Tags: accounting, fraud, SEC
A criticism of the SEC that you’ll sometimes hear is that it’s mostly a bunch of lawyers, and two things that are broadly true of lawyers as a class is that they are good at close readings of dense texts and terrified of math. This means, some might say, that the agency is ill-equipped to regulate the high-tech quantitative world of modern finance. So it’s obscurely pleasing to read that the SEC’s office of quantitative research is rolling out a new program that applies high-tech quantitative methods to, basically, close reading of dense texts:
An initial step in the SEC’s new effort [to crack down on accounting fraud] is software that analyzes the “management’s discussion and analysis” section of annual reports where executives detail a company’s performance and prospects.
Officials say certain word choices appear to reveal warning signs of earnings manipulation, and tests to determine if the analysis would have detected previous accounting frauds “look very promising,” said Harvey Westbrook, head of the SEC’s office of quantitative research.
Companies that bend or break accounting rules tend to play a “word shell game,” said Craig Lewis, the SEC’s chief economist and head of the division developing the model. Such companies try to “deflect attention from a core problem by talking a lot more about a benign” issue than their competitors, while “underreporting important risks.”
It’s also pleasing to hear that a CFO’s guilty conscience over his earnings manipulation seeps directly into his prose. Though the article is a little light on the details of the SEC’s earnings-manipulation model, which I guess makes sense, since “companies and their lawyers are expected to respond to the crackdown by trying to outsmart the agency’s computers,” which I would really like to see.1 That could be a mixed bag; the Journal hints that it might result in easier-to-read but more grandiose filings:2 Read more »
Tags: fraud, Jeffrey Rubin, NFL
Football players are an enticing group of would-be fraud victims, being rich and seemingly very stupid. But the richness that makes them so tempting also allows them to hire lawyers smarter than they are. And those lawyers often have FINRA on speed dial. And so, when you rip off 31 current and retired NFL players, this is likely to happen. Read more »
Tags: coulda woulda shoulda, Fair Finance, fraud, National Lampoon, prison, Timothy Durham
Timothy S. Durham, the onetime chief executive officer of National Lampoon Inc., was sentenced to 50 years in prison for defrauding investors in an unrelated company he partly controlled. Durham, who was also the CEO of Indianapolis-based buyout firm Obsidian Enterprises Inc., and an accomplice, James Cochran, 57, were convicted in June of taking money raised from Fair Finance investors, spending it on themselves and lending it to other entities they controlled. A third man, Rick Snow, 49, was convicted of helping to deceive investors about the company’s financial condition. The three squandered $208 million of investors’ money, according to U.S. Attorney Joseph Hogsett in Indianapolis [...] “I feel badly about all this,” Durham told Magnus- Stinson. He said he was surprised at the amount of money lost by four victims who also spoke in court today. “I wish I had tried harder to make things clearer for them,” he said of Fair Finance’s public disclosures. [Bloomberg]
Tags: Autonomy, fraud, full richness of human information, HP, M&A, Mike Lynch
I don’t know much about this Autonomy thing – in brief, Hewlett-Packard acquired British software company Autonomy last year for $10.3 billion and today wrote that investment down by $8.8 billion, blaming $5 billion of that on “accounting improprieties, misrepresentations and disclosure failures” at Autonomy – but this sure sounds fake doesn’t it?
Today, Autonomy is firmly established as the leading provider of Pan-Enterprise Search and Meaning Based Computing (MBC) solutions. Autonomy’s unique Intelligent Data Operating Layer (IDOL) platform enables organisations to harness the full richness of human information by extracting meaning from the mass of unstructured information they handle every day, which analysts estimate to constitute over 80% of all enterprise data.
That’s from Autonomy’s last annual report as an autonomous company1 before HP bought it. Retrospective red flag perhaps? I would be wary of companies whose business involves “extracting meaning.” Meaning doesn’t come from software.2
Now of course HP is going to sue everyone and demand fraud investigations on two continents. Many people look bad here – HP first of all, whether or not its claims are true, then (if they’re true) Autonomy, Deloitte (Autonomy’s auditors), E&Y (HP’s auditors), HP’s bevy of bankers and others involved in due diligence who seem to have been unduly undiligent, and to some extent Autonomy’s bankers who marketed it to HP.3 I have plenty of sympathies with both sets of bankers, of course; their job is mainly to harness the full richness of human information by extracting meaning from the mass of stuff that companies make public, not to know whether that stuff is true.4 Bankers are an intelligent data operating layer; if you give them bad data then their operating layer is less intelligent. It’s possible that some of those words mean things. Read more »
Tags: .44 Magnum Leveraged Financing Program, a better type of life, a deserving person, call girls, Dresdner Financial, fraud, Geoffrey Lunn, Robert Perello
Sure, Geoffrey H. Lunn of Sheridan, Colorado, may seem like an inveterate fraudster. True, he and his two recruits, Darlene Bishop and Vincent Curry, “solicited investors throughout the U.S. and in several foreign countries for their ‘.44 Magnum Leveraged Financing Program’ that they promised could turn an investment of just $44,000 into $2 million within 10 to 12 banking days.” Yes, “Lunn portrayed himself as the vice president of Dresdner Financial, a firm whose executives he claimed had connections to Dresdner Bank,” in order to further polish the realism of his investment scheme named after a gun and promising 5,000% two-week returns.1 And, admittedly, none of this was true. “Admittedly” in the sense of “Lunn admitted in sworn testimony during the SEC’s investigation that, ‘It was a con, basically.’”
But hear him out. You may think he’s a con man, but if so, he’s a con man with a heart of gold:
The SEC alleges that Lunn did not invest any investor funds as promised and instead began making cash withdrawals after the very first investor deposit. In October 2010, Lunn began making payments to three women he met in Las Vegas whom he described as “call girls.” Lunn testified that he gave at least $848,500 to the three women so that they could have “a better type of life.” In November 2010, Lunn used investor money to make a $1 million Ponzi-like payment2 to a favored investor who he thought “was a deserving person.”
And you know what? He wasn’t even a con man. This goes way, way beyond Geoffrey Lunn. He’s just a pawn in a far bigger game: Read more »