Detecting a Fraud
Detecting a fraud (or Ponzi scheme) and then convincing the affected community that it is really a fraud can sometimes be difficult. While several whistleblowers have been explaining the nature of USAPonzi for many years, their arguments have been falling on deaf ears since no one in Washington wants to be the one that admits that they have been using a fraudulent accounting technique for 45 years. Some other high profile frauds continued for some time before they were exposed and recognized as frauds.
Bernie Madoff created one of the biggest Ponzi schemes in history by enticing investors with promises of consistent and elevated returns on their invested capital. This scheme operated from sometime in the 1970's (hard to tell when it switched from a legitimate investment model to a Ponzi scheme) to 2008 when the scheme finally imploded. Madoff himself called this a $50 Billion fraud but it is now suspected that actual losses were on the order of $18 Billion.
The following describes the difficulty that the Madoff Whistleblower had in convincing the SEC that Madoff was a fraud and was running a Ponzi scheme.
The following is from Wikipedia:
Harry M. Markopolos (born October 22, 1956) is an American former securities industry executive and an independent forensic accounting and financial fraud investigator.
Markopolos discovered evidence over nine years suggesting that Bernard Madoff's wealth management business was actually a massive Ponzi scheme. Beginning in 2000, Markopolos alerted the U.S. Securities and Exchange Commission (SEC) of this formally more than once, but the SEC did not uncover the scheme. Madoff was finally uncovered as a fraud in December 2008, when his sons contacted the Federal Bureau of Investigation. After admitting to operating the largest Ponzi scheme in history, Madoff was sentenced in 2009 to 150 years in prison. In 2010, Markopolos's book on uncovering the Madoff fraud was published, titled No One Would Listen: A True Financial Thriller.
Markopolos has been scathing in his criticism of the SEC for both failing to discover the Madoff fraud despite repeated tips, and for failing to investigate properly the larger companies it supervised. He described the private moments he had with victims of the Madoff fraud as: "Heartfelt, gut-wrenching things. People trying to commit suicide or losing loved ones who’ve died of heartbreak."
The perpetrator of the scheme is now in prison for life and his brother (Peter Madoff) is now serving a 10 year sentence for his part in this Ponzi scheme. The fate of other co-conspiritors is still in limbo.
The Enron Fraud operated for several years before it was detected in 2001. This company must have morphed from a legitimate business to a fraud/Ponzi scheme much as did the Madoff Fraud in order for the company to appear as successful as the management was claiming in their financial reports. This had to have occurred between the time Jeffery Skilling joined the company in 1991 and October of 2001 when the fraud was finally exposed.
The following is from Wikipedia:
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was attributed as the biggest audit failure.
Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that, by the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions of dollars in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives not only misled Enron's board of directors and audit committee on high-risk accounting practices, but also pressured Andersen to ignore the issues.
Enron shareholders filed a $40 billion law suit after the company's stock price, which achieved a high of US$90 per share in mid-2000, plummeted to less than $1 by the end of November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, and rival Houston competitor Dynegy offered to purchase the company at a very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Enron's $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history until WorldCom's bankruptcy the next year.
Many executives at Enron were indicted for a variety of charges and were later sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in a United States District Court, but by the time the ruling was overturned at the U.S. Supreme Court, the company had lost the majority of its customers and had closed. Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies. One piece of legislation, the Sarbanes-Oxley Act, increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders. The act also increased the accountability of auditing firms to remain unbiased and independent of their clients.
Sherron Watkins (born August 28, 1959) was Vice President of Corporate Development at the Enron Corporation. She is considered by many to be the whistleblower who helped to uncover the Enron scandal in 2001.
In August 2001, Watkins blew the whistle internally by alerting then-Enron CEO Kenneth Lay of accounting irregularities in financial reports. However, Watkins has been criticized for not speaking up publicly sooner about her concerns, as her memo did not reach the public until five months after it was written.
