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The messengers of bad news are never much liked, and those who cast warnings are shunned upon, sometimes even, uh, hung from crosses!
So as to prevent, as much as possible, negative effect, I shall not mention names as per se.
There is a certain 'conglomerate', which presently has 1B+ shares o/s, trading around .0005-.0006, that is on the http://www.spamstocktracker.com list that REALLY deserves a great big red flag!
They are non-U.S. (which means, from an American's point of view, if they go belly up...not a DAMN thing you can DO!!!)
Mind you, this is only MO, but if this entity is REALLY authentic, why do they need 1B shares, given the 'obvious' love of this 'product'?
Let's do some math here.
1,000,000,000 x .0006 = $600,000 market cap
Seems to me, this entity should be worth one fricking helluva lot more than that, IF they ARE & DO who they claim. As a matter of fact, in a legitimate world, they would be so well financed, they're market cap should be near $100M, given the nature of their business.
In addition to this, they have taken on a 'need' to give a share divvie of 1 for every 6 presently held, in an O&G company, which actually has two websites, yet same state and city address. The 'publicly' traded one's website looks so cookie cutter, my 9 y/o nephew does better website design than that. It also lists no phone number: another caveat emptor!
What's more, a very recent PR by the first, states a closing price of the O&G, of which was from a day that traded hardly more than 1000 shares, and looks to be a very manipulated pps, at that! (all the shares in the world, of a company gone defunct, in less than 1 year from 'Dec. 21, 05, aren't worth squat!)
FWIW, this 'watchdog' just doesn't want to see more Americans burned by non-Americans. Face it, the only people who like Americans, are the ones who PROFIT from 'stupid' Americans! The rest of 'em are all just envious as all hell of our freedoms and ideals!
L~
Nice link Lowman...bookmarked! eom
FWIW: Is YOUR penny stock on this list?
http://spamstocktracker.com/
Well, there ARE two corps....
NTVI & CCDE
scammy, filty, rotten, dirty. Owned by the same guy.
Thank you friend! If, ya find something that belongs here...please post it also.
Thanks.
Great board Barter! Nice article too!
I plan to be a regular atendee of the 'Crashes Depressions Manipulations Scams Swindles Thefts in Markets Currencies Commodities Stocks Etc' board.
:)
Thanks my friend. You may be right. These issues bother me to no end.
Ie., they bother me A LOT!!!
I like it.
You may have found your true calling here BM.
fringe
You MAY have found you've bit off more than you can chew LOL!
Probably not really...but you certainly have an endless subject to work with! Just the 'cause and trickle down effects' of major events could fill a hundred IHubs!!!
Thanks again! Well, this board is finally starting to get some boardmarks...and that's great! IMO, this board's message is really tough to swallow...but, it's also very much needed IMSO.
VERY nice board, Bartermania! Both, the images and the subjects are something all investors should have common knowledge of.
Often, we fear that which we don't understand, and ignorance is no excuse.
Knowledge is the key to success, and awareness saved more than one man's fortune. Information such as what you bring here should be beneficial, in the long run, to just about everyone!
GL and thanx, for the time you and all others put forth, in enlightening people. The only thing I could add to this board, at present is, ALWAYS ALWAYS ALWAYS look for who's 'fudging the numbers' (and expose the SOB's as quick as possible)!!!
L~
Posted by: Alex Chory
In reply to: stock_seeker who wrote msg# 709 Date:11/5/2005 11:39:31 AM
Post #of 712
$$$$$
U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19457A / November 4, 2005
Securities and Exhange Commission v. One or More Unknown Purchasers of Call Options for the Common Stock of Placer Dome Inc., Civil Action No. 05 CV 9300 (S.D.N.Y.)
SECURITIES AND EXCHANGE COMMISSION OBTAINS EMERGENCY ASSET FREEZE AGAINST UNKNOWN PURCHASERS OF CALL OPTIONS FOR PLACER DOME STOCK PRIOR TO ACQUISITION ANNOUNCEMENT
Orders Placed From Foreign Accounts Just Prior to $9.2 Billion Acquisition Announcement; $3 Million Now Frozen
On November 2, 2005, the Honorable George B. Daniels, U.S. District Judge for the Southern District of New York, entered a Temporary Restraining Order freezing assets of certain Unknown Purchasers of Call Options for the common stock of Placer Dome, Inc. ("Unknown Purchasers"). The Commission's complaint alleges that the Unknown Purchasers engaged in illegal insider trading, in violation of the antifraud provisions of the federal securities laws. In addition to freezing approximately $3 million in assets, the Court's order (i) requires that the Unknown Purchasers identify themselves, (ii) provides for expedited discovery, and (iii) prohibits the defendants from destroying evidence.
The Commission's complaint alleges that on Monday, October 31, 2005, prior to the opening of the market, Barrick Gold Corporation ("Barrick"), a Canadian-based gold mining company, announced that it was making an offer to purchase Placer Dome Inc. ("Placer"), also a Canadian-based gold mining company ("Announcement"). Under the proposed offer, the complaint alleges, Placer shareholders would receive $20.50 per share. The Complaint further alleges that as a result of this Announcement, the price of Placer stock jumped to open at $19.82 per share - a 20% increase over its prior closing price on Friday, October 28, 2005.
The Commission further alleges that on October 25 and 26, while in possession of material, nonpublic information regarding this acquisition offer, the Unknown Purchasers, using overseas accounts, purchased over 10,000 call option contracts for Placer stock in an account at a broker-dealer in the United States. As the complaint alleges, over 5,000 call option contracts were "out of the money" and set to expire in November, within weeks of the purchase date. The complaint further alleges that, as a result of the increase in price of Placer stock following the Announcement, the unrealized illicit profits on these option contracts total over $1.9 million.
The Commission alleges that the Unknown Purchasers in this case engaged in insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest thereon, and civil monetary penalties.
The Commission wishes to thank the Securities Commission of the Commonwealth of the Bahamas, the Bundesanstalt fur Finanzdienstleistungsaufsicht in Germany, the Swiss Federal Banking Commission and the Chicago Board Options Exchange for their assistance in this matter.
http://www.sec.gov/litigation/litreleases/lr19457a.htm
Franklin D. Ponzi’s Scheme
by Gary North
On Sunday morning, March 21, I saw what I never expected to see. The lead story on the "Sunday Morning" news show was on the future of Social Security/Medicare: "Cloudy Future For Retirees."
Charles Osgood, the show’s host, introduced the segment by saying that Social Security is the third rail of American politics: "Touch it, and you die." This is a familiar slogan, based on an analogy with the New York City subway system’s electrical power supply. The slogan goes back to the Goldwater campaign, but it’s nonetheless true. Yet the show basically called for Congress to touch the rail.
Not one politician appeared on-screen to comment on the segment’s details. This came as no surprise.
The on-line version’s text of the segment does not match what was shown on-screen. First, the segment began with a verbal comparison: Social Security as a Ponzi scheme. There was no explanation of what a Ponzi scheme is: a fraud by which early investors are paid above-market returns out of funds provided by later investors. The system goes bankrupt when new investors are too few to pay off previous investors. The system always dies.
Second, the screen displayed the estimated shortfall, or net unfunded liability, of both programs: $50 trillion.
I could hardly believe my eyes and my ears. Here was a mainstream news show, broadcast on a network, that admitted the truth. Never before had I seen this with respect to Social Security/Medicare. The show was saying what I was saying publicly back in 1976. That’s a time delay of a mere 28 years. But I was hardly the first to say it. My high school civics teacher told us back in 1959. Here was CBS News letting the public know the truth after a mere 45 years delay. It’s a new world!
The show even had a photo of Ida Fuller. I had written about her in 1976. As I recall the statistics, she paid in $22, retired, and lived to be a hundred. She collected $22,000. Here is what the on-line script says: $22.54 to $22,000. On-screen, there was an update: $24.75 to $22,888. I’ll go by the revision.
About 77 million children were born between 1946 and 1964. At Woodstock years later, some danced and others skinny-dipped.
But in four short years, those kids, who are now adults, will start collecting Social Security.
If some of them take the early retirement option, they can start collecting in 2004. Most of them will choose to wait until 2012. I’m eligible for full benefits in 2008. Those who were born in 1946 will have to wait another four years . . . if the law isn’t changed again.
The show’s director added some great footage of Woodstock attendees – long hair, peace signs, and Salvation Army clothes that had been donated by the Amish. At least they were wearing clothes.
Given what is going to happen to Social Security/Medicare, I hope they saved some of those clothes.
A PERFECT STORM
The director must have seen George Clooney’s movie.
It may seem like it’s hyperbolic to say there is a huge storm coming. But, CBS News Correspondent Joie Chen explains, the facts are really irrefutable.
Economist Lawrence Kotlikoff says "Baby Boomers" will hit the Social Security system the way a giant wave hit the boat Andrea Gale in the movie "The Perfect Storm."
At this point, there was a great screen shot of the movie, when the wave capsizes the little boat.
"The entire country is getting older," says Kotlikoff. "In 30 years, we’re going to have 100 percent more old people, and only 18 percent more young people to pay their benefits."
The script immediately got worse.
"In 30 years, the entire country is going to be older than Florida is today," explains Kotlikoff. "In 50 years, we’re going to have enough people over 100 to fill up Washington, D.C. We’ll have enough people over 85 to fill up New York City, Los Angeles, Chicago, Houston and a couple of major other cities. We’re talking about very, very old."
Then we were treated to screen shots of geezers who looked really old, even to me.
All I could think of was this: "I hope I’ll be in one of those cities. Maybe I’ll even make it to Washington, D.C."
Then we got the Ida May Fuller photo and the story of the earliest big winner on the Ponzi scheme. Those days are long gone. The early birds got the really fat worms.
But in 1940, there were 42 workers paying into the system for every Ida May Fuller – every retiree – taking money out. Not any more!
By 1950, there were only 16. Today, there are barely three. And in 2030, when most "Boomers" are retired, it will be down to two.
All I can say is that the two I get had better be willing to hustle, because I’m not going to tolerate any K-Mart retirement program.
LIVE LONG AND PROSPER
Moses wrote this, 3,500 years ago:
The days of our years are threescore years and ten; and if by reason of strength they be fourscore years, yet is their strength labour and sorrow; for it is soon cut off, and we fly away (Psalms 90:10).
As we approach Moses’ limit, the system’s finances will get into deep trouble.
Also, retirees are living longer. In 1940, life expectancy was in the 60s. Today, it’s in the 70s and soon will be approaching 80.
Eighty? Only 80? Not this would-be retiree. I expect science to get its act together. The gerontology brigade owes me for all the tax money I shelled out to keep them in government grants.
Add it all up and the United States has a problem. In 14 years, Social Security will begin running at a deficit. By 2042, the shortage will cause an automatic 27 percent cut in benefits. In about 70 years, Social Security could be short $24 trillion.
In 2042, I’ll be a hundred, and living in Washington, D.C. Don’t talk to me about any 27 percent cut! If you do, I’ll vote your upper-middle-class tail out of office, and so will my peers, who will have more votes than any equally well-fed, well-organized special interest group that you ever heard of. Keep your finger off that third rail, sonny, or you’ll pay dearly for it. I know my rights! You’re just going to have to find a way to make up that shortfall, or else your career will have a long fall. Get my drift?
Looking to the future, Federal Reserve Board’s Alan Greenspan said in a report, "Our problem essentially is we have been making commitments without focusing on our capability of meeting them."
Look, Greenspan, I don’t want to hear about our problem and our capability. I want to hear about THEIR problem and THEIR capability. My ship is about to come in. I’m about to get out of "our" group. I’ve been in it too long.
BELLYACHERS
Hart McIntyre says, "It’s something you put money into, and you look at your check every week and you go: ‘Hey, I’m putting money into this. It’s mine. When do I ever get it back? Am I going to get it back?’"
Look, Hart, quit bellyaching. So, maybe you got into Franklin D. Ponzi’s scheme a little late. That’s the luck of the genetic draw. Win some, lose some. You’ll just have to get your two workers to fork over a little more than they presently plan.
Hart and Phyllis McIntyre are both in their late 40s – the heart of the "Baby Boom." They live in Parkland, Fla. He owns a small company. She’s a schoolteacher. They have three children. And, they’re saving on their own for retirement.
"We look at Social Security as something that will be sort of icing on the cake," says Hart McIntyre. "To depend on Social Security, we don’t think that will meet the lifestyle we want to live as we move into retirement."
That’s the right attitude, Hart! You, too, Phyllis. Stay in the game. Earn more money. I want you folks to be my two workers. Do you think you can you find the third one, who thinks just like you do?
To pay for those Social Security checks, Chairman Greenspan has two ideas: raise the retirement age or cut the annual cost-of-living adjustment.
"We’re in the midst of raising the age [of retirement] from 65 to 67," says David Certner, director of Federal Affairs for the AARP.
Not yet! Not yet! Wait six years. Then it’s OK. But don’t rush into this. Take your time. Appoint another committee to study this.
Certner says the decision to raise the retirement age to 67 for everyone born after 1959 was made in 1983 by a commission chaired by Alan Greenspan. The director says America shouldn’t go back to the same well for more money.
You tell ’em, Certner. Find another well.
"A lot of people just don’t have the physical or health ability to continue to work," says Certner. "It’s a lot different if you’re working in a nice office behind a computer or you’re really out doing – real hard labor."
What do you mean? Computer work is really hard work. You can’t begin to know. I just hope I can make it for another four years. You hear that, Hart? You hear that, Phyllis? I’m old. I’m tired. I need help. You’ve got to stay in the game.
Back in 1940, workers paid 1 percent of their salaries into Social Security, up to $3,000.
Over the years, the tax has gone up. Each worker now pays 6.2 percent, up to about $89,000. Employers pay an additional 6.2 percent for each worker. AARP favors raising that – arguing the hit would be felt mostly by the most well-off.
You hear that, Hart? You got that, Phyllis? AARP knows what’s good for the system. You’ve got to get your income up. Both of you.
That idea does not sit well with Phyllis McInytyre: "I think, probably in general, people would say, ‘Why should I put more in if I’m not even guaranteed I’m going to get what I have now.’"
Phyllis, you’re beginning to sound like a slacker. Stop that. If you start funnelling money out of your fair share of Social Security into your own private retirement fund, the system will go into the red earlier than 14 years from now. Don’t even think about trying to weasel out at this late date.
"The more and more you change Social Security to increase taxes on one class of people, and provide greater benefits to another class of people when those payments and benefits are not linked, it does, at its core, change to a welfare program and not a public pension program."
Phyllis, Phyllis, Phyllis: it was never a public pension program. It was always a welfare program. It was packaged as a pension program by President Ponzi, but he knew better. This is all about politics. It’s about votes. How many votes do you have, Phyllis? Sure, you youngsters could gang up on us, but we can guilt-manipulate most of your peers. We always have. Also, if pressed, we’ll use this argument: "Cut Social Security, and your in-laws will have to move in with you." Try to match that, Phyllis!
"I’d rather have the option of taking money and putting it into other types of investments rather than putting it into Social Security," says McIntyre. "We’re taxed enough as it is. We’re taxed too much."
Hart, you’re beginning to sound like Phyllis. That’s not the right attitude. You see, we owe it to each other. Does that sound right? No? Well, how about this one? "If old folks don’t have money to spend, the economy will go into recession." You don’t believe in all that supply-side nonsense, do you? That someone’s demand should be related to his prior production? We know better. Demand is what drives this economy. I plan to do a whole lot of demanding. People my age are really skilled in the demand side of economics. In the domestic division of labor, we have specialized in demand. Don’t mess with us. And that includes your friend, Eugene Stuerle.
"We’ve largely succeeded in giving fairly good health and many years of retirement to an elderly population," Stuerle says. "It now turns out that we have other needs of society, such as children who are generally poorer than the elderly population."
He’s right. More than 16 percent of those under 18 currently live in poverty, compared to about 10 percent of the elderly.
If they are poor, then it’s because they aren’t working. Let’s get the supply-side equation correct: young people work, old people demand. These grade-school slackers need to get jobs and pay taxes. They need to make contributions into the program. I love that word: "contributions." It makes working people feel really good about themselves. I feel good about them, too, just so long as they quit bellyaching.
If you retired in 1970, you could expect about $300,000 in lifetime retirement benefits, including Medicare. In the year 2000, it was $650,000. By 2030, it will be more than a million dollars.
So, my advice is for people who expect to retire in 2070 to aim high. You can do it! Don’t quit now!
Currently, children are the poor parts of our population. And so the question arises, shouldn’t Americans be putting more money to children and perhaps a little less to the elderly?
A story about older Americans takes on a different perspective when it’s looked at from the eyes of those who will have to pay for the Boomers – today’s kids.
Kids should be seen and not heard. Remember this: kids don’t vote. Old people vote. Got that, Congress?
There are fewer of them because the Boomers had fewer children. Time spent climbing the corporate ladder, along with high rates of divorce, cut down the time to have that second or third baby.
There, you see? Old people are the wave of the political future, not a bunch of kids. When you’re talking "constituency of the future," you’re talking old people.
"If we current adults don’t accept a higher tax liability or accept lower expenditures on our behalf, we’re going to try to dump the entire problem into the laps of our kids," says Kotlikoff. "That’s not really possible for the kids to handle, because it would require doubling their lifetime taxes, compared to what we’re facing."
You know what I say? I say, "When the going gets tough, the tough get going." That slogan was on the wall of my high school dressing room. It moved me deeply. It made a great impression. Anyone who balks at this late date is going to get swats.
No one suggests the checks of current or soon-to-be retirees are in jeopardy. So, David Certner of AARP says he doesn’t expect it to be a burning issue in the presidential election.
"It’s a political year. People don’t want to deliver bad news to people," says Certner. "There is no consensus right now about what is to be done for Social Security."
He’s got that right! John Kerry is not going to hold George Bush’s feet to this particular fire, let me tell you. So, this problem can be delayed again. For at least four more years. Maybe eight. Maybe fourteen.
But there is the knowledge, the longer we wait, the worse it will be. To paraphrase an old television commercial: "You can pay me now, or you can pay me later."
OK, pay me later. Keep paying me later. I plan to be here for a long time.
March 24, 2004
Gary North [send him mail] is the author of Mises on Money. Visit http://www.freebooks.com. For a free subscription to Gary North's newsletter on gold, click here.
Copyright © 2004 LewRockwell.com
_______________________
Link: http://www.lewrockwell.com/north/north258.html
Why Corporate Images Die a Slow Death
by Naseem Javed
When sleek world class corporate images go up in flames like ENRON, WorldCom, GlobalCrossing, and start looking badly charred like ENWRONG, WorldCon, DoubleCrossing or when names become obvious liabilities like, Consignia,Thus,Thales, Xansa, or Uniq ... then it’s time to call the gate-keepers of Corporate Identity on a red carpet.
Andersenization of corporations started when voodoo accounting met voodoo branding and a hundred million dollar corporate image road show became a standard. Start with, a splashy logo, a great color scheme, pick any name along the way and roll out a Corporate Identity show. Steal money from shareholders, but give them a decent Corporate Image, at least, in return. CEO’s forged ahead making their marks, the likes of Zorro! Only this time, it was zero, really Zero. While ENRON, led the way, with the only tilted logo in the industry, clearly pointing the slippery, southbound slope, shareholders gasped and waited.
