Canadian Financial Advisor Earl Jones sentenced to 11 years in Prison for massive Ponzi scheme!

February 15, 2010

“He can rot in hell,” said Bevan Jones of his brother Earl Jones who today was sentenced to 11 years in prison for his $50 million Ponzi scheme.  And his brother’s emotional remarks were the only ones heard today as the verdict was handed down.

Jones never invested a cent of the money he collected from his former clients, the Quebec court heard during the criminal proceedings against him.  Rather, in classic Ponzi form, Jones used some of the proceeds to continue the illusion that he created so well and in which many people their life savings.  None of the money has been recovered.

Today, I received a call from a reporter with the CBC regarding Jones sentencing.  Her questions centered around what Jones might have been thinking and if he ever saw an end game other than prison.  She posed those questions of me because, I, like Jones, (not proud of what I’m writing next) too created a Ponzi scheme which left a trail of victims. (Today, some 24 years later I am a business ethics and fraud prevention expert – helping businesses and individuals connect the dots between choices and their consequences).

While what I did in the mid-eighties pails in comparison to Jones and Madoff, the reality is fraud is fraud and theft is theft.  One cannot justify victimizing someone else.  Yet, as evidenced over the past two years…this fraud has come to the forefront almost daily now.  So, her questions were appropriate – like, what was Jones thinking?

Three things come into place for a fraud to occur:  NEED, OPPORTUNITY and RATIONALIZATION.

Now, I can’t begin to predict what Jone’s NEED was, but I suspect that somehow his NEED was beyond the simple NEED for money.  Rather, I suspect that his need was emotionally based.  Madoff, for example, didn’t need the money…he legitimately could earn a handsome income from his legitimate investment advice.  Rather, Madoff seemed to have the need to be RIGHT.  He could not admit that he was fallible.  To Madoff admitting that his investment didn’t always “pay off” would be too difficult to swallow.  Hence his need was emotionally based.  Take to the bank, Jones was likely feeling something that triggered an emotional need when his fraud began.

A report today states:

Some of the victims included Jones’s own relatives, who are no longer speaking to him.

“None of us will ever be the same,” said Bevan Jones who, along with his wife Frances Gordon, was fleeced out of $1 million by his brother. Jones said he would never forgive him for what he’d done.

Both Jones and his financial-services company have been declared bankrupt. He’s been shunned not only by his friends and relatives, but his wife Maxine has also filed for divorce.

Jones saw OPPORTUNITY by taking advantage of his close friends and family.  In my earlier discussion the reporter asked about how or who typically was defrauded.  My answer, those closest to the fraudster.  Most of the time OPPORTUNITY is found in those closest to you – those who trust you!  Now, as a word of caution, if you’re considering investing your retirement…don’t do it with those whom you know best.  Rather, invest with those with whom you have a professional relationship and healthy skepticism.

So, she asked me, “Who did you victimize?”  Unfortunately, my response was typical of those who have defrauded others – “I victimized those clients who were closest to me and trusted me the most.”  As I spoke those words I still feel pain today for what they endured at my hand.  Now…to set the record straight, I did make complete restitution plus interest, but that does not justify what I did and will never erase the memory and feeling that those friend and clients felt when I had to tell them that I, their trusted advisor, was nothing more than a liar and a thief.

Jones once lived in the lap of luxury, with several high-end homes in trendy locales. He was a pillar of the community, active in the church, local charities and amateur sports.

The most difficult part for most people to comprehend is the question, “what did you think would happen?”  To rational individuals who clearly see the difference between right and wong…it is clear that Jones choices could lead to no where but prison.  Yet, when one begins to RATIONALIZE one’s behavior, the very act of RATIONALIZATION creates and illusion and the longer the deviant behavior goes undetected the stronger the illusion becomes until eventually the ILLUSION becomes REALITY.

The reporter asked, “What did you think would be the outcome?”  Fair question.  As I thought back for a moment, the answer became crystal clear.  At first I convinced myself that I was borrowing money, not stealing it.  (We all know that money taken from someone without their consent and knowledge isn’t borrowing!)  What I did was theft…!  Yet, at the time, I went to great lengths to create the illusion that it was a loan.  When I put the stolen money back – gave it back to its rightful owner, I solidified the illusion by RATIONALIZING that my actions were consistent with that of borrowing money – a loan.  The illusion was set and RATIONALIZATION established.  Therefore, as time passed and I stole more, I could more easily convince myself that I was “only borrowing”.  A lie, but one that I believed till…

One of her last questions, “So when did you know?”  Each of us…Madoff, Jones and yes, Gallagher, had to face the day when the illusion burst and reality came blindly into view.  In most every case, it is when someone (or perhaps a group) want their funds and you come to realize – you don’t have the funds…in fact, you never did.  That’s reality…

Today…Jones faced what I faced now some 16 years ago.  I now what it’s like to spend time in federal prison.  Jones is now experiencing the consequences of his choices.  And, while the Canadian legal system would have Jones eligible for Parole in 2011, his life has changed forever…although I doubt enough for those he victimized to feel any comfort.

