Tag Archives | fraud

FAMulous Basis for Achieving Alpha

www3.gmiratingsNo, this article isn’t about becoming famous though the internet, the Sisters of the Sororitas, or Famulous Eateries in Bangkok. Rather, I just spent an hour on a Webinar with GMI Ratings on their Forensic Alpha Model (FAM), designed  to help investors predict stock returns using forensic-accounting and governance-related measures of issuer risk.

Yes, it was essentially a commercial… but it was very convincing. A few of the facts: Continue Reading →

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Video Friday: Occupy Wall Street

Its time to start analyzing, participating and trying to channel this Continue Reading →
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Video Friday: Unraveled & Housing Bubble

“Unraveled” reveals the lesser-known case against Mark Dreier, an attorney and “philanthropist” charged with wire fraud, money laundering and other charges. In what amounts to a fascinating study of greed and motivation told from within an intimate series of exchanges, director Marc Simon allows Dreier to share his account of the events that transpired.

Slick graphic-novel style animations introduce us to Dreier as a man in a position to deal in hundreds of millions of dollars, a man confident in his ability to deliver what Continue Reading →

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CEO Pay in an Age of WikiLeaks: Reporting, Rationale and Ratios

As has been widely reported, WikiLeaks will soon release thousands of documents revealing malfeasance, greed and incompetence at the highest levels of a major American bank, most likely Bank of America. According to WikiLeaks’ Julian Assange, this may be the biggest expose of unethical corporate behavior since the Enron scandal. (Facing Threat From WikiLeaks, Bank Plays Defense, NYTimes, 1/2/2011) For broader “leaks,” see Ex-Banker Gives Data on Taxes to WikiLeaks, NYTimes, 1/17/2011.

This will focus new attention on the subjects of greed, fraud and abuse at the highest levels of Corporate America. See Gary Larkin’s post, Wikileaks Episode Should be Wake-Up Call for Companies. (The Conference Board Governance Center Blog, 1/14/2011)

Last year’s Dodd-Frank bill includes Section 922, which provides that the SEC must pay rewards to whistleblowers who provide original information about violations of the federal securities laws that leads to successful enforcement actions resulting in more than $1 million in penalties. (Concerns Grow Over New Dodd-Frank Act Whistleblower Provisions). Additionally, a pay disclosure rule will require many U.S. companies to report the ratio of CEO pay to median employee pay in the annual proxy statements and also requires votes on corporate proxies concerning how often shareowners will have a “say on pay.”

A recent Towers Watson poll of 135 U.S. publicly traded companies found that 51% expect to hold annual say-on-pay votes, while 39% prefer the vote be held every three years, and 10% anticipate holding biennial votes. Meanwhile, nearly half 48% of companies surveyed are making some adjustments to their executive pay-setting process, while 65% are devoting more attention to explaining their programs in the Compensation Discussion & Analysis (CD&A). Some of the best advice for companies on these issues can be found regularly at CompensationStandards.com, including a program today, The Proxy Solicitors Speak on Say-on-Pay.

Clearly, the issue of executive pay is one that stay with us for years to come but 2011 could set the tone, not just in America but around the world. One of the more interesting discussions I’ve read is in the recent posts of an an Indian blogger, Sonia Jaspal, who cites a recent report of COSO “Fraudulent Financial Reporting 1998-2007- An Analysis of U.S. Public Companies,” which states that CEOs are involved in 72% of the 347 alleged cases of fraudulent financial reporting listed with SEC during 1998-2007 period. (see Fraud Symptom 1- Insatiable hunger of CEO, Fraud Symptom 2- A Weak CFO, and Fraud Symptom 3 – Board’s failure to exercise judgment. We need mechanisms to reduce the likelihood of collusion between CEOs and CFOs, such as making directors and/or audit committee responsible for recruiting and terminating CFOs and not linking CFO pay to stock market performance.

