The US Securities & Exchange Commission (SEC) continues to cop flak over its handling of tip offs regarding the alleged Bernard Madoff Ponzi scheme.
According to a report in the UK's Financial Times newspaper, Lord Jacobs a peer who lost money in the alleged $50 billion scheme, is pointing the finger at the SEC for "the grossest negligence it is possible to conceive" for not fully investigating a whistleblower’s detailed exposé.
He is not alone in his condemnation of the US regulator. Members of the US Senate Committee on Banking, Housing and Urban Affairs also expressed disbelief and amazement at how regulators did not uncover the alleged Madoff Investment Securities Ponzi scheme, citing numerous "red flags" such as the fact that he did not use a separate custodian for his investment advisory business, and that his accountant was not registered with The Public Company Accounting Oversight Board (PCAOB).
However, as a privately held broker-dealer, the Senate hearing heard how Madoff was able to avoid adhering to these requirements. At the same Senate hearing, senior representatives from the SEC defended their investigations of Madoff saying their examinations which were limited to the scope of his broker/dealer business, not his investment advisory business, did not find fraud.
Madoff registered as an investment advisor in 2006. The SEC said it could not examine every investment advisor and that 10% of registered advisors were examined every three years, but that these examinations were limited in their scope and targeted specific activities. The SEC also pointed towards resource constraints.
Nevertheless it seems that the SEC is going to cop a lot more flak over its handling of the alleged Ponzi scheme as a number of investors that have lost money question how detailed tip offs from a reliable source failed to uncover anything. The truth perhaps lies somewhere in the fact that the SEC said it only examined Madoff's broker/dealer activities, not his investment advisory business. Regulatory loopholes appeared to have allowed Madoff's investment advisory activities to escape rigorous scrutiny.
Friday, 6 February 2009
Friday, 30 January 2009
AIG in the spotlight again
US insurance company, AIG, one of the high profile victims of the credit crunch, is in the spotlight again with one of its former vice presidents being jailed for four years for falsely inflating the company's share price and reserves.
According to reports, Christian Milton, who was convicted back in 2008 of conspiracy, mail fraud, securities fraud and making false statements to the Securities and Exchange Commission, participated in a scheme whereby AIG "secretly paid" General Reinsurance to take out reinsurance policies with the company in 2000 and 2001. The scheme reportedly cost investors up to $597 million.
It is not the first time that AIG has been implicated in fraud. According to Wikipedia, an accounting scandal resulted in former CEO Maurice R. Greenberg being ousted in 2005. The allegations made at the time included fraudulent business practice, securities fraud, common law fraud, and other violations of insurance and securities laws. All criminal charges were later dropped however and Greenberg was not held responsible.
AIG, and other victims of the credit crunch are also being investigated by the FBI. The investigation is believed to be looking at whether these firms unduly influenced agencies to "inflate" their ratings and misled investors about the true state of their assets.
According to reports, Christian Milton, who was convicted back in 2008 of conspiracy, mail fraud, securities fraud and making false statements to the Securities and Exchange Commission, participated in a scheme whereby AIG "secretly paid" General Reinsurance to take out reinsurance policies with the company in 2000 and 2001. The scheme reportedly cost investors up to $597 million.
It is not the first time that AIG has been implicated in fraud. According to Wikipedia, an accounting scandal resulted in former CEO Maurice R. Greenberg being ousted in 2005. The allegations made at the time included fraudulent business practice, securities fraud, common law fraud, and other violations of insurance and securities laws. All criminal charges were later dropped however and Greenberg was not held responsible.
AIG, and other victims of the credit crunch are also being investigated by the FBI. The investigation is believed to be looking at whether these firms unduly influenced agencies to "inflate" their ratings and misled investors about the true state of their assets.
Card fraud stats - who do you believe?
Various organisations produce statistics on the incidence of credit card fraud, but the UK payments association, APACS, has hit back at a recent survey published by "life assistance" group CPP, which claims that 12 million people were victims of card fraud in 2008 and that the average loss was £650.
APACS says CPP's stats are "spurious" and that according to its own data, which is drawn from stats provided by its member banks, 2007 figures indicate there were just over a million reported cases of card fraud; and although card fraud increased in 2008 (APACS will publish figures in March), APACS says CPP’s suggestion that there were 12 million victims in 2008 is "wildly out of line".
Is it a case of CPP, which provides protection and insurance against identity theft and card fraud, talking up the incidence of card fraud in order to scare consumers into thinking the problem is much bigger than it really is? There is no question that some organisations may be talking up fraud to benefit their own cause, which is not helpful as card fraud remains a persistent problem for online merchants and exaggerating the levels of fraud, only serves to suggest that none of the solutions deployed so far to combat it are actually working.