Within the last few months alone, PWC Consulting, did a self-destructive branding number to become Monday. A dumb name of the period. During this 60 million dollar makeover and while still in a shock gets picked up by IBM for a merely 3.5 billion. The name Monday is dropped immediately. Only a year ago, PWC did reject a 12 Billion dollar offer by Hewlett Packard.
Deloitte, spends 40 million to become Braxton , a name they picked up from the past so that the future can be their judge. KPMG also kicks in 40 million to be re-named to BearingPoint. Their challenge is now to unite 16,000 bright consultants under this difficult term on the global scene before they reach their breaking point. When two complicated ideas like 'bearing' and 'point' are combined they will only become initialized as BP, because it’s only the fickle and lazy public at large which decides what to think of a name and what to call it and no amount of money will ever change their mind … In the meanwhile, the real BP, which is British Petroleum, is trying very hard to shed the ‘British only’ image by re-inventing as BP as in "Beyond Petroleum" one of their short-lived campaigns. We are not amused. BearingPoint’s symbol is not BP rather it’s BE. Pity. Lastly, Anderson, before their demise also spent 160 million on Accenture, a name suggested by their employees. So be nice to your employees who know one day they may end up naming your corporate destiny.
This fancy colorful makeover of the world's top four consulting companies, plus a 300 million budget for four new names, has certainly guaranteed them a chapter in branding history. While the ad agencies collect their design awards the army of consultants get ready to fight for their corporate identity.
The new laws of Corporate Image clearly point to the failure of the traditional Corporate Identity practice, whereby, logo, design and specific color schemes were everything and the name, only one of the components. Today, under the new laws, names are everything while other paraphernalia is certainly lost in the crowd. A name is what a corporation needs, to talk about, remember, type, chat, refer, call, praise or curse. While the logos, designs and colors you forget and do not call for, in these cyber driven economies they have lost their value ... today everyone is forced to TYPE … better remember the name and better remember the spelling … better like it or click on to the next one. Welcome to global e-commerce.
One hour on the net and you go through enough logos, artworks and design equal to the entire work of all the logo shops in the whole world created during the last century … as business gets more complex, search-ability of a name becomes ever so critical. Under the new laws of corporate image, its all in the name, stupid.
Here are 7 steps to measure the life of a Corporate Image
Name is lost in the crowd for being similar or identical to thousands of others. Names borrowed from a dictionary, or part of everyday lingo, never achieve distinction and despite extraordinary expense they will simply die out of exhaustion.
Name is too old fashioned to convey today’s dynamics.
When the spelling of a name requires a higher IQ. Weird spellings are used to avoid trademark problems or to fit the creativity of a spinning logo. This only ensures obscurity. Spell it four different ways, and it will only bring 25% of the hits or profits.
More money is spent in explaining the origin of the name. Why advertise to educate the universe of this name dysfunctionality. Customers only care about their perceptions - they don’t care about your cute story.
Corporation does not own a trademark or an identical domain name. Why bother?
Name is embarrassing in certain countries.
Name is too long, too difficult, too confusing, too complicated or simply, too boring. Using lower cases, dashes or slashes and other dingbat characters in a name, will only ensure its self-destruction.
So, are we are out of names? Hell no. This is only a myth, successfully established by ad agencies and logo shops, leaving clients with often silly names. Naming is a serious black and white exercise and should not be confused with color design, logos, and holistic branding campaigns, because today these components have very limited value. Naming is naming, which is when a name has been selected under the proven and established guidance of a master naming architect.
Voodoo accounting is hurting us all; voodoo branding is hurting agencies. Now is the time to get serious about corporate names.
END.
--------------------------------------------------------------------------------
Naseem Javed, is a syndicated columnist, author of Naming for Power, Founder of ABC Namebank International, world-renowned lecturer, and an expert on corporate naming issues. Naseem is a committed follower of sobriety in corporate communication strategies and a harsh critic of the "beer commercial" mentality on corporate naming and the influence of voodoo branding on our culture. A hilarious speaker, he has a deadly message on why Corporate Image USA is on fire.
nj@njabc.com
www.naseemjaved.com
www.abcnamebank.com
212-697-7700 New York
905-794-0055 Toronto
_______________
Link: http://www.refresher.com/!njimages.html
Get ready for corporate supertrials
January 20, 2005
(Do you solemnly swear ... taking the oath this year will be, from left, Bernard Ebbers, Dennis Kozlowski, Richard Scrushy and Ken Lay. Photos: AP, Reuters)
US prosecutors have been chasing corporate crooks and piling up big statistics in court for five years. Now get ready for a series of trials featuring many of the biggest executives charged with the most audacious crimes of their era.
A few big figures, such as Martha Stewart and Frank Quattrone, were in the mostly no-name court line-up last year. But 2005 will be remembered as the year of the marquee CEO on trial. Take a look at this line-up:
Bernie Ebbers: The trial of the former WorldCom chief executive charged as the front man for an $US11 billion ($14.5 billion) fraud begins this week in New York.
Ebbers is charged with fraud and conspiracy in the WorldCom collapse, the largest bankruptcy in United States history. Former chief financial officer Scott Sullivan, who cut a plea deal, will be the government's star witness.
This will be an important test of the "idiot CEO" defence (see Richard Scrushy and Ken Lay, below). Ebbers is expected to say he left all the numbers to Sullivan, who told prosecutors what they wanted to hear when he got in trouble. Ebbers was a big-picture guy.
Dennis Kozlowski, the sequel: The former Tyco International chief, who became a symbol of material excess, began his retrial in New York on Tuesday. The first trial of Kozlowski and Tyco CFO Mark Swartz ended in a mistrial after a juror favouring acquittal found herself in the middle of a media frenzy and ultimately received a threatening note.
Kozlowski and Swartz are charged with stealing hundreds of millions of dollars from Tyco by hiding details of their compensation from directors and selling big blocks of company stock after inflating its value.
But it was Kozlowski's outrageous spending on the company tab (including $US15,000 for a poodle-shaped umbrella stand) that grabbed the headlines.
Richard Scrushy: The founder of HealthSouth Corp is charged with masterminding a $US2.7 billion earnings fraud in a trial underway in Alabama. A jury is being selected.
The HealthSouth scam wasn't as big as the WorldCom fraud, and the company continues to operate. But Scrushy takes the cake when it comes to defence stories. He wasn't just the idiot CEO, he may have been in a coma.
Prosecutors will rely on five former chief financial officers who will all implicate him as ringleader; one secretly recorded the former chief executive. Scrushy will blame his lieutenants for inflating HealthSouth's profits. See a pattern?
Ken Lay: The former Enron chairman faces two trials. One, in which he faces fraud, conspiracy, and bank fraud charges alone, will probably be held later this year. The other, in which he is charged along with two other former Enron executives, may not make it to court until next year.
Former chief executive Jeff Skilling and chief accounting officer Richard Causey will join Lay at a second fraud trial.
The Enron team was on the job during the most infamous corporate fraud of its time. More than 5000 employees lost their jobs when Enron filed for bankruptcy in 2001. Lay, as you surely know by now, was just another big-picture guy in the dark.
The idiot CEO strategy may sound risky, but it has been successful elsewhere. A jury in Connecticut was unable to reach a verdict against former Cendant Corp chairman Walter Forbes two weeks ago, despite incriminating testimony from three executives.
The trials ahead culminate the effort to hold people criminally responsible for the worst excesses of a dangerously excessive time. But don't count the idiots out yet.
___________________
Link: http://www.smh.com.au/news/Business/Get-ready-for-corporate-supertrials/2005/01/19/1106110810821.htm....
Banks, law firms were pivotal in executing Enron securities fraud
-Nine banks hid loans, set up false investments and facilitated phantom Enron sales
-Bank executives profited personally from "Ponzi scheme"
-Law firms structured phony deals
-Additional insider trading documented
The Enron fraud perpetrated by the Houston-based energy giant and its auditors succeeded because of the active complicity of several prominent banks and law firms, according to new allegations in federal court today.
The University of California, the lead plaintiff in the Enron shareholders lawsuit, filed a consolidated complaint in the U. S. District Court for the Southern District Court of Texas in Houston, adding nine financial institutions, two law firms and other new individual defendants to a list that already included 29 current and former Enron executives and the accounting firm of Arthur Andersen LLP.
The 485-page amended complaint lays out the scheme in detail, naming J. P. Morgan Chase, Citigroup, Merrill Lynch, Credit Suisse First Boston, Canadian Imperial Bank of Commerce (CIBC), Bank America, Barclays Bank, Deutsche Bank and Lehman Brothers as key players in a series of fraudulent transactions that ultimately cost shareholders more than $25 billion. At the same time, a number of top bank executives profited personally from the schemes, according to the complaint.
Two law firms were also added to the list of Enron defendants because of their significant and essential involvement in the fraud - Enron's Houston-based corporate counsel Vinson & Elkins, as well as Chicago-based Kirkland & Ellis, which Enron used to represent a number of so-called "special purpose entities."
"These prestigious banks and law firms used their skills and their professional reputation to help Enron executives shore up the company's stock price and create a false appearance of financial strength and profitability which fooled the public into investing billions of dollars," said James E. Holst, the university's general counsel. "In return, these firms received multi-million-dollar fees, and some of their top executives exploited the situation to cash in personally."
The amended complaint also documents a total of almost $1.2 billion in insider trading by 28 Enron directors and officers, approximately $171 million more than previously disclosed. Two Enron insiders, Kenneth Lay and Robert Belfer, together sold $144 million more than has been reported.
Bankers tricked investors with dual deception
Many of the financial institutions named in the complaint helped to set up clandestinely controlled Enron partnerships, used offshore companies to disguise loans, and facilitated the phony sale of overvalued Enron assets. As a result, Enron executives were able to deceive investors by moving billions of dollars of debt off its balance sheet and artificially inflating the value of Enron stock.
For their part, the law firms allegedly issued false legal opinions, helped structure non-arm's-length transactions, and helped prepare false submissions to the U. S. Securities and Exchange Commission.
The banks played a dual role in the elaborate scheme, which the amended complaint describes as "a hall of mirrors inside a house of cards." While bank executives were helping conceal the true state of Enron's precarious financial condition, securities analysts at the same banks were making false, rosy assessments of Enron to entice investors.
As underwriters in the sales of Enron securities, the banks also misled the public by approving incomplete or incorrect company statements. J.P. Morgan Chase, for instance, helped Enron raise $2 billion in publicly traded securities that are now almost worthless.
"Instead of protecting the public from the Enron fraud, the bankers knowingly chose to become partners in deceit," said William Lerach, senior partner at Milberg, Weiss, Bershad, Hynes & Lerach, the university's lead counsel. "They were not only willing participants but profiteers. Their executives followed the example of Enron's insiders, getting rich off thousands of unwitting pensioners and other investors who entrusted - and lost - what for many was their life savings."
Bankers made inside deal for themselves
Executives at several of the banks took advantage of their positions to invest more than $150 million in one of the Enron-controlled, off-the-books partnerships called LJM2, which they knew would pay an exorbitantly high return because of "self-dealing" transactions with Enron, according to the complaint.
From the start, the banks provided "extraordinary" assistance to Enron to set up LJM2. In information presented for the first time, the complaint reveals the "prefunding" of LJM2 by J.P. Morgan Chase, CIBC, Deutsche Bank, Credit Suisse First Boston, Lehman Brothers and Merrill Lynch at the end of December 1999 - a critical juncture for Enron. Although under no obligation to do so, the banks advanced nearly 100 percent of the money for LJM2, including a $65 million credit line.
LJM2 used the money in the final days of 1999 to buy four Enron assets that the company had failed to sell to other parties, enabling Enron to report large gains and prevent a sudden decline in stock prices that would have meant large losses for the company and the banks.
The deals, described as "sham" transactions, involved the Nowa Sarzyna power plant in Poland, the MEGS, LLC natural gas system in the Gulf of Mexico, the Yosemite certificates and a set of collateralized loan obligations. Later, LJM2 sold the assets back to Enron.
The four transactions allowed Enron to overstate its profits, conveniently meeting forecasts put out by the company and bank analysts. Simultaneously, bank executives who had invested in LJM2 were enriched when the special-purpose entities paid millions to LJM2.
Banks, law firms helped Enron conceal loans and create fake profits
The banks and law firms are accused of playing an instrumental role in creating a mythical picture of Enron profitability. They helped set up transactions that appeared to be independent, but "which, in fact, Enron controlled through a series of secret understandings and illicit financing arrangements," said Lerach.
Loans, which should have counted as debt, were made to look like profits from sales. The complaint explains how J.P. Morgan Chase helped Enron hide $3.9 billion in debt through a company known as Mahonia Ltd., located in the Channel Islands off England. The bank disguised approximately $5 billion in back-and-forth transactions in which Enron sold gas and oil contracts to Mahonia, but then secretly repurchased the contracts.
The complaint also reveals that Vinson & Elkins gave J.P. Morgan Chase and Enron legal cover for the Mahonia transactions by writing an opinion corroborating them as legitimate.
Citigroup used its Delta subsidiary in the Cayman Islands to carry out $2.4 billion of financial "swaps" with Enron that the lawsuit says "perfectly replicated loans and were, in fact, loans," but were not disclosed on Enron's books. Credit Suisse First Boston gave Enron $150 million in a transaction that the lawsuit says was "made to appear to be a 'swap,'" but was actually a loan, as a bank officer later admitted.
Canadian Imperial Bank of Commerce (CIBC) also formed a partnership with Enron, called EBS Content Systems, and pretended to invest $115 million, enabling the energy company to report $110 million in profits. However, because Enron secretly agreed to guarantee the $115 million, the lawsuit calls the transaction a "contrivance" that inflated the company's profits.
CIBC likewise lent $125 million to the Enron venture New Power IPO, allowing the company to post fictitious profits, while again receiving a secret guarantee that protected the bank. Later, Enron had to reverse the entire $370 million in profits it had created by the New Power deal.
In other cases, Enron and the banks made loans look like investments. Barclays gave $11.4 million to two investors in Chewco, another of Enron's off-the-books partnerships. While the money gave the appearance of outside investment in Chewco, Enron secretly subsidized the loans through a $6.6 million cash deposit with Barclays. The complaint describes the two investors as "strawmen."
Schemes propped up Enron stock but eventually collapsed
The banks' complex maneuvers on Enron's behalf were intended to bolster the value of Enron stock and its apparent creditworthiness. Bank officers were aware that if the price fell, Enron would be required to issue additional stock that would diminish the company's investment rating and limit access to new capital, likely collapsing the scheme from which the banks were profiting. At one point, executives of Credit Suisse First Boston strongly warned their Enron counterparts that the company would be ruined if the stock dropped to $20 a share.
For the first time, the amended complaint reveals that some of the financial institutions were themselves at risk for extensive losses because they had written millions of dollars of "credit default puts" on Enron securities, requiring them to make good on Enron's publicly traded debt if the company defaulted. This gave them strong incentives to keep Enron afloat.
When Enron's financial manipulations finally became public and the stock collapsed in November 2001, executives from J.P. Morgan Chase and Citigroup pressured Moody's to keep Enron's credit rating in place until the banks could arrange a bailout sale of Enron to avoid insolvency and forestall a full-scale investigation into the company's dealings. A proposed sale to Dynegy fell through, however, and Enron filed for bankruptcy on December 2, 2001.
The losses of the plaintiffs in the shareholders class action, who purchased Enron equity and debt securities between October 19, 1998 and November 29, 2001, are estimated at more than $25 billion.
The amended complaint also extends the responsibility of Enron's auditing firm, Arthur Andersen, to cover the role of 24 Andersen executives and several of the firm's international entities, including Andersen Worldwide, SC, and affiliates in Brazil, the Cayman Islands, India, Puerto Rico and the United Kingdom.
"The defendants' sophisticated manipulations allowed them to enrich themselves at the expense of millions of Americans who lost billions of their hard-earned dollars invested in Enron for their retirements," said Holst. "That's not fair. Our lawsuit seeks to return those funds to their rightful owners and to retirees and working families across the country."
Monday, April 8, 2002
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Link: http://www.ucop.edu/news/enron/art408.htm
Structured Finance
The Enron Debacle
This page uses the Enron fraud and collapse to describe the nature and intent of structured finance. It looks at the way the financial institutions used it to aid and abet Enron's fraud. It examines the roles of Citigroup bankers and analysts, accountants, lawyers, and also the political strategies used by these groups.
CONTENTS
Introduction
-Fraud
-The Real Story
-A Sick System
-Citigroup
-The Deceivers Deceived
-Structured Finance and Conscience
The Enron Scandal
-Relevance
-The Enron Story
-The customers
-Enron's wealth
-The fraud
-Comparable situations
-The critical importance of image
-Whistle Blowers
-The collapse starts
-A Life Line is offered
-The Lifeline is Withdrawn
-Bankruptcy
-Many Others Behaved Similarly?
-The investigations
Structured Finance
-Doing it Milton Friedman's way
-History of Structured Finance
-Morality
-The law
-In a Nutshell
Enron's Structured Finance
-Partnership Deals
-Prepay schemes :: Loans hidden in sales
-Other Loans became profits
-Tax Evasion
The Banks and Enron
-How Many Banks?
-Loyal Supporters
-Settling the Allegations
-A Long History Together
-Hedging Loans
Market Analysts and Enron
The Enron Accountants
The Enron Lawyers
Power and Political Influence
-Controlling Democracy
-Lobbying
-Donations Backfire for Enron
-Political Links and donations
-Arthur Andersen and Political Influence
Ideology and the Legislative Process : Oversight Failure
Introduction
Fraud
Enron was the first of the great corporate collapses of the 21st century. Like the others it blew up in a massive scandal of fraud and greed. A close look at what happened gives a very different picture to that revealed in the sound grabs and headlines which penetrate our consciousness in far off Australia.
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- - - - everyone instantly gets an epic fraud in which arrogant high-fliers stacked the deck to fleece thousands of peons to the tune of zillions. The United States of Enron The New York Times January 19, 2002
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The Real Story
The real story is not about Enron. The real story is about structured finance and the giant financial institutions who developed it, embraced it and used it as a vehicle for their own ends without any regard for the social consequences. They set up and arranged the fraud.
The real story is also about the large number of credible financial giants who participated in Enron's fraud. Without their active participation this fraud could not have occurred.
A Sick System
This is not a few bad guys, but a sick and disturbed system and we in Australia are increasingly part of that system and embrace the beliefs which give it legitimacy. Increasingly we think the way it thinks. It is interested in making money from our health care system.
It is not about illegality but about the morality and ethics of all of those involved. Some of them believed that what they were doing was legal and much of it may well have been. That it was totally immoral and quite unacceptable clearly did not worry them at all.