Shareowners are also grappling with how to address the issues. Manifest, a UK-based proxy advisory firm has something of an advantage, since UK shareowners have had a say on pay for many years. See an example of relatively recent discussion at “Excessive” bonuses lead to higher dissent. Other sources of advice include books such as Money for Nothing: How CEOs and Boards Enrich Themselves While Bankrupting America and the classic Pay without Performance: The Unfulfilled Promise of Executive Compensation.

Members of the United States Proxy Exchange have initiated a forum to discuss where individual shareowners and USPX should come down on pay issues. Get in on the conversation for $3.95 a month, if only to monitor what direction this increasingly influential group will take. There are thousands of sites providing investment advice but USPX is one of only a few on investors as owners.

While I have often advocated that any any principles regarding limits should be grounded on academic research, it is difficult to envision a mass movement based on the complex formulas and principles contained in most CD&As, even if they may be grounded in research. Should founding CEOs be given a pass? I don’t think so. CEOs like Steve Jobs of Apple and John Mackey of Whole Foods can easily afford to work for minimum wages because they own a substantial portion of their companies. Their real pay comes through ownership, not by working.

CEOs will try to convince their boards they should be paid in the top 25% of their peers and we have the Lake Wobegon Effect. Since companies will be reporting the ratio of annual CEO pay to median annual total compensation for all employees, that number may drive a popular movement. What will be considered fair? 1 to 25? 1 to 50? 1 to 100? 1 to 200?

In 2007, CEOs in the S&P 500, averaged $10.5 million annually, 344 times the pay of typical American workers, but that was a steep drop in the ratio from 2000 when CEOs earned 525 times average pay. With companies forced to report their ratios, expect more pressure than ever from shareowners in 2011.

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SEC Proposes Whistleblower Regulations

SEC Proposes New Whistleblower Program Under Dodd-Frank Act (Press Release No. 2010-213; November 3, 2010. Section 922 of the Dodd Frank bill gives the SEC the authority to make awards to whistleblowers under regulations prescribed by the SEC of  not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions. See proposed rule and soon comments here under 34-63237.

Under the proposed rules, a whistleblower is a person who provides information to the SEC relating to a potential violation of the securities laws. To be considered for an award, a whistleblower must

Voluntarily provide the SEC …

  • In general, a whistleblower is deemed to have provided information voluntarily if the whistleblower has provided information before the government, a self-regulatory organization or the Public Company Accounting Oversight Board asks for it.

… with original information …

  • Original information must be based upon the whistleblower’s independent knowledge or independent analysis, not already known to the Commission and not derived exclusively from certain public sources.

… that leads to the successful enforcement by the SEC of a federal court or administrative action …

  • A whistleblower’s information can be deemed to have led to successful enforcement in two circumstances: (1) if the information results in a new examination or investigation being opened and significantly contributes to the success of a resulting enforcement action, or (2) if the conduct was already under investigation when the information was submitted, but the information is essential to the success of the action and would not have otherwise been obtained.

I understand that some in the business community had asked for much more restrictive rules.

  1. Require informants to have first told the company hotline of the problem before the SEC;
  2. Once the employee has provided the SEC information, they should be prohibited from providing any further information within the company; and
  3. Prohibit a fiduciary such as a director from informing the SEC of fraudulent behavior.

Basically, they were telling the SEC that if employees have information related to a fraud being perpetrated on investors, that the person should be silenced. Some hotlines link back to the company’s general counsel, the very person responsible for defending the company.  Will they really protect innocent employees who report a potential fraudulent activity?

Once information has been provided, agencies might want the employee to wear a wire tap to gather additional information. Will this be prohibited?

If a director, who has a fiduciary obligation to investors, is aware of fraud, why is that something that should be kept from the SEC and stockholders?

Yes, these whistleblower regulations will make it difficult to operate meaningful company hotline programs, which aren’t going to offer anywhere near the monetary rewards of the SEC program. I’m not sure what the answer is, but it is not caving to suggestions like those listed above. Shareowners should carefully review the proposed regulations and should monitor comments as they are submitted.

For more information, see SEC Proposes Rules For Whistleblower Program (WSJ, 11/3/2010).

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