Having said that more certainly needs to be done, as CHIP and PIN may have reduced "over-the-counter" fraud, but most reports indicate card-not-present fraud is on the increase, particularly online. Some providers have suggested the use of one-time PINs and passwords to "toughen up" existing security.
APACS says CPP's stats are "spurious" and that according to its own data, which is drawn from stats provided by its member banks, 2007 figures indicate there were just over a million reported cases of card fraud; and although card fraud increased in 2008 (APACS will publish figures in March), APACS says CPP’s suggestion that there were 12 million victims in 2008 is "wildly out of line".
Is it a case of CPP, which provides protection and insurance against identity theft and card fraud, talking up the incidence of card fraud in order to scare consumers into thinking the problem is much bigger than it really is? There is no question that some organisations may be talking up fraud to benefit their own cause, which is not helpful as card fraud remains a persistent problem for online merchants and exaggerating the levels of fraud, only serves to suggest that none of the solutions deployed so far to combat it are actually working.
Having said that more certainly needs to be done, as CHIP and PIN may have reduced "over-the-counter" fraud, but most reports indicate card-not-present fraud is on the increase, particularly online. Some providers have suggested the use of one-time PINs and passwords to "toughen up" existing security.
Thursday, 29 January 2009
Regulatory loopholes may have helped Madoff
Members of the US Senate Committee on Banking, Housing and Urban Affairs expressed disbelief and amazement at how regulators did not uncover the alleged Madoff Investment Securities Ponzi scheme. On Tuesday the committee listened to witnesses' testimony regarding regulatory and oversight concerns and the need for reform in light of the alleged Ponzi scheme.
Senators expressed disbelief that securities regulators, the Securities & Exchange Commission (SEC) and the Financial Industry Regulatory Authority (Finra), missed numerous "red flags" pertaining to Madoff, including the fact that he did not use a separate custodian for his investment advisory business, and that his accountant was not registered with The Public Company Accounting Oversight Board (PCAOB).
The SEC said 10% of registered investment advisors were examined every three years, and that these examinations were limited in their scope and targeted specific activities. The other regulator in the spotlight regarding the alleged Ponzi scheme, Finra, said its jurisdiction was limited to Madoff's broker dealer operations and that this meant it could not be an "extra set of eyes".
However, during Tuesday's hearing, Professor John Coffee, Professor of Law at Columbia University, said Finra did have jurisdiction over Madoff Investment Securities. He also stated that registered investment advisors are required to use a "qualified" custodian. However, he said Madoff used himself and that he was able to do this because the SEC gave us an "illusory" rule which allows investment advisors, where it has a broker dealer affiliate, to use its own broker dealer to be its custodian.
Following the implementation of Sarbanes-Oxley, Coffee said broker dealers were supposed to use accountants registered with the PCAOB. However, he said on three occasions, the SEC adopted and extended an exemptive rule that said privately-held broker dealers did not have to use such a PCAOB registered accountant.
Coffee said Ponzi schemes were increasing in regulatory and frequency and tended to occur in unregulated hedge funds or alternative investments put together by investment advisors.
Senators expressed disbelief that securities regulators, the Securities & Exchange Commission (SEC) and the Financial Industry Regulatory Authority (Finra), missed numerous "red flags" pertaining to Madoff, including the fact that he did not use a separate custodian for his investment advisory business, and that his accountant was not registered with The Public Company Accounting Oversight Board (PCAOB).
During the hearing one senator remarked: "... it is inexplicable how the SEC missed it (Madoff's alleged Ponzi scheme). It is as if there was a giant elephant standing next to the SEC in a rather small room for 25 years and the SEC never noticed the elephant or even smelt the peanuts on its breath. And it is not as if the SEC were not looking around the room."The SEC is conducting its own investigation into its handling of the alleged Madoff Ponzi scheme. During Tuesday's testimony senior SEC officials stressed that their past examinations of Madoff were restricted to his broker dealer activities and did not include his investment advisory business which was registered in 2006.
The SEC said 10% of registered investment advisors were examined every three years, and that these examinations were limited in their scope and targeted specific activities. The other regulator in the spotlight regarding the alleged Ponzi scheme, Finra, said its jurisdiction was limited to Madoff's broker dealer operations and that this meant it could not be an "extra set of eyes".
However, during Tuesday's hearing, Professor John Coffee, Professor of Law at Columbia University, said Finra did have jurisdiction over Madoff Investment Securities. He also stated that registered investment advisors are required to use a "qualified" custodian. However, he said Madoff used himself and that he was able to do this because the SEC gave us an "illusory" rule which allows investment advisors, where it has a broker dealer affiliate, to use its own broker dealer to be its custodian.