Citigroup
Once again Citigroup was at the helm making arrangements for the largest portion of the scam. Citigroup was less brazen in its denials when it was prosecuted and this is why it earned a lesser fine for its complicity than Morgan Chase and Merrill Lynch. Those defrauded are also pursuing a long list of other banks for compensation. They too played their part in what happened and picked up the scraps from the trough.
The Deceivers Deceived
To some extent the financiers also were victims. Because they were competitors and because Enron used several of them to assist in the fraud none of them realised how imminent the collapse was until too late. They lost money too but much less. Enron kept its own council and played one against the other.
Structured Finance and Conscience
Structured finance was the credible sounding vehicle which the co-conspirators advising Enron used to make what they were doing sound legitimate. Somewhere deep down they obviously knew that what they were doing was wrong. This was never formally objectified and recognised. It was officially seen as legitimate and the investment banks protested angrily when they were accused of complicity in fraud.
This deeper recognition of what they were doing is seen in the emails and private notes made by individuals as they interacted with one another and experienced doubts. It was the undeleted emails that finally gave the lie to public assertions, and led to large fraud settlements by the banks. It prompted shareholder litigation against the banks claiming US $25 billion.
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Here's the link to the rest of this large article: http://www.uow.edu.au/arts/sts/bmartin/dissent/documents/health/citienron.html
Investment/Brokerage Fraud
Investment advisors and stockbrokers are responsible for providing information that is accurate and complete to investors. Investment fraud (also known as brokerage fraud) occurs when an advisor, stockbroker, or brokerage firm offers inaccurate, incomplete, or biased information in an effort to control the market or draw business. The SEC (Securities Exchange Commission) has established guidelines for stockbrokers and advisors to follow to ensure that investment advice is being given fairly and consistently.
Types of investment fraud include:
Biased investment advice - An advisor may have a preference toward or against a specific company for various reasons and advise his or her clients according to that bias instead of research results.
Unfounded advice - An advisor may persuade or discourage an investor toward, or against a company, without the support of appropriate research.
Contradictory investment advice - An advisor may give contradicting advice to different clients.
Continuing a risk - An advisor may advise his or her client to 'stay in' when the risk is apparent and the potential gain is unlikely.
Conflict of interest - An advisor or firm that has outside ties to a business may sell that business's stock, even if the investment opportunity is not the most lucrative for the client.
SEC guidelines for stockbrokers
Because the investor-advisor relationship balances the trust of the investor with the knowledge of the advisor, guidelines are necessary to protect both parties. The investor must receive accurate information, but also must understand the risks involved in investment. In October of 1998, the SEC set standards for how stockbrokers, dealers, and advisors would distribute information (section IV of the "Compliance Guide to the Registration and Regulation of Brokers and Dealers"). The intent of the compliance guide was to create an investment environment where the investor knew his advisor was seeking to find him or her the best possible gains, and the advisor could perform his or her duties reasonably within a risk market with normal fluctuations. These rules are the standard by which fraudulent companies are now being judged:
Fair Dealing – By establishing oneself as a stockbroker, an individual becomes accountable to the standard rules and laws of the profession. Among these standards are requirements to: "execute orders promptly, disclose material [relevant] information…charge prices reasonably related to the prevailing market, and fully disclose any conflict of interest."
Best Execution - The stockbroker must find the best deal for the client. As an advisor, he or she is responsible to the client for the money being invested. An advisor must assess what the appropriate risk level for the investor is, and which market will provide that investor with the greatest gains. The stockbroker is responsible to buy and sell within this market.
Customer Confirmation Rule - The stockbroker must receive the investor's permission before purchasing stocks, bonds, or mutual funds. The investor must be informed as to:
The date and time the investment will be made
Which companies will be invested in
How many shares will be purchased
What the purchase price of each share is
How much stockbroker commission will be charged, and how it will be charged (order flow, or mark up/mark down)
If the stockbroker or dealer is an SIPC (Securities Investor Protection Corporation) member
Expected yield
Disclosure of Credit Terms - If the client desires to purchase securities on credit, the dealer must explain the credit terms upfront. In addition, the status of the client's account must be provided when he or she initially purchases shares, and again on each of the client's quarterly account statements.
Short Sales - In a short sale a stockbroker sells securities that are 'on loan.' If an investor realizes that the value of his or her shares is going down, he or she may lend them to a stockbroker, who will sell them at the market price. When prices go down, the stockbroker will repurchase the shares at their low point, and make a profit between the difference of what they were sold at (high market price), and what they were bought back at (new, low market price). Regardless of whether share prices go up or down, the stockbroker must return the original number of shares to the lender. He or she is, in a sense, borrowing them against a drop in the market. These sales are highly restricted.
Trading During an Offering - A public offering occurs when new securities are made available to the public. When a company first 'goes public,' it will hold an initial public offering (IPO). Individuals participating in an offering may not manipulate the price of the security. For example, a brokerage firm that is underwriting an IPO may not purposefully undervalue its IPO client's shares to make profits when the shares hit a more accurate market price.
Inside Trading - Stockbrokers, dealers, and advisors often have access to private material. Dealers may not make trades based on this information. Preventative measures must be taken to maintain an equal distribution of information among investors (that is to say, certain investor should not be privileged with inside information). Some ways through which information leaks can be prevented are:
Employee training
Trading restrictions for employees of brokerage houses
Information control between departments of brokerage firms
Recent Fraud Accusations
Merrill Lynch
Stock analysts at Merrill Lynch were accused of committing brokerage fraud on April 8, 2002. New York's Attorney General, Eliot Spitzer, brought securities fraud charges against the analysts, claiming they'd given investors biased advice, favorable to companies who used Merrill Lynch as their investment banker. Merrill Lynch's head Internet investment analyst, Henry Blodget, rated InfoSpace stock, for instance, as 'buy' through 2000, though in his own correspondence he called it a "piece of junk." InfoSpace did not do its investment banking through Merrill Lynch, but Go2Net, which InfoSpace was in the process of purchasing at the time (summer 2000), used the firm as its financial advisor.
Spitzer cited the poor advice given in this instance and others as evidence of a conflict of interest. Brokerage firms bring in immense revenues when companies choose them as their investment bankers, and when they act as underwriters during public offerings. Although Blodget and the analysts under him played no official role in the investment banking side of Merrill Lynch’s business, their favorable coverage encouraged businesses to choose and continue to use Merrill Lynch as their investment brokerage. Merrill Lynch settled with the state of New York for $100 million on May 21, 2002, but did not admit to wrongdoing. $100 million was added to the fine on April 28, 2003, after the SEC and other regulators completed an investigation into the acts of Merrill Lynch and nine other brokerage firms.
Salomon Smith Barney
Citigroup’s investment banking unit, Salomon Smith Barney, came under investigation in 2002 by New York’s Attorney General, Eliot Spitzer. According to the findings of the investigation, Smith Barney, as an IPO underwriter, offered shares of new stocks with high gain potential to executives and board members of current and prospective corporate banking clients. In one such deal, Bernie Ebbers, WorldCom’s former CEO, purchased IPO shares that rose 200% in value their first day on the market. Smith Barney was suspected of having acted and advised in a biased manner to obtain and maintain key investment banking relationships. In addition to offering IPO perks, Smith Barney gave its corporate customers high public ratings through heavy declines in the value of their stock.
Stock ratings by Smith Barney’s former telecom analyst, Jack Grubman, were investigated during the inquiry. Grubman, who resigned from Smith Barney August 15, 2002, was suspected of having presented failing telecom stocks as valuable out of a conflict of interest. Grubman was involved with WorldCom, a Smith Barney customer, as a proxy solicitor in 1997, and he sat in on three of the corporation’s board meetings in the years before they declared bankruptcy. Although these actions were disclosed and fully legal, they raised two questions: How close was Grubman, an analyst, to WorldCom, a Smith Barney investing client? And Did Grubman’s interactions with WorldCom influence his stock analysis?
During a recent (April 2003) settlement with the SEC, Smith Barney agreed to pay $400 million to end investigations into its banking practices. Grubman was fined $15 million and barred from the securities industry.
Morgan Stanley
Morgan Stanley has faced opposition on two fronts. Moët Hennessy Louis Vuitton (LVMH) is attempting to sue Morgan Stanley for what it claims were biased ratings in favor of its competitor, Morgan Stanley’s investment banking client, Gucci. Morgan Stanley has issued a counter suit against LVMH for what it claims are “vexatious” allegations, “without merit.” If LVMH succeeds in presenting its case, and is awarded a settlement, the gates may be opened for other companies to reclaim money lost because of inaccurate stock analysis. The suit will begin to be heard on March 3, 2003 in France.
In addition, Morgan Stanley’s correspondence records were recently scrutinized by Eliot Spitzer’s office for evidence of a conflict of interest. Mary Meeker, one of Morgan Stanley’s top Internet analysts, published ratings that are now suspected of having been biased toward companies she assisted in bringing public. Meeker was highly involved in Morgan Stanley’s investment banking business. Her approval or disapproval was a deciding factor for Morgan Stanley as it chose whether or not to underwrite Internet clients that wanted to go public. Because she had set a precedent early on that she would only give her approval to companies that had strong fundamentals, her signature meant, ‘buy.’ This exclusiveness, however, was compromised as the telecom boom grew. Meeker became less stringent with her ‘buy’ ratings and continued to support failing companies (usually Morgan Stanley clients) into their proverbial graves. Spitzer’s investigation aimed to discover if Morgan Stanley indeed offered investors inaccurate ratings out of conflicts of interest. Morgan Stanley agreed to pay a $125 million fine in April of 2003 to end investigations into the practices of its research division.
Further Investigations
The following brokerage firms were also investigated by the New York Attorney General, Securities Exchange Commission (SEC), NASD, New York Stock Exchange (NYSE), and North American Securities Administrators Association (NASAA):
Bear Stearns
Credit Suisse Group
Deutsche Bank
Goldman Sachs
J.P. Morgan
Lehman Brothers
Morgan Stanley
Thomas Weisel
UBS Warburg
U.S. Bancorp Piper Jaffray
If you feel that you or a loved one has suffered loss because of biased investment advice, you may want to contact an investment fraud lawyer.
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Link: http://www.securitiesfraudfyi.com/investment_brokerage_fraud.html
Securities Fraud
Securities fraud is an act committed by an entity intending to manipulate the market through deliberate concealment, or distortion of information. The SEC (Securities and Exchange Commission) acts to regulate against securities fraud by enforcing investment acts and laws.
Securities fraud may be committed by:
Brokers-dealers (misleading clients or advising based on inside information)
Financial advisors or analysts (purposefully offering poor advice or inside information)
Corporations (hiding or distorting information)
Private investors (acting on inside information)
The SEC
The SEC was established in 1934 following the advent of extended federal checks on investment markets. Since then the focus of the SEC has been to increase investor confidence by making information on companies and securities publicly accessible. The SEC monitors the securities market and investigates unusual market activity. The SEC was initially designed to enforce the Securities Act of 1933 and the Securities Exchange Act of 1934. Both acts were built on the following principles:
Companies offering investment opportunities must be open and forthcoming about the status of their business and the stocks they are offering. This way the investor has the opportunity to judge the information and assess the potential investment risks versus gains.
Persons who sell or exchange securities must perform their business honestly and with fairness. Because a broker-investor relationship involves trust on the part of the investor, the broker (or dealer, or company, as the case may be) must provide reliable information to his customer.
Forms of securities fraud
The most common forms of securities fraud that the SEC regulates against are:
Insider trading (trading based on information that is not available to the public)
Accounting fraud (keeping inaccurate books or presenting false information purposefully)
Misrepresentation (presenting misleading or untrue information about a company, or its securities, to an investor or the public)
Corporate/shareholder fraud
Corporate fraud or shareholder fraud occurs when a corporation conceals information or misrepresents itself before the public. Because corporations are designed to function as entities of their own, directors have a lower level of personal responsibility for the outcome of business decisions than they would if they were direct owners. In addition, corporation directors operate under limited liability. Under limited liability, the partner or investor takes no loss greater than the amount he has invested in the business. The partners and shareholders are not personally responsible for company debts. The liability for corporation failure or debt, because of the dissemination of responsibility and ownership, is harder to pinpoint than it would be under a sole proprietorship or a limited partnership.
Investment/brokerage fraud
Investment and brokerage houses commit fraud when they offer false or deceptive information to their investors in an effort to manipulate the market. The SEC has set business standards for broker-dealers to follow in order to advise investors well, and handle the flow of inside information fairly.
Course of action
Normally, cases of security and corporate fraud will be addressed in a federal district court. Brokerage fraud disputes are usually handled by the NASD or other dispute resolution organizations. The NASD (National Association of Securities Dealers) regulates its members and may remove them from the association if their actions are found to be fraudulent by NASD or SEC standards. In either situation, a qualified securities fraud attorney can best present the case of the defendant before the court.
Find a Securities Fraud Lawyer in Any State:
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Link: http://www.securitiesfraudfyi.com/index.html
Enron Fraud
It was one of the largest securities fraud scandals in history, and the investigation into the extent of the fraud committed by Enron is still ongoing. As a result, Enron was forced to file for bankruptcy in December 2001.
History of Enron
Enron is an energy company based in Houston, Texas that deals with the energy trade on an international and domestic basis. It was formed in 1985 when Houston Natural Gas merged with InterNorth. After several years of international and domestic expansion involving complicated deals and contracts, Enron was billions of dollars into debt. All of this debt was concealed from shareholders through partnerships with other companies, fraudulent accounting, and illegal loans. Listed below are a few of the partnerships that allowed Enron to hide debt:
RADR – a group of entities secretly funded by Enron that purchased electricity-generating windmills from Enron, then later sold them back with some of the profits going to key Enron officials and their families.
Chewco – a company formed by executives of Enron in order to buy out the shares of California Public Employees’ Retirement System (CalPERS) in a joint venture investment partnership known as JEDI. Chewco bought out CalPERS interest in order to retain JEDI’s off-balance-sheet status. However, Chewco did not meet the requirements for accounting rules and claimed profits that it was not entitled to. In addition, when Enron bought out Chewco’s interest, Chewco’s price was driven up, reaping huge benefits for the original investors (Enron execs).
Southampton – Enron bought the shares of National Westminster Bank (NatWest) in a limited partnership with Credit Suisse First Boston. Enron paid $20 million, but only $1 million went to NatWest. The remainder of the money went to several executives and their families, as well as to three NatWest employees who were in on the deal.
Although top level executives at Enron were likely aware of the debt and the illegal practices, the fraud was not revealed to the public until October 2001 when Enron announced that the company was actually worth $1.2 billion less than previously reported. This prompted an investigation by the Securities and Exchange Commission, which has revealed many levels of deception and illegal practices committed by high-ranking Enron executives, investment banking partners, and the company’s accounting firm, Arthur Anderson.
Investigation of Enron
To date, the SEC has uncovered several instances of financial fraud committed by high-ranking executives at Enron. Many of the executives have been charged with wire fraud, money laundering, securities fraud, mail fraud, and conspiracy. The following is a list of key players who are suspected of fraud related to the Enron scandal:
Kenneth Lay – former CEO and Chairman of Enron.
Andrew Fastow – former CFO of Enron. Fastow was indicted on 78 counts of securities fraud, money laundering, wire and mail fraud, as well as conspiracy to inflate Enron’s profit.
Michael Kopper – former director in the global finance unit.
Kopper pleaded guilty to financial wrongdoing in August 2002.
Jeffrey Skilling – former CEO of Enron.
J. Clifford Baxter – former Vice Chairman of Enron. Accused of securities fraud, Baxter died in an apparent suicide in January 2002.
Arthur Anderson – the accounting firm that was responsible for auditing Enron. Arthur Anderson was found guilty of obstruction of justice for shredding documents related to the Enron scandal.
Timothy Belden – former head of trading at Enron’s Portland, OR office. Belden pleaded guilty to one count of conspiracy to commit wire fraud related to Enron’s activities during the California power crisis.
Gary Steven Emigre, Gilles Robert Hugh Darby, David John Birmingham – three former employees of NatWest (National Westminster Bank). These men have been charged with wire fraud that defrauded their employer but benefited themselves and executives at Enron.
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Link: http://www.securitiesfraudfyi.com/enron_fraud.html
Double Take
WorldCom's Convincing Lies
David Simons, 07.08.02, 6:00 PM ET
NEW YORK - Analysts and fund managers blindsided by WorldCom's (nasdaq: WCOME - news - people ) accounting fraud insist they didn't have a clue. Was there a smoking gun? Even knowing where to look, it's tough to find one among the five quarters of published versions of the financials that were jiggered to the tune of $3.8 billion, allegedly by WorldCom's chief financial officer.
The scam wasn't as complex as that of Enron (otc: ENRNQ - news - people ). At least on the surface it was simple. WorldCom says that operating expenses for using other telecommunications companies' lines--mainly for last-mile access to homes and businesses--were reclassified as capital improvements. Because telco capital costs are charged as depreciation against income over periods ranging from four to 40 years, the reclassification reduced expenses in the past five reported quarters by at least $2.6 billion.
I examined the five quarters of line costs and capital expenses at the company's two main divisions. The WorldCom Group operates the core network and sells voice, data and Internet backbone services to business and government. MCI is the consumer and small-business operation. I also compared the figures' rates of change and ratios to revenue with WorldCom's main competitors, Sprint (nyse: FON - news - people ) and AT&T (nyse: T - news - people ).
I came away with a sense of awe. Far from being ham-handed, the scam was incredibly elegant. All of the numbers behave as would be expected. In fact, the closer the look, the more convincing it becomes.
For example, at the MCI unit, which accounts for 47% of total line costs and 39% of revenue, line costs as a percent of revenue soared from 44% to 51% during the first four quarters of the fraud. That's the opposite of what would be expected if line costs were being transformed to capital costs. The annual report says the increase was due mainly to wholesale price pressure in Internet services.
Indeed, a careful con wouldn't mess with MCI line costs. Access line statistics, while not included in WorldCom's financials, are tracked by the Federal Communications Commission. It's easy to relate numbers of access lines to household subscribers and figure reasonable total line costs.
At the WorldCom division, the ratio is obscured by business and government customers that use many lines. Yet line costs remained flat at 38% of revenue, while total revenue fell 6%--within range of what's reasonable given the division's higher-margin offerings such as Web hosting and private networks. At AT&T's telephone operations, line costs also stayed flat, at 29% of revenue. Sprint doesn't break out line costs, but its 50% gross margins didn't budge.
The capital-expense side of WorldCom's fraud ledger also appears OK. Instead of increasing as the fraud would suggest, capital expense declined at both units by a combined 25%, to $7.9 billion in 2001. That's spot on the $8 billion forecast by WorldCom's year 2000 annual report. At AT&T's phone operations, capital expense decreased 19%, and at Sprint they increased 25%.
The most apparent smoking gun is a $3.5 billion increase in transmission-equipment assets. It's more like a leaky water pistol. The percentage increase is half that notched in the boom year 2000. That's consistent with the overall decline in capital spending.
Now, any junior accountant can tweak a quarter or two. But it takes a real maestro to do it for five full quarters and have the data line up like a business-school case study. In fact, the WorldCom data points look too perfect. Other kinds of costs, such as maintenance-related labor, may have been put in play to fine-tune the tweaks.