Watkins testified before committees of the U.S. House of Representatives and Senate at the beginning of 2002 and was selected as one of three "People of the Year 2002" by Time. (The two other whistleblowers who joined her as "People of the Year" were Cynthia Cooper of WorldCom and Coleen Rowley of the FBI.)
Several of the senior officers at Enron have been imprisoned for their part in this fraud.
The Worldcom accounting fraud apparently operated for about three years before it was detected and exposed by a group of internal auditors at the company.
The following is from Wikipedia:
CEO Bernard Ebbers became very wealthy from the increasing price of his holdings in WorldCom common stock. However, beginning in the year 2000 the telecommunications industry was declining and WorldCom’s aggressive growth strategy suffered a serious setback when it was forced by the US Justice Department to abandon its proposed merger with Sprint during mid-2000. By that time, WorldCom’s stock price was decreasing and banks were placing increasing demands on Ebbers to cover margin calls on his WorldCom stock that was used to finance his other businesses (timber and yachting, among others). During 2001, Ebbers persuaded WorldCom’s board of directors to provide him corporate loans and guarantees in excess of $400 million to cover his margin calls. The board hoped that the loans would avert the need for Ebbers to sell substantial amounts of his WorldCom stock, as his doing so would result in further decrease of the stock's price. However, this strategy failed and Ebbers resigned as CEO during April 2002 and was replaced by John Sidgmore, former CEO of UUNET Technologies, Inc.
Beginning modestly during mid-year 1999 and continuing at an accelerated pace through May 2002, the company (directed by Ebbers (as CEO), Scott Sullivan (CFO), David Myers (Controller) and Buford "Buddy" Yates (Director of General Accounting)) used fraudulent accounting methods to disguise its decreasing earnings to maintain the price of WorldCom’s stock.
The fraud was accomplished primarily in two ways:
- Booking ‘line costs’ (interconnection expenses with other telecommunication companies) as capital expenditures on the balance sheet instead of expenses.
- Inflating revenues with bogus accounting entries from "corporate unallocated revenue accounts".
During 2002, a small team of internal auditors at WorldCom worked together, often at night and secretly, to investigate and reveal $3.8 billion worth of fraud. Soon thereafter, the company’s audit committee and board of directors were notified of the fraud and acted swiftly: Sullivan was dismissed, Myers resigned, Arthur Andersen company withdrew its audit opinion for 2001, and the U.S. Securities and Exchange Commission (SEC) began an investigation into these matters on June 26, 2002 (see accounting scandals). By the end of 2003, it was estimated that the company's total assets had been inflated by about $11 billion.
Bernie Ebbers (CEO) is still serving prison time for his part in this fraud and Scott Sullivan (CFO) is now out of prison after serving 4 years for his part in the fraud.
USAPonzi has been operating for now 45 years (since 1968) and as such is not only "The Biggest Ponzi Scheme on the Planet" but is also one of the longest running Ponzi schemes in history.
One of the early "whistleblowers" regarding this USA Ponzi scheme was David Stockman back in the early 1980s who at the time was Ronald Reagan's Office of Management and Budget (OMB) director. Stockman resigned in 1985 due to his disagreement with Reagan regarding the Federal budget with Stockman feeling that the Government was overspending and creating a "welfare state". The Financial Data for 1969-2012 shows why Stockman was concerned during the Reagan years of the early 1980s because the cash-based deficit as a percent of GDP was in the 5% range for several years. So the Reagan years were second only to the Bush/Obama years in cash-based deficit spending since 1969.
Stockman remains an outspoken critic of the Government fiscal policy and of the Federal Reserve monetary policy. One of his recent quotes called the Paul Ryan budget plan for addressing our long term deficit and debt problem "a fairy tale''. Stockman's March Op Ed in the New York Times expresses his view of Capitalism in America.