Following the implementation of Sarbanes-Oxley, Coffee said broker dealers were supposed to use accountants registered with the PCAOB. However, he said on three occasions, the SEC adopted and extended an exemptive rule that said privately-held broker dealers did not have to use such a PCAOB registered accountant.
Coffee said Ponzi schemes were increasing in regulatory and frequency and tended to occur in unregulated hedge funds or alternative investments put together by investment advisors.
Online fraud continues to rise despite countermeasures
Despite ongoing investment in tackling fraud, online merchants continue to see their losses from fraud increase, according to a survey of 150 online retailers conducted by Cybersource Ltd.
The overall rate of fraud increased 2.6%, which does not sound like much, however, Cybersource says for approximately 13% of merchants, the rate of fraud increased by more than 20% and 37% of merchants experience losses due to fraud of 1% or more. These increases are in spite of the fact that in the UK at least, approximately 60% of merchants now deploy Verified by Visa and MasterCard SecureCard schemes, which require the purchaser to type in a private code known only to them and their bank.
But it is perhaps the indirect costs of fraud that are more telling. According to the survey, 20% of merchants reject more than 5% of orders because they suspect fraud, although some of these orders may be authentic.
Despite the increasing sophistication of automated fraud screening software, Cybersource's survey indicates that 10% of merchants still reviewed every order manually, which is deemed costly and inefficient. It begs the question, do merchants see automated fraud screening as too costly or difficult to implement?
The overall rate of fraud increased 2.6%, which does not sound like much, however, Cybersource says for approximately 13% of merchants, the rate of fraud increased by more than 20% and 37% of merchants experience losses due to fraud of 1% or more. These increases are in spite of the fact that in the UK at least, approximately 60% of merchants now deploy Verified by Visa and MasterCard SecureCard schemes, which require the purchaser to type in a private code known only to them and their bank.
But it is perhaps the indirect costs of fraud that are more telling. According to the survey, 20% of merchants reject more than 5% of orders because they suspect fraud, although some of these orders may be authentic.
Despite the increasing sophistication of automated fraud screening software, Cybersource's survey indicates that 10% of merchants still reviewed every order manually, which is deemed costly and inefficient. It begs the question, do merchants see automated fraud screening as too costly or difficult to implement?
How did "India's Enron" come about?
"We will see a significant increase in
[ financial accounting scandals], however the jurisdiction is shifting from the more regulated markets where Sarbanes-Oxley, independent audit committees and the significant level of oversight make it more difficult to get away with, to emerging markets where supervision and broad oversight is not as advanced," said Richard Abbey, managing director, Financial Investigations for risk consulting company, Kroll.
I have reported these comments from Abbey before in an earlier posting, but I wanted to highlight them again in light of the Financial Times publishing its account of B. Ramalinga Raju, the former chairman of Indian IT firm, Satyam Computers and how "India's Enron" unfolded.
According to the newspaper report, Mr Raju became "obsessed with market capitalisation", which is what Abbey is alluding to in his statement above.
The report goes on to say that Mr Raju also appeared to benefit from the silliness that prevailed during the dot.com boom when the market cap of companies was wildly overinflated and no one, including those financing dot.com companies, really paid any attention to a company's earnings or P&L .
According to the FT, Mr Raju listed Satyam Infoway on the Nasdaq in 1999, and was able to immediately raise money despite the fact that the company had lost money. But once the dot.com bubble burst, according to the police the accounting fraud began in 2001 when the share price deflated.
Friday, 23 January 2009
Fund heaped praise on Madoff
As more details come to light about the alleged Madoff Ponzi scheme, lawyers representing those investors that lost millions are pointing the finger at the apparent lack of due diligence conducted by the banks and the funds that invested money with Madoff.
According to a report in the Financial Times, Santander's Swiss-based alternative investment arm, Optimal, "heaped praise" on Madoff before his arrest, for his ability “to find great entry and exit points to benefit investors”.
With parent bank, Banco Santander admitting losses of up to €2.33 billion as a result of the alleged Ponzi scheme, lawyers will be clambering all over this latest revelation.
According to a report in the Financial Times, Santander's Swiss-based alternative investment arm, Optimal, "heaped praise" on Madoff before his arrest, for his ability “to find great entry and exit points to benefit investors”.
With parent bank, Banco Santander admitting losses of up to €2.33 billion as a result of the alleged Ponzi scheme, lawyers will be clambering all over this latest revelation.
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