Most amazing, though, is that apparently a single person at a company the size and complexity of WorldCom could reclassify $3.8 billion worth of expenses as easily as changing entries on a home-PC personal finance program. Clearly, increased oversight of outside auditors and penalties for perpetrators isn't enough.
The focus should be on foiling fraud before damage is done. That requires real-time bookkeeping controls. The most basic, which would have flagged the WorldCom flimflam, is mandatory review of revision to entries before they are actually made. At the very least, changes that exceed cumulative thresholds should be approved by internal auditors.
Companies should also be required to publicly detail bookkeeping controls and have them independently evaluated by accounting firms other than those who audit the financial statements.
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Link: http://www.forbes.com/columnists/2002/07/08/0708simons.html
Thursday, 27 June, 2002 Disgraced WorldCom faces fraud charge
Bankruptcy could be a day or two away
The US financial watchdog, the Securities and Exchange Commission (SEC), has charged US telecommunications giant WorldCom with fraud.
With executives like WorldCom's, who needs a crumbling industry?
Market analyst Michael Hodel
The company has admitted that its profits had been inflated by $3.8bn (£2.5bn) between January 2001 and March 2002, to keep them in line with Wall Street expectations.
President George W Bush has condemned the fraud as "outrageous" and vowed to address the problems shaking corporate America.
Analysts predicted that WorldCom would file for bankruptcy before the end of week, after it announced 17,000 redundancies and sacked its chief financial officer, Scott Sullivan.
New cash deal 'dead'
"WorldCom's shareholders' long-term hope depends largely on the faith of the firm's creditors, which is now probably nonexistent," said Michael Hodel of Morningstar, a fund rating agency.
"With executives like WorldCom's, who needs a crumbling industry?"
WorldCom now can only avoid bankruptcy by securing $5bn in fresh cash. However, sources close to the creditor banks holding the firm's $30bn debt said this deal was now dead.
Without enough money to cover expenses and interest payments, the firm would be forced to file for Chapter 11 bankruptcy. This would give WorldCom protection from its creditors, but would allow it to continue operating.
Blocking another Enron
SEC chairman Harvey Pitt said the commission was seeking a court order to prevent WorldCom disposing of assets, destroying documents or making payments to senior officers - as happened in the case of failed energy giant, Enron.
Pitt: SEC trying to restore lost credibility
He said the SEC move was "an attempt to restore the understandably lost credibility that people have in what they are hearing and reading".
The WorldCom fraud is far bigger in money terms than Enron's misdeeds, and will further undermine the trust of investors in corporate America.
The US dollar lost strength and share prices around the world plummeted on Wednesday, although the greenback and Wall Street later recovered lost ground.
The SEC said WorldCom's accounting improprieties were of "unprecedented magnitude".
The news is also another damning indictment of auditor Andersen which was responsible for approving the accounts of WorldCom as well as Enron.
Trouble at the top
WorldCom was one of the pioneers of the 1990s telecoms boom.
The scandals that shook Wall Street
Enron's accounts turned out to be an elaborate scam
Andersen approved the WorldCom and Enron accounts
Other firms under fire: Xerox, Adelphia, Tyco, Global Crossing
Click here for more details
An aggressive acquisition spree saw it grow from a small-time regional operator in the early 1980s to a huge international business, but also saddled it with $30bn of debt.
The firm was already shrouded in scandal after the departure of its founder and chief executive, Bernie Ebbers, in April.
Mr Ebbers borrowed hundreds of millions of dollars from the firm to underwrite the inflated prices he had paid for the company's own shares.
WorldCom shares have tumbled from a high of more than $60 in 1999 to 83 cents this week.
Trading on the stock on the Nasdaq market was suspended on Wednesday,
The shares had hit a mere 10 cents in pre-opening trade.
Secret actions
The scandal broke late on Tuesday evening, when the company said it had not actually made the $1.4bn of profits it reported in 2001, nor the $130m stated during the first three months of 2002.
Founder Bernie Ebbers was forced to quit in April
WorldCom said its chief financial officer Scott Sullivan improperly booked expenses as investment in order to make the company look much healthier than it actually was.
John Sidgmore, who took over from Mr Ebbers at the top, said executives were "shocked by the discoveries".
Andersen is protesting its innocence, saying Mr Sullivan did not let on what he was doing.
The SEC added: "We are ordering the company to file, under oath, a detailed report of the circumstances and specifics of these matters."
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Link: http://news.bbc.co.uk/1/hi/business/2068865.stm
14th Jul 2005 Bernard Ebbers gets 25 years for WorldCom Fraud
Former WorldCom founder and CEO Bernard Ebbers was today sentenced to 25 years in federal prison for the famous accounting fraud, which led to the downfall of the WorldCom. He was already declared found guilty in March this year for his involvement in declaration of inflated telecom’s finances to cover massive losses that led to an $11 billion accounting fraud. The judgment was passed by the Judge Barbara S. Jones who said that her decision took into consideration the seriousness of the charges and the effect the massive fraud had on many.
Jones said in the ruling: “I find that a sentence of anything less would not reflect the seriousness of this crime.” the charges against Bernard included conspiracy, securities fraud and seven counts of lying to the Securities and Exchange Commission. He was facing much worse punishment in the form of 85 years in prison. However, he somewhat got a bargain due to his numerous charitable works and poor health.
One of his worst decisions was to instruct the former CFO Scott Sullivan to adjust the company’s accounting numbers over a two-year period to keep the markets happy. This seems to be just the beginning of the decisions pertaining in the case as several other former company employees including Scott Sullivan are scheduled to get their sentences later this year.
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Link: http://news.techwhack.com/1666/bernard-ebbers-gets-25-years-for-worldcom-fraud/
WorldCom's Sullivan gets 5-year term for fraud role
CHICAGO TRIBUNE
August 12, 2005
NEW YORK – Scott Sullivan, credited with helping the government to convict former WorldCom chief executive Bernard Ebbers, was sentenced yesterday to five years in prison for his role in the largest case of corporate fraud in U.S. history.
Sullivan, who had been the telecom company's financial director, received far less than the 25 years given last month to Ebbers, his one-time boss. The lighter sentence was seen as a powerful signal to would-be white-collar criminals to cooperate with government prosecutors rather than take their cases to trial.
At a morning hearing in a packed Manhattan courtroom, Sullivan, 43, repeatedly apologized for his actions, pleading with U.S. District Court Judge Barbara Jones to recognize the importance of his cooperation in convicting Ebbers.
Sullivan also said his wife suffers from a severe case of diabetes and has been hospitalized for emergencies nine times this year, suggesting a prison sentence would be an "extreme burden" on her and their 4-year-old daughter.
"I am sorry for the hurt that has been caused by my cowardly actions. I truly am," Sullivan said. "I ask the court for leniency so that I can get back to my family as soon as possible."
In reducing his sentence, Jones said Sullivan was a "model of cooperation" and added that she recognized Sullivan's "extraordinary family circumstances."
For Sullivan, who pleaded guilty to fraud and other charges in March 2004, the opportunity to testify against Ebbers gave him an avenue for redemption and will allow him to leave prison before he turns 50.
"It was extremely fortunate there was an opportunity for you to cooperate," Jones told Sullivan. "Mr. Sullivan, you would have faced a substantial sentence had you not cooperated with the government."
After the hearing, Sullivan hugged his mother and shook hands with his father, who suffers from Parkinson's disease. Sullivan must surrender to federal officials Nov. 11.
Sullivan's effort to win a light sentence was helped considerably by Assistant U.S. Attorney David Anders, who told Jones that the government would not have been able to convict Ebbers without the help of WorldCom's former No. 2 man.
"Mr. Sullivan was not the cause of the fraud at WorldCom. Mr. Ebbers was," Anders said. "Without his cooperation, Mr. Ebbers would never have been convicted." Under nonbinding federal sentencing guidelines, Sullivan could have received as much as 25 years in prison.
Kirby D. Behre, a former prosecutor and a partner with Paul Hastings LLC in Washington, said, "The interesting thing is the huge disparity between what Ebbers gets for going to trial – 25 years – and what Sullivan gets for cooperating.
"It's a great advertisement for the benefits of cooperating with the government," he said.
Ebbers, 63, was sentenced in July, four months after a jury ruled that he had committed fraud and conspiracy in conjunction with the $11 billion accounting scam that sent WorldCom into bankruptcy, the largest in U.S. history. Ebbers, who suffers from a weak heart, has appealed the conviction.
While praising Sullivan for his cooperation, Jones was quick to add that his "offenses were of the highest magnitude." Thousands of shareholders lost billions of dollars when the extent of WorldCom's fraud became public.
Jones labeled Sullivan the "day-to-day manager of the scheme at WorldCom" – someone who she said was "significantly more culpable" than the other managers who cooperated. "In keeping WorldCom going," she said, "he was also preserving his $700,000 salary, $10 million bonus and stock options."
In addition, she pointed out that in June 2002 when WorldCom first acknowledged fraud at the company, Sullivan initially denied any involvement.
That denial, she said, "remains in sharp contrast" to David Myers, the former WorldCom controller who quickly admitted guilt and agreed to work with the government. Myers received a sentence of one year and one day in prison.
Nonetheless, Jones said she recognized that Sullivan was under intense pressure from Ebbers.
During Ebbers' six-week trial, Sullivan testified for seven days, detailing conversations between the two men that led the company to manipulate its sales and profit numbers to buoy WorldCom's stock price. At its 1999 peak, WorldCom's stock was worth $180 billion, the company served about 15 million customers and employed about 40,000 people.
Sullivan told jurors Ebbers repeatedly urged him to "hit the numbers" – a kind of mantra that Sullivan said he interpreted as a command to commit fraud in order to meet Wall Street expectations.
"I told Bernie, 'This isn't right,' " Sullivan said from the witness stand, describing an October 2000 meeting in which he said he showed Ebbers a plan to improperly create $133 million in revenue. "He just stared at it, and he looked up at me and he said, 'We have to hit our numbers.' "
Sullivan's testimony was the pivotal point in the Ebbers trial. The standoff was an extraordinary confrontation between two men who had once been so closely linked in the minds of investors and the financial media that covered them.
Though Ebbers was unmistakably the public face of WorldCom, Sullivan was widely recognized as the engineer of the company's stunning string of acquisitions. WorldCom, after all, was the most successful stock of the 1990s.
Throughout Ebbers' trial, his defense attorney, Reid Weingarten, charged that it was Sullivan, not his client, who had concocted and engineered the accounting scam meant to cover-up the company's declining revenues. Ultimately, a jury determined that Ebbers was responsible for WorldCom's fraud.
Sullivan made one final reference to his old boss before the sentence came down.
"In the face of intense pressure inside the company, I turned away from the truth," Sullivan said. "I knew it was wrong. My intentions were not to hurt people."
As part of his guilty plea, Sullivan sold his $11 million beachside home in Boca Raton, Fla., handing the proceeds to a fund for WorldCom shareholders.
Sullivan will not be fined and will not have to pay any restitution beyond the assets that he agreed to turn over last month. Sullivan must also serve three years of probation.
Jones also agreed to recommend that Sullivan be sent to a minimum-security prison in Pensacola, Fla., near his home, and that he receive treatment for alcohol abuse.
Sullivan's lawyer also asked for 90 days before his surrender, so that his client could arrange for child care at his home.
But Sullivan's payments and reduced sentence are probably cold comfort to WorldCom's investors and to its former employees, who lost their livelihoods as WorldCom entered bankruptcy protection in 2002.
"It was a mixed blessing, but a well-measured sentence," said Henry J. Bruen Jr., a former WorldCom salesman who submitted a victim-impact statement to the judge. Bruen said he had lost all of his savings, investments, medical benefits and some of his property since being laid off in early 2003.
Sullivan's sentence is roughly in proportion to those given to four of his subordinates, who had also pleaded guilty.
Ebbers, meanwhile, is scheduled to report to a federal prison in Mississippi Oct. 12. Jones must decide whether to allow Ebbers to remain free during his appeal.
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The Associated Press and the New York Times News Service contributed to this report.
Link: http://www.signonsandiego.com/uniontrib/20050812/news_1n12worldcom.html
Jungle Fever
The Bre-X saga is the greatest gold scam ever. But to understand the enormity of the fraud, you had to be there. Our man in Borneo tells his story.
Richard Behar
When I stepped off the plane in Jakarta, I was, like the rest of the world's lemmings, swept up in the Bre-X Minerals euphoria. The Canadian company had found the largest gold deposit of the century, buried deep underground in a dense Indonesian jungle on the island of Borneo. As Bre-X vice chairman John Felderhof later explained to me, a volcano had essentially "collapsed back onto itself" three million years ago, causing a massive buildup of heat and pressure, which created the miraculous treasure. He drew a diagram. It made sense. After all, he was on his eighth beer of the evening; I was on my fourth. What's more, everyone believed him--fellow geologists, engineers, financial analysts, business journalists, the world's largest mining companies, government officials, even a former U.S. President. "Geologically, it's the most brilliant thing I've ever seen in my life," Felderhof sputtered. "It's so big, it's scary. It's f--ing scary!"
Horrifying is a better word. Bre-X was a gold-mining hoax--the largest of any century--until it collapsed onto itself last month. Allegedly thousands of rock samples were "salted" with flakes of gold before they were tested. Today Felderhof is rich and sends his regrets from the Cayman Islands, where he professes his innocence and is applying for permanent residency. His deputy geologist, Mike de Guzman, is not so fortunate, having apparently jumped 800 feet into the jungle from a helicopter once the jig was up. Bre-X CEO David Walsh is holed up at the company's Calgary headquarters, scuffling with camera crews. Class-action lawsuits are flying, while criminal investigators are poring over the company's books.
The numbers are heart-stopping. The market value of Bre-X had topped $4 billion--a growth rate of 100,000% in three years. In early May the company melted into bankruptcy. But not before Walsh, his wife, and Felderhof had mined roughly $50 million from stock sales. And the gold? In the weeks before the fraud was exposed, some 71 million ounces of the yellow metal, worth $25 billion at today's prices, had supposedly been "proven" by Bre-X. Then Felderhof said he was "comfortable" with 200 million ounces--far more than the California gold rush. One Bre-X official told me "400 million."
The numbers tell only part of the story. To grasp the enormity of the scam, you had to be there. You had to see the cosmos that Bre-X had created, like an elaborate Hollywood set with hundreds of actors who could be loaded onto trucks and barges once the tickets had been sold. "You have to understand, this thing is like a 20-foot man," gushed Research Capital mining analyst Chad Williams after returning from an early pilgrimage. "For someone in our business, it's like taking the biggest Elvis fan to Graceland."
I spent two weeks in Indonesia in February to chronicle an epic tale of how a bunch of average Joes stumbled onto the holy grail, only to find powerful and greedy forces conspiring to take it away from them. Felderhof told me only one other publication (the Northern Miner) had ever been permitted inside Busang, the exploration camp on the island of Borneo. I felt lucky. I proved even luckier when I returned to New York with an illness that delayed my story for several weeks. ("Saved by a parasite," FORTUNE managing editor John Huey now says.) We held our fire again after Freeport-McMoRan Copper & Gold, Bre-X's new partner, said it was conducting its own drilling tests--the first time in nearly four years anyone independent had checked beneath the surface. Looking back, I don't have the answers. But the trip provided a fascinating look at several characters who may be the century's greatest scam artists.
By the time I got to Indonesia, both Walsh and Felderhof were trapped in a Javanese version of It's a Mad, Mad, Mad, Mad World, the timeless movie farce in which Mickey Rooney, Milton Berle, and a slew of other characters try to outsleaze one another in a manic race to recover buried treasure. The Bre-X version came complete with payola, private eyes, and break-ins. It led from the leech-infested swamps of Borneo to the presidential palace in polluted Jakarta. It featured a dictator's greedy kids and some of the world's biggest mining firms, stabbing one another in the dark.
The story is familiar now. For nearly a year, until Freeport was awarded the contract, the Indonesian government had delayed giving Bre-X control over Busang. Big mining companies jockeyed for position. As the gold estimates grew, Indonesian officials were determined to select an established firm as the operator. Mining giants were lobbying for the post, none harder than Peter Munk, CEO of Toronto's Barrick Gold, the world's second-largest gold producer. Munk hired Kroll Associates, the world's biggest detective agency, to dig up dirt on Bre-X in anticipation of a hostile takeover bid. He enlisted former U.S. President George Bush to lobby Suharto, the Indonesian ruler. He retained the services of a daughter of Suharto to get an edge. (Bre-X offered $40 million to a son.)
When I arrived in early February, Jakarta had become a corporate war zone centered on five-star fortresses. Bre-X was at the Shangri-La (the "Bre-X Shangri-La"). From his window Walsh could see the enemy--the "Barrick Hyatt." Just up the road, at the Regent Hotel, a Houston lawyer was assembling spies to help him figure out whom to sue on behalf of Bre-X shareholders. It was impossible to figure out what was going on. The man holding the cards: Suharto's golfing buddy, a secretive timber tycoon named Mohamad "Bob" Hasan. The dictator had asked him to clean up the Bre-X mess. At one point it wasn't clear whom Suharto's government was favoring as Bre-X's partner. "This place is like Casablanca," complained Doug MacIntosh, Bre-X's investment banker at J.P. Morgan. "The story changes every day."
In Jakarta, I talked with Walsh, Felderhof, and other Bre-X officials dozens of times. We met separately. We met together at lunches and dinners. Not once did a yellow flag go up during those talks. Were they all just playing their parts in an elaborate scheme? If so, they were playing those parts quite well.
Even now, I have trouble believing that Walsh participated in the scam. He was a miserable soul when we were introduced in his Jakarta suite, just hours after he'd had it swept for electronic bugs. He was chain-smoking Dunhills and hacking his brains out. He hadn't exercised in years, he said, which was apparent from a huge deposit hanging over his belt. He was depressed and distracted, and often stared out his window at the litter and sewage that flowed continuously down a muddy canal--a metaphor, we joked, for the corruption that thrived in Indonesia. "We all find it hard to believe that we're responsible for the largest gold discovery probably in the history of the world," he said without much feeling. Indeed, Walsh looked more like some poor schlemiel who had just won the lottery and couldn't locate the ticket.
Walsh told me his story: A former stockbroker, he launched Bre-X in 1989. He hunted for gold in Quebec and joined a diamond rush in the Northwest Territories. His luck was so abysmal that he opened his 1991 annual report with the line "Yes, we are still in business." After filing for personal bankruptcy, he decided he needed "a proven gold finder." Enter Felderhof, whose claim to fame was the co-discovery of one of the world's biggest silver and gold mines in Papua New Guinea in 1968. It took Walsh two weeks to track down Felderhof, whom he hadn't seen in ten years. Using his last $10,000, Walsh flew to Indonesia, where Felderhof talked him into buying the rights to part of the Busang property in 1993.