David Walker, former U. S. Comptroller General and now Founder and CEO of the Comeback America Initiative, has for many years been explaining the issues that USAPonzi is creating for the U.S. economy and as such has been an outspoken "whistleblower" explaining the severity of the U.S. fiscal situation.
The following is from Wikipedia:
Walker has compared the present-day United States to the Roman Empire in its decline, saying the U.S. government is on a "burning platform" of unsustainable policies and practices with fiscal deficits, expensive overcommitments to government provided health care, swelling Medicare and Social Security costs, the enormous expense of a prospective universal health care system, and overseas military commitments threatening a crisis if action is not taken soon.
Walker has also taken the position that there will be no technological change that will mitigate health care and social security problems into 2050 despite ongoing discoveries.
In the national press, Walker has been a vocal critic of profligate spending at the federal level. In Fortune magazine, he recently warned that "from Washington, we'll need leadership rather than laggardship". in another op-ed in the Financial Times, he argued that the credit crunch could portend a far greater fiscal crisis; and on CNN, he said that the United States is "underwater to the tune of $50 trillion" in long-term obligations.
He compared the thrift of Revolutionary-era Americans, who, if excessively in debt, would "merit time in debtors' prison", with modern times, where "we now have something closer to debtors' pardons, and that's not good".
In the fall of 2012, the Comeback America Initiative led a campaign called the "$10 Million a Minute" Bus Tour. The tour covered about 10,000 miles and stopped at universities, technical colleges, businesses, and more in over a dozen states. The tour’s goal was to bring national attention to the economic and fiscal challenges that face our nation and various nonpartisan solutions that should be able to gain bipartisan support.
The problem is to whom do you "blow the whistle" when the perpetrator of this Ponzi scheme is the Government of the most powerful country on the planet.
President Clinton chartered the Bipartisan Commission on Entitlement and Tax Reform in 1994 and President Obama chartered the National Commission on Fiscal Responsibility and Reform in 2010 both of which sounded the alarm regarding the unsustainablility of our fiscal policies. The cautions that were highlighted and the recommendations that were made by both of these commissions have been totally ignored. I think the reasons for ignoring these commission results are understandable since taking the actions as recommended would immediately expose USAPonzi for what it truly is and a recession/depression would result. The easy way out is to just ignore the problem and let USAPonzi continue to percolate which will make the crisis even more traumatic when it finally does implode.
While the perpetrators of the Madoff, Enron, and Worldcom could be identified rather precisely, the perpetrators of USAPonzi are much more difficult to pinpoint. One of the strengths and at the same time one of the weaknesses of our form of government is that we have significant shared responsibility. While I am of the opinion that this problem started with the Lyndon Johnson administration it has been continued by eight more presidents and thousands of congress men and women. The ending of USAPonzi will be quite traumatic and every senior member of our Government will be trying to distance themselves from that trauma.
One of the big problems that has developed because of USAPonzi is that the legislators in Washington have been careful to separate their retirement pensions and healthcare coverage from the entitlement programs for the general population of the U.S. They did that for good reason as they know that the current entitlement system is unfunded and therefore they have set up separate "prefered" plans for themselves to better protect themselves when USAPonzi implodes.
The government of the city of Bell, CA did this to an extreme and as a result a number of these officals were convicted on corruption charges. As I note above, in these high profile cases where fraud was proven (Madoff, Enron, Worldcom, Healthsouth, etc.) the perpetrators of these frauds were convicted and imprisoned.
Since nine presidents (and their administrations) and thousands of members of Congress have been complicit in USAPonzi, it will be difficult to sort out the few ringleaders of this scheme. In general, these Government officials each only spend a few (some a lot of years) years in Washington so most of them will get a silent pardon for their part in USAPonzi and it will likely go down as communal guilt for the whole lot. Their defense will be that the problem already existed before I arrived on the scene so it is not my problem. And in fact that will be true but each of them must share a part of the blame for continuing the Ponzi scheme except for the very few that have fought hard against this Government overcommitting and overspending (aka USAPonzi).
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