Crown prosecutors and Jones’s lawyer jointly recommended a sentence of 11 years, which Judge Hélène Morin handed down.

“The accused not only robbed the victims of their money, he robbed them of their freedom and self-esteem and of a decent life they expected in their retirement,” Morin said in her comments before delivering the sentence.


Sujata “Sue” Sachdeva pleads not guilty by reason of a “Spending Disorder?”

February 4, 2010

With her attorney again signaling that he will mount a mental-illness defense, a former Koss Corp. executive pleaded not guilty Friday to accusations that she embezzled $31 million from her longtime employer.

Sujata “Sue” Sachdeva, 46, of Mequon, Wisconsin, pleaded not guilty yesterday to charges she embezzled as much as $31 million from Koss Corporation, a publicly traded head phone manufacturer where she had been employed as Vice President of Finance, Secretary, and Principal Accounting Officer. According to the indictment, Sachdeva authorized numerous massive wire transfers of funds from company bank accounts to pay for her American Express credit card bills and obtained cashier’s checks to pay for personal expenses, among other things. The scheme dates back to at least 2004, according to reports.

Michael F. Hart, her Attorney, said in a brief interview, “As this case proceeds . . . we intend to show that Ms. Sachdeva’s mental and emotional health played a significant role in her conduct.”

Asked whether that was the basis for Friday’s not guilty plea, Hart declined additional comment. Later, he issued a statement reiterating his remarks in the interview and added, “This is the beginning of an ongoing process, and our focus will be on the arguments we make in court. However, the issues of Ms. Sachdeva’s mental and emotional health are essential to this case.”

In court, Hart agreed to a new condition of release requested by prosecutors that prevents Sachdeva from disposing of assets that might be confiscated if she is convicted. According to the indictment, the government will attempt to seize her $800,000 Mequon home, her 2007 Mercedes Benz E350, a Hawaiian vacation timeshare and other assets if she is convicted.

The U.S. Marshals Service also is working to inventory approximately 22,000 items FBI agents gathered at the Sachdeva home and from local luxury stores and resale shops.

Several stores kept paid-for clothing in their storerooms for Sachdeva. She also sold thousands of dollars’ worth of merchandise through local resale shops, according to several retailers.  The government expects to sell the items, probably in an online auction, and return the proceeds to Koss.

Sachdeva also was ordered Friday to refrain from using alcohol and to submit to drug and alcohol testing.

If Sachdeva is convicted, she faces up to 120 years in prison plus fines, restitution and forfeiture of merchandise.

Her trial is scheduled for April 19th.

COMMENTARY:

I know there is a vast difference, but Sachdeva’s defense is a bit like the fellow who killed the abortion doctor – there is a justifiable reason?  Clearly stated…I am unaware that using a spending disorder as a defense has been successful in achieving a verdict of “not guilty”.   Certainly this case will be watched closely, as there are many white collar criminals who have either embezzled or created Ponzi schemes and lived lavish lifestyles who would welcome the opportunity to be found not guilty by reason of a “spending disorder.”  If this defense wins…I would suspect that Bernie Madoff would be regretting his guilty plea.

IF I were a betting man, I’d bet she’ll face time in prison…but?

YOUR COMMENTS WELCOME!


The Anatomy of a Ponzi Scheme – Commentary by Fraud Prevention Expert Chuck Gallagher

February 2, 2010

“I have an inside track on a great investment.  You’ll get better than a 12% per year return.  But, there are only a limited number of folks that I can get in on this offering.  You interested?

STEP ONE – make a promise that seems ‘special’ or ‘better’ than what anyone else can get on their investment funds!

“Wow…this is great.  I just got our statement in the mail and you know that investment I made in that private fund that Joe recommended…well its done better than he projected.  The market has been down, but this has returned over 16% thus far.  Man…I’m glad we got in on this deal!”

STEP TWO – Create an illusion that the investment is real.  This is done with fake statements (Bernie Madoff has had co-workers indicted for their role in creating fake documents).  Gordon Grigg is now in jail for his Ponzi scheme when he made a simple mistake on one of his fake statements.  He reversed the names and instead of calling them Fannie Mae and Freddy Mac he stated Fannie Mac and Freddy Mae…oops.

“Hey Frank…I know you told me the other day how badly your portfolio has been.  Well, I got connected with one of my friends on a private placement investment and, well, I was hesitant at first, but it’s been going great guns.  We’re up over 16% this year and I have a guarantee of 12%.  I didn’t say anything at first, but I thought that you might want to connect with this guy.  He’s really got it together.  Who knows, if you put some money with him…you might be able to dig yourself out of the hole a bit quicker.  Want me to call him and see if he could take you on?”