Looking back, maybe I should have been suspicious when I met the Dutch-born Felderhof. He had a shifty mug, a gruff manner, and a hideous laugh trapped in the back of his throat ("Kkh! Kkh! Kkh!...Kkh! Kkh! Kkh!"). Still, his talent for storytelling made him more enjoyable than Walsh. Here was a pirate without the eye patch--a hard-drinking, swashbuckling explorer who had prowled the world's jungles, dodging flash floods and poisonous snakes. He wore his 14 bouts with malaria like medals on his chest. He said he was so poor that in 1992 he had to steal a Christmas tree for his family. Never again. He pulled out a photo of Ingrid, his second wife. "She just bought me a Lamborghini for Christmas," he said. "It's two seats strapped to a f--ing engine. I think she's trying to kill me. Kkh! Kkh! Kkh!"
Shortly after we met, Felderhof took me to dinner with de Guzman, his longtime pal whom he'd invited to join the Bre-X team. The Filipino geologist beamed like a jewel when Felderhof explained that he couldn't have discovered the gold without his deputy's "pioneering theories." De Guzman boasted that his IQ ranged from 150 to 170, which came in handy when he hiked 32 kilometers through dense jungle "with the camp on my back, eating noodles every meal for a week," and hunting for signs of mineralization. The first two drill holes were failures. "We almost closed the property," recalled de Guzman. "In December 1993 John said, 'Close the property,' and then we made the hit." Never mind that more than a dozen mining companies had dismissed the property as worthless. The previous operator had even drilled 19 holes, but "they were all in the wrong places," snickered Felderhof during the meal. Or they were "too shallow." Or the workers used a wet-drilling method that, ironically, washed away whatever gold they did strike. "Geology wasn't on their minds," added Felderhof. "They were spending all their time in town chasing girls and naming creeks after them." De Guzman, who, as it turns out, had at least four wives simultaneously, laughed as he recalled the various creeks--"Karen, Jenny, Martha, Ann." After consulting with a local tribe of Christian Dayaks, he gave the creeks back their traditional names.
As I continued my work, things got tense. Walsh complained about a break-in at his Calgary office; two weeks earlier his wife had found a spy rifling through the garbage at their Bahamas estate. He claims he sent a memo advising employees to "shred sensitive materials." (If true, that will make it harder for investigators to solve the mystery.) The company's top financial officer, Rolando Francisco, was also caught up in the hysteria. He would talk in his hotel room only after cranking up the volume on the TV. Over at the Hyatt, Barrick spokesman Luc Lavoie was waxing philosophical: "If this was the biggest oil discovery, so what? More oil. But gold is different...It brings up more emotions. It clouds the minds of people." It clearly fogged the mind of his client. I later learned that Barrick, last November, couldn't find gold in many Bre-X samples. "This can't be a scam!" Munk screamed at his deputies. "Do some more tests! Figure it out! I know it's there, okay? You confirm it's there."
I looked forward to seeing the gold. After four days in Jakarta, Felderhof joined me on the flight to Balikpapan, the only place in Borneo with a runway big enough to handle the plane. During the trip he explained that Bre-X had spent more than $1 million on a social-development program for the tribe of Christian Dayaks that comprised the bulk of the 400 workers. "I've always been interested in developing people," he said. From Balikpapan, it was an exhilarating two-hour jaunt in a helicopter to Busang. The dense, swampy jungle stretched as far as the eye could see. Felderhof leaned over and said that a chopper once made an emergency landing in the area. "When the pilot was found, four days later, his body was covered with leeches," yelled Felderhof, over the roar of the engine. "Kkh! Kkh! Kkh!" Little did I know that, six weeks later, Felderhof's sidekick, de Guzman, would apparently throw himself out of the same chopper we were sitting in. It would also take four days to find the body, which had been partly devoured by wild pigs and other creatures.
Once on the ground, you would never know that this wasn't the real deal. What a production! If Busang was a Hollywood set, the 2,000 Dayaks were the extras. Bre-X had electrified their village, built a new church, opened a kindergarten, and organized sewing classes for the local women. A swath of jungle had been cleared for an airport. Bre-X planned to open a fishery and a poultry-farming venture to enable the tribe to sell products to the mine.
I shared a cigar with a young villager who had just received a scholarship from Bre-X to study engineering. I met Pebit, the barefoot Dayak leader, as he was helping construct new homes for the workers--a tribal Levittown, courtesy of Bre-X. Through a translator, Pebit boasted that it was his decision to sacrifice a pig to God that "allowed the gold to be pulled from the ground." Then there was the army of young geologists working the site. At the exploration camp, I drank Bintang (a local beer) deep into the night with ten of these workers, many of whom were fresh out of geology school in Canada, Indonesia, or the Philippines. As we listened to wild monkeys screech like sirens in the darkness, the young men talked about the rigors of life in the bush. They complained about the grueling work schedule (eight weeks on, two weeks off) and the lack of sex. But they believed they were making history. They were the geological equivalent of batboys for the World Champion Yankees. They didn't know that they were pawns in a crooked game that was fixed from the get-go.
After two days, my tour was over. I saw no gold. But then again, I didn't know what real gold was supposed to look like buried in those long, tubular core samples. My return trip included a seven-hour speedboat ride down the narrow Mahakam River with Cesar Puspos, de Guzman's 36-year-old deputy. We spent the day waving to the locals, who lived in shabby huts and washed in the muddy water they used for defecation. Puspos, by contrast, had struck it rich. He drove a BMW. He described how de Guzman, "my mentor," awakened him in the middle of the night in a frenzy to announce that he had solved Busang's geological puzzle. When we arrived at Bre-X's office in the city of Samarinda, I noticed huge piles of core sample bags and persuaded Puspos to climb atop for a picture. Investigators say Bre-X's samples were "probably" salted in Samarinda before being delivered to testing labs in Balikpapan. (Walsh had once said that the bags were transported directly from Busang to the labs.)
After a few more days in Jakarta, I returned to the States on February 17. Bre-X soon unraveled. Even then, many believers chose to stay blind. In March, after de Guzman's death, Barrick's Peter Munk told FORTUNE, "I don't believe that those guys salted the mine...you couldn't have fooled that many analysts for that long." When Freeport said its drilling showed "insignificant" gold, Bre-X's flacks at Hill & Knowlton suggested that Freeport was behind a scheme to lower the stock price (see following box). The last time I heard from Walsh, March 20, he left me a phone message confirming some arcane historical facts in my story--a day after de Guzman's death and a week after Freeport called Walsh with the news that they were coming up dry at Busang. This is a crook? Or the Mr. Magoo of mining?
Looking back, some things seemed suspicious. Like the "accidental" fire at Busang that destroyed a building containing de Guzman's papers and visible gold samples. I was also disappointed to see no gold at the century's biggest gold deposit. A geologist, Steve Hughes, took me through the bush to a creek. We panned. We found nothing. "That's strange," said Hughes. "You'd think we'd find something." The next day I needled Felderhof, telling him I had bad news for Bre-X. "No gold, huh?" he snapped back. "Kkh! Kkh! Kkh!" There was another peculiar moment. In one of my last meetings in Jakarta with Felder-hof, de Guzman walked in. I rose and slapped him on the back, congratulating him on Freeport's emerging as Bre-X's new partner. He should have been thrilled. Instead, he was stone cold. Grim. Icy. He didn't even look at me. It was clear he wanted to talk to Felderhof alone.
No matter who pulled off the crime, Bre-X has left a mother lode of victims--from individual investors to the poor tribal people counting on the mine to earn a meager living. But even the pros got burned in this tale of greed. Recently I caught up with MacIntosh of J.P. Morgan, the Bre-X banker. We'd shared several meals in Jakarta, where he jabbered for hours about how the gold mine would be the most lucrative in the world. Doug is a mining engineer with 30 years of experience. I was curious how it felt to be suckered. "I have been surprised at every turn of this thing," he said, noting how fortunate I was that we had held the presses. "I hope that we're as lucky as you have been." Not a chance, mate.
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Link: http://www.sgrm.com/art45.htm
The Bre-X Gold Scandal
From Andrew Alden,
First there is a gold mountain, then there is no mountain
Start with the biggest gold deposit ever reported, in the headwaters of the Busang River in the steaming jungle of Borneo. The Canadian company Bre-X Minerals Ltd. didn't know that when it bought rights to the site in 1993. But after it hired a high-living geologist to map the ore body, the deposit, along with the fever dreams that always accompany gold, grew to monster size—by March 1997 that geologist was talking about a 200-million-ounce resource. You do the math at, say US$350 per ounce.
Bre-X prepared for big times ahead by building a gold-plated Web site, where you could generate your own Bre-X stock chart to follow its meteoric rise. It also had a chart showing the equally meteoric rise of the estimated gold resource: together, those two pages could infect anyone with gold fever.
Bigger mineral companies took notice. Some made takeover offers, as did the Indonesian government—that is, president Suharto and his powerful family. Bre-X owned more of this lode than seemed prudent for such a small, inexperienced foreign firm. The government suggested that Bre-X share its fortunate surplus with the people of Indonesia and with Barrick, a firm tied to Suharto's ambitious daughter Siti Rukmana. (Barrick's advisors, among them former president George Bush and ex-prime minister of Canada Brian Mulroney, also favored this scheme.) Bre-X in turn enlisted Suharto's son Sigit Hardjojudanto on its side.
To end the contretemps, family friend Mohamad "Bob" Hasan stepped in to offer all sides a deal. The American firm Freeport-McMoRan Copper & Gold (led by another old Suharto friend) would run the mine, Indonesian interests would share the wealth, Bre-X would keep 45 percent of the ownership, and Hasan for his pains would accept a share possibly worth, oh, a billion or so. When asked what he was paying for this stake, Hasan said, "There is no payment, no nothing. It is a very clean deal." (You may hear a voice saying "Forget it, Jake. It's Indonesia-town.")
The deal was announced on February 17, 1997. Freeport went to Borneo to start its own due-diligence drilling. Suharto was ready to sign a contract after this step, locking in Bre-X's land rights for 30 years and starting the flood of gold. But just four weeks later, Bre-X's geologist at Busang, Michael de Guzman, exited his helicopter (250 meters in the air at the time), an evident suicide. On March 26 Freeport reported that its due-diligence cores, drilled only a meter and a half from Bre-X's, showed "insignificant amounts of gold." The next day Bre-X stock lost almost all of its value.
Freeport brought more samples to its headquarters under armed guard. Bre-X commissioned a review of Freeport's drilling; it recommended more drilling. Another review focusing on the chemical assays caused Bre-X to clam up completely on April 1, and Suharto's signature was postponed.
Bre-X blamed the Web. CEO David Walsh told a fawning Calgary Herald reporter that the meltdown began when scurrilous local rumors in Indonesia were "picked up by one of the ghost writers on the Internet on the chat page or whatever." The whole sorry interview is preserved on the Internet Archive.
Further reviews took the rest of April. Meanwhile, disquieting details began to arise. Industry journalists soon found evidence that the Busang ore samples had been "salted" with gold dust.
On Friday April 11, Northern Miner magazine put a "news flash" on its Web site laying out three lines of evidence that Bre-X had been duped.
First, contrary to company statements, Busang core samples had been prepared for assay in the jungle, not in the testing lab. Videotape made by a visitor to the field site showed the humble machines common in assay labs—hammer mills, crushers, and sample splitters. Well-labeled sample bags clearly had finely crushed ore in them. Security was lax enough that samples could easily have been spiked with gold.
Second, the local inhabitants had begun panning for gold in the Busang River, but in two years they never found any. Yet Bre-X claimed that gold was visible, a sign of unusually rich ore. And de Guzman's technical report, confusingly, called the gold submicroscopic, which is typical of hard-rock gold ore.
Third, the assayer that tested the samples said the gold was predominantly in visible-sized grains. Also, the grains showed signs consistent with being typical river-panned gold dust, such as rounded outlines and rims depleted in silver. The assayer dodged the 64-billion-dollar question, saying that there were indeed ways for hard-rock gold grains to acquire rounded edges—but the argument was a fig leaf.
Meanwhile a storm of securities lawsuits arose around Bre-X, which vigorously protested the whole unfortunate series of misunderstandings. But it was too late. The collapse of Bre-X cast a cloud over the gold mining industry that lasted into the next century.
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Link: http://geology.about.com/cs/mineralogy/a/aa042097.htm
Fraud charge filed against former Refco CEO By Adam Shell and Elliot Blair Smith, USA TODAY
Thu Oct 13, 6:34 AM ET
Former Refco (RFX) CEO Phillip Bennett was charged Wednesday with one count of criminal securities fraud in a dramatic reversal of fortune that is proving far more costly than the approximately $545 million in trading losses he is accused of hiding from his firm.
U.S. Attorney Michael Garcia said authorities worked "around the clock" to bring the criminal charge against Bennett, 57, after the futures trading giant Refco disclosed Monday that an internal investigation had uncovered the alleged fraud at its expense.
The disclosure launched a sell-off of firm shares that erased 62% of its value in three days of heavy trading.
According to the criminal complaint, Bennett shifted trading debts for which he personally was responsible off the firm's books each quarter, improving the firm's appearances of profitability. He paid unidentified partners to take custody of the IOUs before moving them back, never disclosing his responsibility for them.
The trading losses date to the emerging markets crisis of 1997. Refco spokesman Rob Solomon said, "We're cooperating with authorities." An attorney for Bennett had no comment. On Monday, the executive repaid $430 million to the firm and took a leave of absence. He was arrested Tuesday evening, arraigned in federal court in New York and then released after posting a $50 million bond and $5 million in cash.
The criminal complaint says Bennett financed one bogus debt swap in February, just before the firm's fiscal year ended, by ordering a subsidiary, Refco Capital Markets, to lend an unidentified customer $335 million that was repaid two weeks later. At the time, that unit's chief was Santo Maggio, already under investigation by the Securities and Exchange Commission in an unrelated short-selling scheme. The firm put Maggio on leave Monday. He has not been charged with wrongdoing.
The SEC and Commodity Futures Trading Commission also are investigating Refco's finances.
John Vita, a spokesman for Refco's auditor, Grant Thornton, said the alleged transfers of Bennett's debts were "specifically hidden from us." Vita said, "If he is responsible for this deception, we believe this would support serious charges."
Last year, Bennett negotiated the sale of Refco to private equity firm Thomas H. Lee Partners, which took it public. The IPO had lifted the value of Bennett's personal stake from $382.5 million to about $1.4 billion.
Plaintiff's attorney Steve Schulman, whose firm filed the first shareholder lawsuit against Refco, said the criminal complaint "provides further corroboration, if any was needed, that there was a serious fraud and theft of shareholders' money."
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Link: http://news.yahoo.com/s/usatoday/20051013/bs_usatoday/fraudchargefiledagainstformerrefcoceo
How Bennett Pulled off his $500 Million Refco Scam (Thursday, October 20, 2005)
The New York Post explains:
Refco Inc.'s former boss Phillip R. Bennett duped some of the world's most sophisticated financial corporations by hiding almost $500 million in a huge line of credit the bankrupt commodities broker gave to hedge fund Liberty Corner Advisors.
New Jersey-based Liberty Corner had a $5 billion line of credit with Refco that it used to trade fairly low-risk government securities through Refco's prime brokerage unit, Refco Capital Markets, according to people close to the company.
Every quarter, Bennett would transfer the debt onto Liberty's books.
Because of its huge credit line and low-risk trading strategy, the $500 million or so didn't raise any red flags with Refco's outside auditors and other big financial institutions responsible for selling Refco's shares to public investors, according to sources close to the bankrupt firm.
"Liberty's debt would go from $3.5 billion to $3.9 billion every quarter but that's not something that would normally cause alarm," said one source familiar with the company.
Here's an interesting question: What did Liberty Corner execs know and when did they know it?
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Link: http://stocknewsdirect.com/2005/10/how-bennett-pulled-off-his-500-million.html
T.H. LEE TAKES A BATH AFTER REFCO SCAM, INVESTIGATION
By ZACHERY KOUWE
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October 12, 2005 -- One of Wall Street's most respected investors has taken a $721 million beating over the last two days as shares of Refco Inc. have plummeted on revelations of an accounting scandal and a Securities and Exchange Commission probe.
Thomas H. Lee Partners, named after its legendary billionaire founder, owns roughly 49 million shares of Refco through its $6.1 billion buyout fund.
Shares of Refco, one of the world's largest commodities brokerage firms, dropped 11 percent yesterday to end the day at $13.85.
They fell 45 percent on Monday after Chief Executive Phillip R...
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Link: http://www.nypost.com/business/55203.htm
Disaster in the Making
As early as 1925, then-Secretary of Commerce Hoover had warned President Coolidge that stock market speculation was getting out of hand. Yet in his final State of the Union Address, Coolidge saw no reason for alarm. "No Congress...ever assembled has met with a more pleasing prospect than that which appears at the present time"...said Coolidge early in 1929. "In the domestic field there is tranquility and contentment...and the highest record of prosperity in years."
Al Smith's campaign manager, General Motors executive John J. Raskob, agreed. In an article entitled "Everybody Ought to be Rich" Raskob declared, "Prosperity is in the nature of an endless chain and we can break it only by refusing to see what it is." President-elect Hoover disagreed. Even before his inauguration he urged the Federal Reserve to halt "crazy and dangerous" gambling on Wall Street by increasing the discount rate the Fed charged banks for speculative loans. He asked magazines and newspapers to run stories warning of the dangers of rampant speculation.
Once in the office, the new president ordered a reluctant Andrew Mellon, his holdover secretary of the treasury, to promote the purchase of bonds instead of stocks. He sent his friend Henry Robinson, a Los Angeles banker, to convey a cautionary message to the financiers of Wall Street--and received in return a long, scoffing memorandum from Thomas W. Lamont of J.P. Morgan and Company. When the Federal Reserve Board that August did take steps to check the flow of speculative credit, New York bankers defied Washington, the National City Bank alone promising $100 million in fresh loans. An angry Hoover let the president of the New York Stock Exchange know that he was thinking of regulatory steps to curb stock manipulation and other excesses. Yet he undercut his own threat by placing ultimate responsibility for such measures on New York State's new governor, Franklin D. Roosevelt.
Presidents in 1929 were not supposed to regulate Wall Street, or even talk about the gyrating market for fear of inadvertently setting off a panic. Hoover had his own reasons for keeping quiet. His conscience was pained after a friend took his advice to buy an issue that later nosedived. "To clear myself," the president told intimates, "I just bought it back and I have never advised anybody since."
By early September, 1929 the market was topping out, some eighty two points above its January plateau. In eighteen months, General Electric had tripled in value, reaching $396 per share. Other blue chips, fueled by more than $8 billion in brokers' loans, enjoyed similar rises. The last week of October, however, brought a terrible reckoning. On October 24 alone, radio stocks lost 40% of their paper value. Montgomery Ward surrendered thirty-three points. Big bankers tried and failed to stem the dizzying decline in U.S. Steel, a bellwether stock.
A Day of Reckoning
On Black Tuesday, the twenty-ninth, the market collapsed. In the words of a gray haired Stock Exchange guard, "They roared like a lot of lions and tigers. They hollered and screamed, they clawed at one another collars. It was like a bunch of crazy men. Every once in a while, when Radio or Steel or Auburn would take another tumble, you'd see some poor devil collapse and fall to the floor."
