even larger bankruptcies and the world economy being brought to its knees in what is now known as the Great Recession. Now, the largest municipal bankruptcy in history also appears to have been fueled by some cleaver investment bankers who undoubtedly made out like bandits as it appears that they structured deals that gave them huge fees.

Tuesday, October 1, 2013

Lance Armstrong Investigation: I can't believe it's come to this....

Here we are, nearly three and a half years after Floyd Landis's first confession came out and I posted that I was 99.9% confident that pro cyclists had been doping for the past 15-20 years. I ended that first post by saying "Sadly, what would be surprising to me is if someone who is dominating pro cycling such as Alberto Contador was actually not doping!" Of course, soon after that, Alberto failed a doping test in the Tour de France and was suspended from racing.

Since that first post, there have been many posts to follow (this makes number 150 with the label of Lance Armstrong Investigation) and