In a single day, sixteen million shares were traded--a record--and thirty billion dollars vanished into thin air. Westinghouse lost two thirds of its September value. DuPont dropped seventy points. The "Era of Get Rich Quick" was over. Jack Dempsey, America's first millionaire athlete, lost $3 million. Cynical New York hotel clerks asked incoming guests, "You want a room for sleeping or jumping?"
Refusing to accept the "natural" economic cycle in which a market crash was followed by cuts in business investment, production and wages, Hoover summoned industrialists to the White House on November 21, part of a round robin of conferences with business, labor, and farm leaders, and secured a promise to hold the line on wages. Henry Ford even agreed to increase workers' daily pay from six to seven dollars. From the nation's utilities, Hoover won commitments of $1.8 billion in new construction and repairs for 1930. Railroad executives made a similar pledge. Organized labor agreed to withdraw its latest wage demands.
The president ordered federal departments to speed up construction projects. He contacted all forty-eight state governors to make a similar appeal for expanded public works. He went to Congress with a $160 million tax cut, coupled with a doubling of resources for public buildings and dams, highways and harbors. In December of 1929, Hoover's friend Julius Barnes of the U.S. Chamber of Commerce presided over the first meeting of the National Business Survey Conference, a task force of four hundred leading businessmen designated to enforce the voluntary agreements. Looking back at the year, the "New York Times" judged Commander Richard Byrd's expedition to the South Pole-- not the Wall Street crash-- the biggest news story of 1929.
Praise for the President's intervention was widespread. "No one in his place could have done more," concluded the "New York Times" in the spring of 1930, by which time the Little Bull Market had restored a measure of confidence on Wall Street. "Very few of his predecessors could have done as much." On February 18 Hoover announced that the preliminary shock had passed, and that employment was again on the mend. In June, a delegation of bishops and bankers called at the White House to warn of spreading joblessness. Hoover reminded them of his successful conferences with business and labor, and the explosion of government activity and public works designed to alleviate suffering. "Gentlemen," he concluded, "you have come six weeks too late".
Boom and Bust
For most of our history Americans have been resigned to the "boom and bust" school of economics. When the economy got overheated and speculation ran rampant, a crash was unavoidable. Under such circumstances the best government could do was to do nothing that might make a bad thing worse. "Panics" had occurred in the 1830's under President Martin Van Buren, in the 1850s under James Buchanan, during Ulysses Grant's term in the 1870s and, most notably, under Grover Cleveland in the 1890s.
None of these presidents did much to stem the deflation in prices, contraction of investment, and loss of jobs that resulted--for the simple reason that standard economic theory held there was little if anything they could do. Then, in 1921, a post war slump led President Warren Harding to name Hoover as chairman of a special conference to deal with unemployment. "There is no economic failure so terrible in its import," Hoover declared at the time, "as that of a country possessing a surplus of every necessity of life in which numbers...willing and anxious to work are deprived of dire necessities. It simply cannot be if our moral and economic system is to survive.
This view explains President Hoover's vigorous counterattack in the wake of Wall Street's initial tumble. Not all of his advisers were so willing to abandon Boom and Bust theories. As late as 1930, Secretary of the Treasury Andrew Mellon held that a panic might not be such a bad thing. "It will purge the rottenness out of the system," he added. "High costs of living...will come down. People will work harder, live a moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people." Mellon lost out, however, and was packed off to the Court of Saint James.
Why the "Great" Depression?
Economists are still divided about what caused the Great Depression, and what turned a relatively mild downturn into a decade long nightmare. Hoover himself emphasized the dislocations brought on by World War I, the rickety structure of American banking, excessive stock speculation and Congress' refusal to act on many of his proposals. The president's critics argued that in approving the Smoot-Hawley Tariff in the spring of 1930, he unintentionally raised barriers around U.S. products, worsened the plight of debtor nations and set off a round of retaliatory measures that crippled global trade.
Neither claim went far enough. In truth Hoover's celebration of technology failed to anticipate the end of a postwar building boom, or a glut of 26,000,000 new cars and other consumer goods flooding the market. Agriculture, mired in depression for much of the 1920's, was deprived of cash it needed to take part in the consumer revolution. At the same time, the average worker's wages of $1,500 a year failed to keep pace with the spectacular gains in productivity achieved since 1920. By 1929 production was outstripping demand.
The United States had too many banks, and too many of them played the stock market with depositors' funds, or speculated in their own stocks. Only a third or so belonged to the Federal Reserve System on which Hoover placed such reliance. In addition, government had yet to devise insurance for the jobless or income maintenance for the destitute. When unemployment resulted, buying power vanished overnight. Since most people were carrying a heavy debt load even before the crash, the onset of recession in the spring of 1930 meant that they simply stopped spending.
Together government and business actually spent more in the first half of 1930 than the previous year. Yet frightened consumers cut back their expenditures by ten percent. A severe drought ravaged the agricultural heartland beginning in the summer of 1930. Foreign banks went under, draining U.S. wealth and destroying world trade. The combination of these factors caused a downward spiral, as earning fell, domestic banks collapsed, and mortgages were called in. Hoover's hold the line policy in wages lasted little more than a year. Unemployment soared from five million in 1930 to over eleven million in 1931. A sharp recession had become the Great Depression.
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Gallery Index | 1:Years of Adventure | 2:The Humanitarian Years | 3:The Roaring Twenties | 4:The Wonder Boy | 5:The Logical Candidate | 6:The Great Depression | 7:From Hero to Scapegoat | 8:An Uncommon Woman | 9:Counselor to the Republic
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Last updated: August 29, 2001
The Herbert Hoover Presidential Library-Museum is administered by the
National Archives and Records Administration
(Here's the link: http://hoover.archives.gov/exhibits/Hooverstory/gallery06/gallery06.html )
Great Depression
Related: United States History
in U.S. history, the severe economic crisis supposedly precipitated by the U.S. stock-market crash of 1929. Although it shared the basic characteristics of other such crises (see depression ), the Great Depression was unprecedented in its length and in the wholesale poverty and tragedy it inflicted on society. Economists have disagreed over its causes, but certain causative factors are generally accepted. The prosperity of the 1920s was unevenly distributed among the various parts of the American economy—farmers and unskilled workers were notably excluded—with the result that the nation's productive capacity was greater than its capacity to consume. In addition, the tariff and war-debt policies of the Republican administrations of the 1920s had cut down the foreign market for American goods. Finally, easy-money policies led to an inordinate expansion of credit and installment buying and fantastic speculation in the stock market. The American depression produced severe effects abroad, especially in Europe, where many countries had not fully recovered from the aftermath of World War I; in Germany, the economic disaster and resulting social dislocation contributed to the rise of Adolf Hitler. In the United States, at the depth (1932-33) of the depression, there were 16 million unemployed—about one third of the available labor force. The gross national product declined from the 1929 figure of $103,828,000,000 to $55,760,000,000 in 1933. The economic, agricultural, and relief policies of the New Deal administration under President Franklin Delano Roosevelt did a great deal to mitigate the effects of the depression and, most importantly, to restore a sense of confidence to the American people. Yet it is generally agreed that complete business recovery was not achieved and unemployment ended until the government began to spend heavily for defense in the early 1940s.
Bibliography: See D. Wecter, The Age of the Great Depression (1948, repr. 1956); A. M. Schlesinger, Jr., The Crisis of the Old Order (1957); D. A. Shannon, ed., The Great Depression (1960); A. U. Romasco, The Poverty of Abundance (1965); G. Rees, The Great Slump (1970); C. P. Kindleberger, The World in Depression (1973); D. M. Kennedy, Freedom from Fear (1999); T. H. Watkins, The Hungry Years (1999).
Columbia Encyclopedia, Sixth Edition, Copyright (c) 2005.
(Link is here: http://www.encyclopedia.com/html/G/GreatD1ep.asp )
Crashing Hopes: The Great Depression
In 1929, Yale University economist Irving Fisher stated confidently: "The nation is marching along a permanently high plateau of prosperity." Five days later, the bottom dropped out of the stock market and ushered in the Great Depression, the worst economic downturn in American history. Although Americans often believe that the Crash was the starting point of the Great Depression, many historians point out that it wasn't the sole cause. This lecture examines the roots of the Crash and the effect of the Great Depression on the American public.
Some questions to keep in mind:
Why were Americans so confident in the stock market in the years leading up to the Great Depression?
How did the Psychology of Consumption shape the causes and effects of the Crash?
How did stock market investing change during the 1920s? Who were the main investors and how did they pay for their investments?
Explain the statement: "By 1929, much of the money that was invested in the stock market did not actually exist."
Why did Hoover choose the term "depression" for this economic downturn? Why do you think this term has remained part of the American vocabulary ever since?
Optimism and Prosperity
When Americans elected Herbert Hoover President in 1928, the mood of the general public was one of optimism and confidence in the United States economy. Most people believed that national prosperity would continue indefinitely. In his acceptance speech for the Republican party nomination for the presidency, Hoover had said:
"We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from among us."
(The rest of this article and it's photo's are here: http://us.history.wisc.edu/hist102/lectures/lecture18.html )
The Great Depression information ( USA) - Pictures, causes of the Great depression.
(Here's the link to the webpage: http://www.indianchild.com/the_great_depression.htm )
The Great Depression took place from 1930 to 1939. During this time the prices of stock fell 40%. 9,000 banks went out of business and 9 million savings accounts were wiped out. 86,00 businesses failed, and wages were decreased by an average of 60%. The unemployment rate went from 9% all the way to 25%, about 15 million jobless people.
Causes of The Great depression
* Unequal distribution of wealth
* High Tariffs and war debts
* Over production in industry and agriculure
* Stock market crash and finacial panic
Effects of The Great depression
* Widespread hunger, poverty, and unemployment
* Worldwide economic crisis
* Democratic victory in 1232 election
* FDR's New Deal
It was appropriate that the terrible economic slump of the 1930s started in the United States, to which Europe seemed to have surrendered economic leadership during the Great War and on which she had been dependent ever since.
Stock Market Crash
The stock market crash that began on a black Friday in October 1929 and deepened in the ensuing months had immediate repercussion in Europe. Indeed, even before this, the superheated boom in stock prices that marked the bull market of 1928 siphoned money from Europe. The pricking of the bubble sent shock waves throughout the world.
Large exports of American capital had helped sustain Europe, besides providing an outlet for American surpluses of capital, during the 1920s. Investment in European bonds now contracted sharply and swiftly, as banks that were "caught short" with too many of their assets invested in securities desperately tried to raise money. By June 1930, the price of securities on Wall Street was about 20 percent, on average, of what it had been prior to the crash; between 1929 and 1932 the Dow-Jones average of industrial stock prices fell from a high of 381 to a low of 41!
The American market for European imports also dropped sharply as the entire American economy went into shock; and, to compound trouble, congress insisted on passing a high tariff law in 1930, against the advice of almost all economists. Effective operation of the international economy required that the United States import goods to allow foreign governments to pay for American loans. Moreover, the raising of tariffs set off a chain reaction as every government tried to protect itself against an adverse trade balance leading to currency deterioration. The result was a drying up of world trade that further fueled the economic downturn.
These exceptions may seem more numerous than the rule, but the United States and most parts of Europe did enjoy relatively favorable economic conditions between 1924 and 1930. But it turned out that this prosperity rested on American loans and American markets, which now almost vanished. A European economy still recovering from the trauma of the war and its aftermath was too frail to weather this storm.
The Great Depression
Indices of Industrial Production, 1929-1938,
in Major European Countries
(1937 = 100)
Year 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938
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France 123 123 105 91 94 92 88 95 100 92
Germany 79 69 56 48 54 67 79 90 100 92
Italy 90 85 77 77 82 80 86 86 100 100
Gr. Br. 77 74 69 69 73 80 82 94 100 101
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Unemployment (in thousands)
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938
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France neglig. 13 64 301 305 368 464 470 380 402
Germany 1,899 3,070 4,520 5,575 4,804 2,718 2,151 1,593 912 429
Italy 301 425 734 1,006 1,019 964 - - 874 810
Gr. Br. 1,216 1,917 2,630 2,745 2,521 2,159 2,036 1,755 1,484 1,791
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The business cycle had long had its ups and downs. If this downswing turned out to be words than any previous one, the reason must be sought in the profound structural changes heaped on top of a normal cycle. Fulcrum of the world economy, the United States had not yet learned how to play that part, as its erratic financial policies and high protective tariffs indicated. Deeper changes were going on in the world. Policies of "autarchy" had developed after the war an were to be perpetuated during the Great Depression; that is, countries that were no longer prepared to trust the international order tried to insulate their economies by tariffs, import quotas, or a managed currency. During the 1920s, while sometimes readjusting the rate at which their currencies were exchanged for gold, most nations clung to the gold standard, which facilitated international trade by permitting currencies to be freely exchanged in terms of gold. But beginning in 1931, when Great Britain was driven off the gold standard, country after country left it in order to protect themselves against a flight of gold leading to deflation and unemployment. The flight from gold was followed by all kinds of nationalist economic policies - exchange controls, import quotas, tariffs. International trade was thus further impaired.
Perfect competition was obviously lacking in an era increasingly prone to both corporate business monopolies or allowance for wars, revolutions, dictatorships, the dismemberment of countries, and all kinds of political factors.
Whatever the causes, panic soon spread through Europe. In 1931, after the World Court refused to allow Austria to enter a customs union with Germany, that economically distressed country collapsed. The central bank failed, touching off a panic that threatened Great Britain next. president Herbert Hoover of the United States proposed a moratorium on all war debts and reparations, but French opposition delayed its acceptance.
One of the most punishing features of the depression had been the drastic fall in agricultural prices, together with other primary products. The years from 1925 to 1928 brought good harvests all over the world, the latter a record in wheat. The price of grain tumbled just as the industrial and financial slump hit, compounding the crisis. Loss of urban and international markets afflicted farmers already in trouble from overproduction and, frequently, from a burden of debt incurred in expanding production and buying agricultural machinery. With unemployed workers suffering from hunger, the sight of farmers refusing to harvest crops because the price was too low to make it worthwhile drove home the bitter lesson of poverty in the midst of plenty, the curse of Midas fallen on man. But by 1936 agricultural prices had risen somewhat........
By 1933, 26.6% of people who were wage earners were unemployed. Workers were either fired, laid off, or had extra work to do with less pay if they still had their job. The domestic market was affected and many lost their lands because they couldn't keep up with the payments, and most factory workers had to work twice as had to earn the same amount of money they did before the Depression hit.
The Savings and Loan Scandal: The Untold Story
Article # : 18941
Section : CURRENT ISSUES
Issue Date : 2 / 1991 3,496 Words
Author : Glenn R. Simpson
Glenn R. Simpson covers the Keating case for the Capitol Hill newspaper Roll Call.
The National Mortgage News, the Orange County Register, the Mesa (Arizona) Tribune, Regardie's magazine: These are some of the unlikely press heroes of the Charles Keating-Lincoln Savings and Loan scandal. Along with some bigger newspapers like the Detroit News, the Los Angeles Times, the San Francisco Chronicle, the Dallas Morning News, the Arizona Republic, and the Wall Street Journal, these journalistic bush leaguers made major contributions to uncovering the financial misdeeds and vast subterranean web of political influence spun by accused racketeer Charles H. Keating, Jr.
Without them, the story of one of the most sensational American scandals of the 1980s would in all likelihood have remained untold. For the two most politically influential news organs in America, the Washington Post and the New York Times, have snoozed--albeit fitfully--through most of this complex but sensational tale of venality, greed, and political corruption.
One accomplished investigative reporter for a medium-sized West Coast paper bitterly calls the Post and the Times "the Pravdas." When it comes to the Keating scandal, that is a devastatingly accurate description; both papers virtually dictate what is news--even the television networks take their cues from the two dailies-and little, indeed, has seemed newsworthy to them about Keating.
This reporter has written several ground-breaking stories about the Keating affair, some as recently as last fall, but they have been ignored by the Pravdas and, as far as Washington is concerned, might as well never have been written. It is a familiar plaint among the small community of Keating investigators in the press.
On May 24, 1988, an ironic memorandum was written by a senior aide on the House Banking Committee. He urged his boss, then-Banking Committee Chairman Fernand St. Germain (a Rhode Island Democrat who in November of that year became one of the first electoral casualties of the S&L scandal), to investigate the long-controversial Lincoln.
The thrift, the aide wrote, "is now very much in the eyes of the various national investigative reporters--Jack Anderson, Mike Binstein, Brooks Jackson up front and others like [Kathleen] Day not far behind. My guess, based on conversations with Binstein and Jackson, in particular, is that Lincoln smells and that they will track the smell like sharks after blood."
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Copyright © 2004 The World & I. All rights reserved.
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ps. The link to this article is here: http://www.worldandihomeschool.com/public_articles/1991/february/wis18941.asp
Savings and Loan crisis
From Wikipedia, the free encyclopedia.
(Redirected from Savings and Loan scandal)
The Savings and Loan crisis of the 1980s was a wave of savings and loan failures in the USA, caused by mismanagement, rising interest rates, failed speculation, fluctuation in real estate values, and, in some cases, fraud. The ultimate cost of the crisis is estimated to have totalled around USD$150 billion, about $125 billion of which was directly borne by the U.S. government, which contributed to the soaring deficits of the early 1990's. The concomitant slowdown in the finance industy and the real estate market may have been a contributing cause of the 1990-1991 economic recession. Cost of Savings & Loan Crisis
Contents
1 Background
2 Nature of the Deregulation
3 External links
4 References
Background
Many banks, but particularly savings and loan institutions, were experiencing an outflow of low rate deposits, as depositors moved their money to the new high interest money market funds. At the same time, the institutions had much of their money tied up in long term mortgages which, with interest rates rising, were worth far less than face value.
In 1980, under the Carter administration, the limits on deposit insurance were raised from $40,000 to $100,000 per account. Early in the Reagan administration, savings and loan institutions ("S&Ls") were deregulated (see the Garn - St Germain Depository Institutions Act of 1982), putting them on an equal footing with commercial banks. S&Ls (thrifts) could now pay higher market rates for deposits, borrow money from the Federal Reserve, make commercial loans, and issue credit cards.
Nature of the Deregulation
The deregulation of S&Ls did not have the effect of causing them to be under the same regulations as banks. Firstly, thrifts could choose to be under either a state or a federal charter. Deregulation at the federal level caused a race to the bottom at the state level (especially in California) because state regulators were paid by the thrifts they regulated, and they didn't want to lose that money.
In an effort to take advantage of the real estate boom and high interest rates of the early 1980s, many S&Ls lent far more money than was prudent, and in risky types of ventures in which many S&Ls were not competent. Whereas insolvent banks in the United States were typically detected and shut down quickly by bank regulators, the S&L regulators were apparently surprised by deregulation, and not sufficiently competent or staffed to perform the due diligence needed to regulate effectively.
The most important contributor to the problem was deposit brokerage. Deposit brokers, somewhat like stockbrokers, are paid a commission by the customer to find the best CD (Certificate of deposit) rates and place their customers' money in those CDs. These CDs, however, are usually short term 100,000.00 CDs. Previously banks and thrifts could only have five percent of their deposits be brokered deposits; the race to the bottom caused this limit to be lifted. A small one-branch thrift could then attract a large number of deposits simply by offering the highest rate. In order to make money off this expensive money, it had to lend at even higher rates, which means that it had to make more risky investments. This system was made even more damaging when certain deposit brokers, instituted a scam known as "linked financing." In "linked financing" a deposit broker would approach a thrift and say that they would steer a large amount of deposits to that thrift if the thrift would loan certain people money (the people however were paid a fee to apply for the loans and told to give the loan proceeds to the deposit broker). This caused the thrifts to be tricked into taking on bad loans.
A large number of S&L customers' defaults and bankruptcies ensued, and the S&Ls that had overextended themselves were forced into bankruptcy themselves. The U.S. government agency FSLIC, which at the time insured consumers' S&L accounts in the same way the FDIC insures consumers' bank accounts, then had to repay all the consumers whose money was lost.
The Federal Home Loan Bank Board reported in 1988 that fraud and insider abuse were the worst aggravating factors in the wave of S&L failures. The most notorious figure in the S&L crisis was probably Charles Keating, who headed Lincoln Savings of Irvine, California. Keating was convicted of fraud, racketeering, and conspiracy in 1993, and spent four and one-half years in prison before his convictions were overturned. In a subsequent plea agreement, Keating admitted committing bankruptcy fraud by extracting $1 million from the parent corporation of Lincoln Savings while he knew the corporation would collapse within weeks.
Keating's attempts to escape regulatory sanctions led to the Keating five political scandal, in which five U.S. senators were implicated in an influence-peddling scheme to assist Keating. Three of those senators — Alan Cranston, Don Riegle, and Dennis DeConcini — found their political careers cut short as a result. Two others — John Glenn and John McCain — escaped relatively unscathed.
External links
FDIC: The S&L Crisis: A Chrono-Bibliography
The Cost of Savings & Loan Crisis: Truth & Consequences
References
Inside Job, by Steven Pizzo, Mary Fricker, and Paul Muolo. ISBN 0-07-050230-7
Retrieved from "http://en.wikipedia.org/wiki/Savings_and_Loan_crisis"
This page was last modified 00:45, 28 May 2005. All text is available under the terms of the GNU Free Documentation License (see Copyrights for details).
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ps. Here's the link to this page: http://en.wikipedia.org/wiki/Savings_and_Loan_scandal
The S&L Crisis: A Chrono-Bibliography
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(It's easier to read this if, one goes to the actual webpage which is here: http://www.fdic.gov/bank/historical/s&l/ )
[NOTE: This chronology and bibliography is provided solely for informational purposes. The inclusion or exclusion of a source constitutes neither an endorsement nor a rejection by the FDIC of the opinions expressed in that source.]
General Books and Articles A basic bibliography to provide an overview of the S&L Crisis.
Causes of the S&L Crisis Background materials for understanding what led to the S&L Crisis.
Charles Keating and Lincoln Savings and Loan Details on one of the costliest S&L failures that involved 5 U.S. Senators.
Criminal Activity Associated with S&L Failures The goods on specific criminal investigations of S&L owners and directors.
Depository Institutions Deregulation and Monetary Control Act of 1980 Details on the 1980 law (DIDMCA) that eased the distinctions among savings institutions.
Deregulation of the S&Ls Working papers and analysis covering the deregulation of the S&L industry that led to the crisis.
Financial Institutions Reform Recovery and Enforcement Act (FIRREA) The law enacted in August, 1989, to bail out the S&L crisis and create the Resolution Trust Corporation.
Garn - St Germain Depository Institutions Act of 1982 Analyses of the 1982 law that allowed S&L's to diversify their activities with the view of increasing profits.
Interest Rate Vulnerability Bibliography for understanding S&L interest rates, and S&L vulnerability during this time period.
Southwest Plan The plan to consolidate and package insolvent Texas S&Ls and sell them to the highest bidder.
State Deposit Insurance Funds - Ohio and Maryland S&L failures in Ohio and Maryland and the end of the State Deposit Insurance Funds/
Taxation and Accounting bibliography Understanding the tax and accounting rules for S&L's
1966-1979 Market interest rates fluctuate with increasing intensity and S&Ls experience difficulty with each interest rate rise. Interest rate ceilings prevent S&Ls from paying competitive interest rates on deposits. Thus, every time the market interest rates rise, substantial amounts of funds are withdrawn by consumers for placement in instruments with higher rates of return. This process of deposit withdrawal ("disintermediation") and the subsequent deposit influx when rates rise ("reintermediation") leaves S&Ls highly vulnerable. Concurrently, money market funds become a source of competition for S&L deposits. S&Ls are additionally restricted by not being allowed to enter into business other than accepting deposits and granting home mortgage loans.
1967--State of Texas approves major liberalization of S&L powers. Property development loans of up to 50% of net worth are allowed.
1972--Hunt Commission recommendations would have created federal savings banks to replace S&Ls. The banks would have had additional authority to make commercial loans and invest in commercial paper.
1973--FINE Study would have granted same powers for S&Ls as for banks, including checking accounts. Also recommends consolidation of the regulators. Interest rate insurance was recommended if S&Ls are to remain primarily involved in housing finance.
1978--Financial Institutions Regulatory and Interest Rate Control Act of 1978 enacted. Weak version of previous recommendations. Allows S&Ls to invest up 5% of assets in each of land development, construction, and education loans.
1979--Doubling of oil prices. Inflation moves into double digits for second time in five years.
1980-1982 Statutory and regulatory changes give the S&L industry new powers in the hopes of their entering new areas of business and subsequently returning to profitability. For the first time, the government approves measures intended to increase S&L profits as opposed to promoting housing and homeownership.
March, 1980--Depository Institutions Deregulation and Monetary Control Act (DIDMCA) enacted. The law is a Carter Administration initiative aimed at eliminating many of the distinctions among different types of depository institutions and ultimately removing interest rate ceiling on deposit accounts. Authority for federal S&Ls to make ADC (acquisition, development, construction) loans is expanded. Deposit insurance limit raised to $100,000 from $40,000. This last provision is added without debate.
November, 1980--Federal Home Loan Bank Board reduces net worth requirement for insured S&Ls from 5 to 4 percent of total deposits. Bank Board also removes limits on the amounts of brokered deposits an S&L can hold.
August, 1981--Tax Reform Act of 1981 enacted. Provides powerful tax incentives for real-estate investment by individuals. This legislation helps create a "boom" in real estate and contributes to over-building.
September, 1981--Federal Home Loan Bank Board permits troubled S&Ls to issue "income capital certificates" that are purchased by FSLIC and included as capital. Rather than showing that an institution is insolvent, the certificates make it appear solvent.
1982-1985 Reductions in the Bank Board's regulatory and supervisory staff. In 1983, a starting S&L examiner is paid $14,000 a year. The average examiner has only two years on the job. Examiner salaries are paid through OMB, not the Bank Board. During this period of supervisory and examination retraction, industry growth increases. Industry assets increase by 56% between 1982 and 1985. 40 Texas S&Ls triple in size between 1982 and 1986; many of them grow by 100% each year. California S&Ls follow a similar pattern.
January, 1982--Federal Home Loan Bank Board reduces net worth requirement for insured S&Ls from 4 to 3 percent of total deposits. Additionally, S&Ls are allowed to meet the low net worth standard not in terms of generally accepted accounting principles (GAAP), but of even more liberal regulatory accounting principles (RAP).
April, 1982--Bank Board eliminates restrictions on minimum numbers of S&L stock holders. Previously, it required at least 400 stock holders of which at least 125 had to be from "local community", with no individual owning more than 10% of stock and no "controlling group" more than 25%. Bank Board's new ownership regulation would allow a single owner. Purchases of S&Ls were made easier by allowing buyers to put up land and other real estate, as opposed to cash.
December, 1982--Garn - St Germain Depository Institutions Act of 1982 enacted. This Reagan Administration initiative is designed to complete the process of giving expanded powers to federally chartered S&Ls and enables them to diversify their activities with the view of increasing profits. Major provisions include: elimination of deposit interest rate ceilings; elimination of the previous statutory limit on loan to value ratio; and expansion of the asset powers of federal S&Ls by permitting up to 40% of assets in commercial mortgages, up to 30% of assets in consumer loans, up to 10% of assets in commercial loans, and up to 10% of assets in commercial leases.
December, 1982--In response to the massive defections of state chartered S&Ls to the federal system, Nolan Bill passes in California. Allows California-chartered S&Ls to invest 100% of deposits in any kind of venture. Similar plans adopted in Texas and Florida.
1983--Lower market interest rates return many S&Ls to health. 35% of institutions, however, still sustain losses. 9% of all S&Ls (representing 10% of industry assets) are insolvent by GAAP standards.
March, 1983--Edwin Gray becomes Chairman of the Federal Home Loan Bank Board. Beginning in 1984 and continuing throughout his tenure, regulatory and supervisory measures passed by the Bank Board begin the reversing of deregulation.
November, 1983--Bank Board raises net worth requirement for newly chartered S&Ls to 7%.
March, 1984--Failure of Empire Savings of Mesquite, TX. "Land flips" and other criminal activities are a pattern at Empire. This failure would eventually cost the taxpayers approximately $300 million.
April, 1984--Bank Board moves jointly with the FDIC to attempt to eliminate deposit insurance for brokered deposits. Federal court rejects this attempt in mid-1984 as overstepping statutory limits.
July, 1984--Bank Board requires S&L management to adopt policies and procedures for managing interest rate risk.
January, 1985--Bank Board limits the amount of brokered deposits to 5% of deposits at FSLIC insured institutions failing to meet their net worth requirements. Bank Board also limits direct investment (equity securities, real estate, service corporations, and operating subsidiaries) to the greater of 10% of assets or twice the S&L's net worth, provided the institution meets regulatory net worth.
March, 1985--Ohio bank holiday. Anticipated failure of Home State Savings Bank of Cincinnati, OH and possible depletion of Ohio state deposit insurance fund cause Governor Celeste to close Ohio S&Ls. Eventually, those that can qualify for federal deposit insurance are allowed to reopen.
May, 1985--S&L failures in Maryland eventually cause loss to state deposit insurance fund and Maryland taxpayers of $185 million. Ohio and Maryland S&L failures helped kill state deposit insurance funds.
July, 1985--Chairman Gray begins transfer of federal examiners to the twelve regional Federal Home Loan Banks so that they are no longer overseen by OMB and their salaries are paid directly by the Bank Board system.
August, 1985--Only $4.6 billion in FSLIC insurance fund. Chairman Gray tries to gain support for recapitalizing FSLIC on Capitol Hill. In 1986, GAO estimates the loss to the insurance fund to be around $20 billion.
December, 1985--Bank Board allows S&L examiners to "classify" questionable loans and other assets for the purpose of requiring loan loss reserves.
1986-1989 Compounding of losses as insolvent institutions are allowed to remain open and grow, allowing ever increasing losses to accumulate.
August, 1986--Bank Board raises net worth standard gradually to 6% with up to 2% points offset for reduced interest rate-risk.
1987--Losses at Texas S&Ls comprise more than one-half of all S&L losses nationwide, and of the 20 largest losses, 14 are in Texas. Texas economy in major recession: crude oil prices fall by nearly 50%, office vacancy is over 30%, and real estate prices collapse.
January, 1987--GAO declares FSLIC fund insolvent by at least $3.8 billion. Recapitalization has stalled on Capitol Hill until now by claims of powerful S&L lobbyists that Bank Board regulations are too harsh and arbitrary.
February, 1987--Bank Board requires prior supervisory approval for S&Ls making direct investment in excess of 2.5 times their tangible capital.
April, 1987--Edwin Gray ends his term as chairman of Federal Home Loan Bank Board in June. Before his departure, he is summoned to the office of Sen. Dennis DeConcini. DeConcini, with four other Senators (John McCain, Alan Cranston, John Glenn, and Donald Riegle) question Gray about the appropriateness of Bank Board investigations into Charles Keating's Lincoln Savings and Loan. All five senators, who have received campaign contributions from Keating, would become known as the "Keating Five". The subsequent Lincoln failure is estimated to have cost the taxpayers over $2 billion.
May, 1987--Bank Board begins phasing out the remains of the liberal RAP accounting standards. S&Ls must conform to GAAP accounting standards, as banks do. Effective date of this rule postponed by new Chairman of the Federal Home Loan Bank Board, M. Danny Wall, to 1/1/1989.
August, 1987--Competitive Equality Banking Act of 1987 enacted. The Act authorizes $10.8 billion recapitalization of the FSLIC with only $3.75 billion authorized in any 12-month period. Also contains forbearance measures designed to postpone or prevent S&L closures.
February, 1988--Bank Board introduces the "Southwest Plan" to consolidate and package insolvent Texas S&Ls and sell them to the highest bidder. The strategy is to resolve insolvencies quickly while conserving scarce cash for FSLIC. The Bank Board uses a number of strategies to pay for the difference between assets and liabilities of the failed institutions: FSLIC notes, tax incentives, and income, capital value and yield guarantees. The Bank Board disposes of 205 S&Ls through the Southwest Plan with assets of $101 billion.
November, 1988--George Bush elected President. S&L problem not part of election debate.
1989--President Bush unveils S&L bailout plan in February. In August, Financial Institutions Reform Recovery and Enforcement Act (FIRREA). FIRREA abolishes the Federal Home Loan Bank Board and FSLIC, switches S&L regulation to newly created Office of Thrift Supervision. Deposit insurance function shifted to the FDIC. A new entity, the Resolution Trust Corporation is created to resolve the insolvent S&Ls.
Other major provisions of FIRREA include: $50 billion of new borrowing authority, with most financed from general revenues and the industry; meaningful net worth requirements and regulation by the OTS and FDIC; allocation funds to the Justice Department to help finance prosecution of S&L crimes. Additional bank crime legislation the next year (i.e., the Crime Control Act of 1990) mandates a study by the National Commission on Financial Institution Reform, Recovery and Enforcement to uncover the causes of the S&L crisis, and come up with recommendations to prevent future debacles.
Last Updated 12/20/2002 library@fdic.gov
Savings and Loan Scandal
Here are some facts on the infamous S&L scandal of the eighties which we are still paying for.
The Savings and Loan scandal is the largest theft in the history of the world.
Deregulation eased restrictions so much that S&L owners could lend themselves money.
The Garn Institute of Finance, named after Senator Jake Garn, co-authored the deregulation of the industry and received $2.2 million from industry executives.
Neil Bush, George Bush's son, never servered time in jail for his part in running an S&L into the ground.
Represenative Fernard St. Germain, who was head of the House of Representatives banking, co-authored the deregulation and was voted out of office after other questionable dealings and was sent back to D.C. as an S&L lobbiest.
Charles Keating, when asked if massive lobbying efforts had influenced the government officials, he replies "I certainly hope so."
The rip-off began in 1980 when the government raised the federal insurance on S&L's from $40,000 to $100,000 even though the typical savings account was only around $6000.
Some of the seized assets were a buffalo sperm bank, a racehorse with syphilis, and a kitty litter mine.
James Fail invested $1000 of his own money to purchase 15 failing S&L's. The government reimbursed him $1.85 billion in federal subsidies.
It sometimes took over 7 years to close failing S&L's by the government.
When S&L owners who stole millions went to jail, their sentances were typically one-fifth that of the average bank robber.
The goverment bail out will cost the taxpayers around $1.4 trillion dollars when it is over.
If the White House had stepped in and bailed out the S&L's in 1986 instead of delaying until after the 1988 elections, the cost might have been only $20 billion.
With the money lost from the S&L scandals, the government could have provided prenatal care for every American child for the next 2,300 years.
With the money lost from the S&L scandals, the government could have purchased 5 million average homes.
The authors of "Inside Job", a book about the S&L scandal, found criminal activity at every S&L they investigated.
Facts were taken from"Inside Job" and "It's a Conspiracy! by the National Insecurity Council.
Copyright 1995-2005, Charles R. Grosvenor Jr.
http://www.inthe80s.com/sandl.shtml
The Savings and Loan Scandal and Public Accounting
By Wade Frazier
A Brief Economic History
The Biggest Gold Rush of All Time
The Need for Public Accounting
The Savings and Loan Industry and What Doomed it
The Savings and Loan Gold Rush and Public Accounting
An Enron Postscript
Footnotes
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ps. Go here for these writings: http://www.ahealedplanet.net/savings.htm
FAS Note: This December 1992 document is the penultimate draft of the Senate Foreign Relations Committee report on the BCCI Affair. After it was released by the Committee, Sen. Hank Brown, reportedly acting at the behest of Henry Kissinger, pressed for the deletion of a few passages, particularly in Chapter 20 on "BCCI and Kissinger Associates." As a result, the final hardcopy version of the report, as published by the Government Printing Office, differs slightly from the Committee's softcopy version presented below.--Steven Aftergood
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The BCCI Affair
A Report to the Committee on Foreign Relations
United States Senate
by
Senator John Kerry and Senator Hank Brown
December 1992
102d Congress 2d Session Senate Print 102-140
1.) EXECUTIVE SUMMARY
2.) Introduction and Summary of Investigation
3.) The Origin and Early Years of BCCI
4.) BCCI's Criminality
5.) BCCI's Relationship with Foreign Governments, Central Banks, and International Organizations
6.) BCCI in the United States - Initial Entry and FGB and NBG Takeovers
7.) BCCI in the United States - Part Two: Acquisition, Consolidation, and Consequences
8.) BCCI and Law Enforcement - The Justice Deparment and the US Customs Service
9.) BCCI and Law Enforcement - District Attorney of New York
10.) BCCI and Its Accountants
11.) BCCI, The CIA and Foreign Intelligence
12.) The Regulators
13.) Clark Clifford and Robert Altman
14.) Abu Dhabi: BCCI's Founding and Majority Stockholders
15.) Mohammed Hammoud: BCCI's Flexible Frontman
16.) BCCI And Georgia Politicians
17.) BCCI's Lawyers and Lobbyists
18.) Hill and Knowlton and BCCI's PR Campaign
19.) Ed Rogers and Kamal Adham
20.) BCCI and Kissinger Associates
21.) Capcom: A Case Study of Money Laundering
22.) Legislative and Policy Recommendations
23.) Appendix - Matters For Further Investigation, Witnesses and Writs
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ps. the actual link is here (with all the HTML and writing)
http://www.fas.org/irp/congress/1992_rpt/bcci/05foreign.htm
BCCI'S CRIMINALITY
BCCI's unique criminal structure -- an elaborate corporate spider-web with BCCI's founder, Agha Hasan Abedi and his assistant, Swaleh Naqvi, in the middle -- was an essential component of its spectacular growth, and a guarantee of its eventual collapse. The structure was conceived by Abedi and managed by Naqvi for the specific purpose of evading regulation or control by governments. It functioned to frustrate the full understanding of BCCI's operations by anyone.
Unlike any ordinary bank, BCCI was from its earliest days made up of multiplying layers of entities, related to one another through an impenetrable series of holding companies, affiliates, subsidiaries, banks-within-banks, insider dealings and nominee relationships. By fracturing corporate structure, record keeping, regulatory review, and audits, the complex BCCI family of entities created by Abedi was able to evade ordinary legal restrictions on the movement of capital and goods as a matter of daily practice and routine. In creating BCCI as a vehicle fundamentally free of government control, Abedi developed in BCCI an ideal mechanism for facilitating illicit activity by others, including such activity by officials of many of the governments whose laws BCCI was breaking.
As one BCCI officer later recalled, Abedi had a saying that expressed his view about law:
The only laws that are permanent are the laws of nature. Everything else is flexible. We can always work in and around the laws. The laws change.(1)
BCCI would not change to accommodate human laws. On the occasions that such laws actually interfered with BCCI's business, BCCI would, as necessary, change the laws to accommodate BCCI -- or ignore them entirely.
Significantly, at the same time that BCCI created its elaborate corporate structure for the purpose of deceiving and defrauding those outside BCCI, within BCCI, BCCI's various entities were largely disregarded, and treated interchangably. As BCCI's liquidators concluded one year after the bank's closure in a report to the bank's creditors committee, "in a number of respects, the BCCI Group appears to have conducted its affairs as a single entity, witout clearly identifying which company or entity within the BCCI Group was responsible for any particular transaction."(2)
As a result, the records of BCCI's criminal activity constitute an accounting and legal nightmare, and a full record of what actually took place is unlikely to be reconstructed. BCCI's multiplicity of locations, layered corporate structure, front-companies, front-men, its willingness from the top down to falsify information, and its pervasive disregard for the national laws of each country it operated in, combined to create a culture of criminality within the bank so massive as to defy investigation.
BCCI records in the United States are fragmentary and incomplete. To the extent that they are organized at all, that organization is in chronological order document by document, rather than according to any subject matter, customer account, or transaction. Though fragmentary, these records are also voluminous, amounting to at least 9,000 boxes in New York and Miami alone, and several million pages. Foreign BCCI document repositories of BCCI, especially in the United Kingdom, the Grand Caymans, and Abu Dhabi, are even larger, with access for U.S. investigators limited by foreign bank confidentiality, privacy laws, and the willingness of the foreign jurisdictions to cooperate.
One year following the closure of BCCI, federal investigators in the U.S. were still in the process of microfilming BCCI documents from Miami, and liquidators for BCCI in the United Kingdon had indexed 1600 boxes containing approximately 2.4 million separate BCCI documents -- approximately 2.5 percent of the total of BCCI's documents in the United Kingdom.(3)
Adding to the inherent problem of investigating the largest case of organized crime in history, spanning over some 72 nations, has been the destruction of documents at BCCI and its affiliates by shredding and arson; document backdating and falsification; the removal of most key documents from London to Abu Dhabi in 1990; the refusal of authorities in the United Kingdom and in the Grand Caymans to share information with Congress and other U.S. investigators as a consequence of their interpretation of local bank confidentiality and privacy laws; the inability to question Abedi due to his stroke, the inability to question BCCI's other key officials due to their incarceration and segregation in Abu Dhabi by Abu Dhabi officialdom since July 5, 1991, and BCCI's haphazard method of record-keeping.
Regardless of what might be shown in the missing material, the remainder is more than adequate to document BCCI's criminality, including fraud by BCCI and BCCI customers involving billions of dollars; money laundering in Europe, Africa, Asia, and the America; BCCI's bribery of officials in most of those locations; its support of terrorism, arms trafficking, and the sale of nuclear technologies; its management of prostitution; its commission and facilitation of income tax evasion, smuggling, and illegal immigration; its illicit purchases of banks and real estate; and a panoply of financial crimes limited only by the imagination of its officers and customers.
Among BCCI's principal mechanisms for committing crimes were shell corporations, bank confidentiality and secrecy havens, layering of corporate structure, front-men and nominees, back-to-back financial documentation among BCCI controlled entities, kick-backs and bribes, intimidation of witnesses, and retention of well-placed insiders to discourage governmental action.
As Robert Mueller III, the Assistant Attorney General at the Justice Department now in charge of the BCCI investigation, testified in October, 1991:
BCCI was not an ordinary bank. It was set up deliberately to avoid centralized regulatory review, and operated extensively in bank secrecy jurisdictions. Its affairs are extraordinarily complex. Its offers were sophisticated international bankers whose apparent objective was to keep their affairs secret, to commit fraud on a massive scale, and to avoid detection.(4)
In the words of former Senate investigator Jack Blum:
The problem that we are all having in dealing with this bank is that . . . it had 3,000 criminal customers and every one of those 3,000 criminal customers is a page 1 story. So if you pick up an one of [BCCI's] accounts you could find financing from nuclear weapons, gun running, narcotics dealing, and you will find all manner and means of crime around the world in the records of this bank.(5)
However daunting the task of explicating the full extent of BCCI's criminality, it is essential to recognize that at core, BCCI was not a bank which made an adequate return on investment through lending out depositors funds like other banks, but a "Ponzi scheme," which used new depositors funds to pay current expenses and to repay earlier depositors, creating a pyramid of mounting obligations that ultimately and inevitably would bring about BCCI's collapse.
As Blum testified:
"The people I talked to at the bank would say, this was a bank that was very strange, because it needed deposits all the time, and if you're running a Ponzi scheme you need more and more cash in to support the whole system of fraud that you've generated. What it meant was that BCCI people would go out and bribe central bank officials and high government officials to get them to deposit their country's foreign exchange at BCCI, and in exchange for whatever amount of money, suddenly the foreign exchange reserves of a country would be put there and put to use."(6)
From the beginning, BCCI President Abedi conceived of BCCI as a machine with two driving mechanisms -- asset growth and faith. The latter was essential to prevent a day of reckoning when depositors and creditors alike would cause a run on the bank. The former was necessary to sustain the latter through bad times. Together, they worked to sustain the illusion that BCCI was solvent, when in fact, it is unlikely BCCI was ever solvent.
On December 18, 1991, in an agreement with the Justice Department and New York District Attorney, BCCI's liquidators pled guilty to having engaged in a criminal conspiracy through financial fraud, and thereby constituting a Racketeering Influenced and Corrupt Organization (RICO), whose entire assets, legitimate and illegitimate, were subject to confiscation by the government. Specific crimes admitted to by BCCI's liquidators in the agreement included:
** Seeking deposits of drug proceeds and laundering drug money
** Seeking deposits from persons attempt to evade U.S. income taxes
** Using "straws" and nominees to acquire control of U.S. financial institutions
** Lying to regulators and falsifying regulatory documents
** Creating false bank records and engaging in sham transactions to deceive regulators.(7)
Thus, the criminality at BCCI was not, as has sometimes been suggested, a side-effect of the bank's enormous growth during the 1970's, an unintended consequence of overly rapid expansion, but inherent in the bank's philosophy of asset expansion from the beginning, and pervasive to its closure.
While U.S. law enforcement was not able to legally establish BCCI as organized crime until December, 1991, the scope of BCCI's criminality had been clear to both prosecutors and BCCI's defense team at least a year earlier. As BCCI's own private investigators, hired by the bank after its indictment in Tampa for money laundering in October, 1988, told BCCI officials in 1990:
It is [the government's] view that BCC is a full service bank in the worse sense of the phrase. [Prosecutors] believe that it is official bank policy to actively seek out and market high net-worth individuals, and to gain from them large and frequent deposits, preferably in cash. They see such marketing efforts as being done at best without regard for the source of the customer's cash, ant at worst with tacit acceptance or even actual knowledge that in many cases the customer's money is derived from illegal enterprises, most notably narcotics. . . In the eyes of some prosecutors and investigators, the Bank's "services" are not limited merely to accepting the proceeds of illegal activities. They believe that BCC officers and employees, with express upper management approval, also actively assist and even advise their customers on the most effective methods of hiding their money and evading taxes. Money, for example, is seen to be hidden or "laundered" by the constant, carefully controlled transfer of funds from one account to another within BCC and its world-wide branches or between BCC and other banks related to BCC, thus making the money almost impossible for U.S. law enforcement to trace. (8)
As an officer of BCCI Canada wrote to law enforcement just three days after the closure of BCCI worldwide, even those inside BCCI were often appalled by its practices.
We have read with a sense of relief that finally somebody had the guts to investigate into the affairs in the Bank . . . BCCI s.a., BCCI Overseas and BCC Canada have been for years conducting false accounting practices, concealment of losses (more so to avoid displeasing the Arab Owners) and making irregular loans.(9)
The letter went on to describe the knowledge of principal officers of BCCI, including its chief executive officer in the Americas, knowledge of money laundering, drug trafficking, loans created in "bogus" names, and advances of funds to non-existent companies in London, Luxembourg, Cyprus, Malta, the Channel Islands, and other locations. The writer begged investigators prosecute "the big crooks in London and Abu Dhabi."(10)
BCCI Paris branch manager Nazir Chinoy would later admit to investigators that essentially all of BCCI's activity in France was the result of the customer or the bank or both violating somebody's laws.
All the money we got [at BCCI-France] in some way we were breaking the law. If you taking it with a kickback, you are breaking foreign exchange, all Africans who brought their money got commissions which meant kick-backs. Back to back LCs to misrepresent financial deals, taking out less money in a third world country and keeping a share, kickbacks, exchanges, laundering, in some way you are breaking the law in each case. The law breaking was pretty systematic.(11)
(For the rest of this long article go here: http://www.fas.org/irp/congress/1992_rpt/bcci/04crime.htm )
Bre-X....
Bre-X and Its Lessons
Bre-X was a junior gold exploration company that perpetrated the largest "gold discovery scam" in the history of the world.
The stock went from pennies to $286.50 (pre-split basis), at which time the gold reserves of this company supposedly amounted to 200 million ounces (a value of $70 billion) ... 8% of the entire world's gold in one deposit!
The stock went right back to pennies when the scam was finally discovered. For those who don't know, it turns out that two or three of the Bre-X geologists merely sprinkled gold onto the drill cores! That simple crime created THE most extreme example of the "greed-then-grief" cycle that you will ever see in your lifetime.
Way before this incredible story unfolded, Bre-X looked like just another "PennyGold type of stock." Founded in 1988, here is its high-low trading history:
YEAR 1989 1990 1991 1992 1993 1994 1995
HI__ 0.42 0.75 0.41 0.35 1.55 3.10 59.00
LO__ 0.15 0.20 0.04 0.06 0.12 1.15 1.90
-- and onwards up to $286.50 (NOT a typo!), before the deception was finally discovered.
At its peak, the market put a $6 billion valuation on a company that:
owned a piece of undeveloped jungle in Indonesia
had provided NO independent verification of its drill results
BEFORE it could pour its first ounce of gold, would have to spend $1.5 billion in a country where you are subject to the whim of a corrupt and greedy government
was headed by some rather questionnable characters with generally poor reputations.
There are many lessons to be learned from the "$6 billion" greed side of Bre-X. Suffice it to repeat that Bre-X will stand forever as the ultimate example of the excesses of the "greed" part of the "greed-then-grief" cycle.
But for PennyGold Practitioners, the lessons lie NOT in the years of 1994 and after, but in 1993 and before. Because, while PennyGold does not create these cycles, it DOES recognize and exploit them.
From 1989 to 1993, the Bre-X stock systematically yo-yo'd in price. Several times, Bre-X was an "over-killed" stock that APPEARED dead, but was actually in no danger of delisting. Each year, the Prez worked hard to develop a new promotion. Notice how you could have bought Bre-X for as low as 4 cents in 1991, six cents in 1992 and 12 cents in 1993.
Yes, from 1989 to 1993, Bre-X was just a typical "penny dreadful." But you could have tripled (or better your money) each year by following PennyGold strategies ... and that is BEFORE the really big move even occurred!
The big fraud that occurred post-1992 is merely the most extreme (and illegal) version of what causes these movements ... ruthless promotion ... rumors of rumors ... exaggerated stories .... endless hype ... greed. Then, quiet ... disillusionment ... fear ... panic ... grief ... anger.
And the cycle happens over and over. How can that be? Believe it or not, the 97% of penny stock investors who lose money simply forget ... because "this time it's different." And those who finally give up are replaced by new "players" with a zero knowledge base.
PennyGold puts you into the ranks of the 3%. It will show you how to find those "over-killed" stocks, how to make sure they are not about to delist, how to find the ones with the most upside potential, and how to buy and sell them.
It is infinitely more powerful than what I used to do by hand. For example, while I did not track Alberta actively at the time of Bre-X, today's electronic version of PennyGold would certainly have identified this stock as a PennyGold buying opportunity. Of course, I would likely have sold it at 40-50 cents and then kicked myself for the next decade, so I'm better off
(here's the link): http://www.goodbytes.com/pennygold/bre-x.html
--------------------------------------------
and another Bre-X link: http://pennystocks.org/s5_2.htm
Here's a pertinent post from my other paying member board to get things going here too:
Schemers and Scams: A Brief History of Bad Business
It takes some pretty spectacular behavior to get busted in this country for a white-collar crime. But the business world has had a lot of overachievers willing to give it a shot.
FORTUNE
Monday, March 18, 2002
By Ellen Florian
1920: The Ponzi Scheme
Charles Ponzi planned to arbitrage postal coupons--buying them from Spain and selling them to the U.S. Postal Service at a profit. To raise capital, he outlandishly promised investors a 50% return in 90 days. They naturally swarmed in, and he paid the first with cash collected from those coming later. He was imprisoned for defrauding 40,000 people of $15 million.
1929: Albert Wiggin
In the summer of 1929, Wiggin, head of Chase National Bank, cashed in by shorting 42,000 shares of his company's stock. His trades, though legal, were counter to the interests of his shareholders and led to passage of a law prohibiting executives from shorting their own stock.
1930: Ivar Krueger, the Match King
Heading companies that made two-thirds of the world's matches, Krueger ruled--until the Depression. To keep going, he employed 400 off-the-books vehicles that only he understood, scammed his bankers, and forged signatures. His empire collapsed when he had a stroke.
1938: Richard Whitney
Ex-NYSE president Whitney propped up his liquor business by tapping a fund for widows and orphans of which he was trustee and stealing from the New York Yacht Club and a relative's estate. He did three years' time.
1961: The Electrical Cartel
Executives of GE, Westinghouse, and other big-name companies conspired to serially win bids on federal projects. Seven served time--among the first imprisonments in the 70-year history of the Sherman Antitrust Act.
1962: Billie Sol Estes
A wheeler-dealer out to corner the West Texas fertilizer market, Estes built up capital by mortgaging nonexistent farm gear. Jailed in 1965 and paroled in 1971, he did the mortgage bit again, this time with nonexistent oil equipment. He was re-jailed in 1979 for tax evasion and did five years.
1970: Cornfeld and Vesco
Bernie Cornfeld's Investors Overseas Service, a fund-of-funds outfit, tanked in 1970, and Cornfeld was jailed in Switzerland. Robert Vesco "rescued" IOS with $5 million and then absconded with an estimated $250 million, fleeing the U.S. He's said to be in Cuba serving time for unrelated crimes.
1983: Marc Rich
Fraudulent oil trades in 1980-81 netted Rich and his partner, Pincus Green, $105 million, which they moved to offshore subsidiaries. Expecting to be indicted by U.S. Attorney Rudy Giuliani for evading taxes, they fled to Switzerland, where tax evasion is not an extraditable crime. Clinton pardoned Rich in 2001.
1986: Boesky and Milken and Drexel Burnham Lambert
The Feds got Wall Streeter Ivan Boesky for insider trading, and then Boesky's testimony helped them convict Drexel's Michael Milken for market manipulation. Milken did two years in prison, Boesky 22 months. Drexel died.
1989: Charles Keating and the collapse of Lincoln S&L
Keating was convicted of fraudulently marketing junk bonds and making sham deals to manufacture profits. Sentenced to 12 1/2 years, he served less than five. Cost to taxpayers: $3.4 billion, a sum making this the most expensive S&L failure.
1991: BCCI
The Bank of Credit & Commerce International got tagged the "Bank for Crooks & Criminals International" after it came crashing down in a money-laundering scandal that disgraced, among others, Clark Clifford, advisor to four Presidents.
1991: Salomon Brothers
Trader Paul Mozer violated rules barring one firm from bidding for more than 35% of the securities offered at a Treasury auction. He did four months' time. Salomon came close to bankruptcy. Chairman John Gutfreund resigned.
1995: Nick Leeson and Barings Bank
A 28-year-old derivatives trader based in Singapore, Leeson brought down 233-year-old Barings by betting Japanese stocks would rise. He hid his losses--$1.4 billion--for a while but eventually served more than three years in jail.
1995: Bankers Trust
Derivatives traders misled clients Gibson Greetings and Procter & Gamble about the risks of exotic contracts they entered into. P&G sustained about $200 million in losses but got most of it back from BT. The Federal Reserve sanctioned the bank.
1997: Walter Forbes
Only months after Cendant was formed by the merger of CUC and HFS, cooked books that created more than $500 million in phony profits showed up at CUC. Walter Forbes, head of CUC, has been indicted on fraud charges and faces trial this year.
1997: Columbia/HCA
This Nashville company became the target of the largest-ever federal investigation into health-care scams and agreed in 2000 to an $840 million Medicare-fraud settlement. Included was a criminal fine--rare in corporate America--of $95 million.
1998: Waste Management
Fighting to keep its reputation as a fast grower, the company engaged in aggressive accounting for years and then tried straight-out books cooking. In 1998 it took a massive charge, restating years of earnings.
1998: Al Dunlap
He became famous as "Chainsaw Al" by firing people. But he was then axed at Sunbeam for illicitly manufacturing earnings. He loved overstating revenues--booking sales, for example, on grills neither paid for nor shipped.
1999: Martin Frankel
A financier who siphoned off at least $200 million from a series of insurance companies he controlled, Frankel was arrested in Germany four months after going on the lam. Now jailed in Rhode Island--no bail for this guy--he awaits trial on charges of fraud and conspiracy.
2000: Sotheby's and Al Taubman
The world's elite were ripped off by years of price-fixing on the part of those supposed bitter competitors, auction houses Sotheby's and Christie's. Sotheby's chairman, Taubman, was found guilty of conspiracy last year. He is yet to be sentenced.
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Posted by: bartermania
In reply to: None Date:1/11/2005 5:38:50 PM
Post #of 35
I'm sure I'll be spending lots of time on this board's subject area and subject matter. I find it fascinating...and I may even have an axe or two to grind. We'll see. I know some things about this area already but, I will also continue to learn as I go. Shorting will certainly be addressed here. Human greed, individuality vs. mob or herd mentality, cycles, generational and lifetime cycles for/of depressions (economic in nature and their causes and extensions)...I could go on and on and on...and hopefully, given enough time I will do just that.
Others are welcome to join in the discussion once it gets going...or if, you've got the feel for it already...please post.
To understanding, to better people and to a better society.
This is a copy of a premium board I created.
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