STEP THREE – Grow the fraud using trust.  First you trusted the person who hooked you into the fraud, and now you’re using that same blind trust to lead others to the slaughter.  Ouch…it will be painful both emotionally and financially on the back side.

HISTORY:

Charles Ponzi arrive in Boston on November 15, 1903, aboard the S.S. Vancouver. By his own account, Ponzi had $2.50 in his pocket, having gambled away the rest of his life savings during the voyage. “I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me,” he later told The New York Times. He quickly learned English and spent the next few years doing odd jobs along the East Coast, eventually taking a job as a dishwasher in a restaurant, where he slept on the floor. He managed to work his way up to the position of waiter, but was fired for shortchanging the customers and theft.

NOTE: There was a pattern of theft and unethical behavior, but the consequence of his actions were not significant enough for Ponzi to change his ways.

Imprisoned for forgery, Ponzi spent three years in the prison St. Vincent-de-Paul near Montreal. Rather than inform his mother of this development, he posted her a letter stating that he had found a job as a “special assistant” to a prison warden.   After his release in 1911 he decided to return to the United States, but got involved in a scheme to smuggle Italian illegal immigrants across the border. He was caught and spent two years in Atlanta Prison, where he met inmate Charles W. Morse, a wealthy Wall Street businessman and speculator, where he learned of greater opportunities than simple petty theft.

Ponzi seized on, what he said was an opportunity, to use postal coupons (I guess today we’d call them stamps), to make money.  IRCs (the postal coupons referred to) were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit.  Here’s where Ponzi dreamed up his opportunity for fraud.

Ponzi went to several of his friends in Boston and promised that he would double their investment in 90 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. Some people invested and were paid off as promised, receiving $750 interest on initial investments of $1,250.

NOTE: The scheme always involves a promise of something that the average bloke just can’t get.  So when someone – especially someone you trust tells you that they have a fail safe investment that offers great returns…be prepared to be scammed.

Soon afterward, Ponzi started his own company, the “Old Colony Foreign Exchange Company,” to promote the scheme. He set up shop in a building on School Street. Word spread, and investments came in at an ever-increasing rate. Ponzi hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi’s total take was US$5,000, (approximately US$54,000 in 2008 dollars). By March, he had made $30,000 ($328,000 in 2008 terms). A frenzy was building, and Ponzi began to hire agents to take in money from all over New England and New Jersey. At that time, investors were being paid impressive rates, encouraging yet others to invest. By May 1920, he had made $420,000 ($4.59 million in 2008 terms).

NOTE: The illusion was in full force.  Just as soon as folks began to see the promised returns happening (just as promised) they began to believe that what they were seeing was real.  Bernie Madoff, Gordon Grigg, and many many more in just 2009 did exactly the same thing.  They promised something and delivered…creating the illusion that all was just as portrayed.  What investors didn’t know was that the returns they were seeing came from other peoples investments.

By July 1920, Ponzi had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested.

NOTE: Another psychological part of most Ponzi schemes is that once there is an element of trust, greed sets in and investors (wanting more and more) do not take their profits, but rather leave them for yet bigger and bigger profits.  In effect, victims would rather gamble with their funds than protect their assets.

Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money. In fact, new money was the only way Ponzi had to pay off those investors, as he made no effort to generate legitimate profits.

NOTE: It seems odd, but the obvious somehow becomes clouded in the quest for more money.  In the Madoff scam…people now looking back could have seen that what he was doing couldn’t work…yet, Madoff survived three SEC investigations with flying colors.  It seems that it is human nature to want to believe that what is not real somehow is real.

Ponzi lived luxuriously: he bought a mansion in Lexington, Massachusetts with air conditioning and a heated swimming pool, and he maintained accounts in several banks across New England besides Hanover Trust. He also brought his mother from Italy in a first-class stateroom on an ocean liner.

NOTE:  Most Ponzi schemers use the funds (for the most part) for an illusory lifestyle.   That’s part of the illusion that causes people to trust the schemer.  Madoff, Grigg, Stanford (although he’s not yet been found guilty) Huffman and others all have become part of the illusion that promotes trust so that more people will invest (oops…become scammed).

Joseph Daniels, a Boston furniture dealer who had given Ponzi furniture which he could not afford to pay for, sued Ponzi to cash in on the gold rush. The lawsuit was unsuccessful, but it did start people asking how Ponzi could have gone from being penniless to being a millionaire in so short a time. There was a run on the Securities Exchange Company, as some investors decided to pull out. Ponzi paid them and the run stopped. On July 24, 1920, the Boston Post printed a favorable article on Ponzi and his scheme that brought in investors faster than ever. At that time, Ponzi was making $250,000 a day. Ponzi’s good fortune was increased by the fact that just below this favorable article, which seemed to imply that Ponzi was indeed returning 50% return on investment after only 45 days, was a bank advertisement that stated that the bank was paying 5% returns annually. The day after this article was published, Ponzi arrived at his office to find thousands of Bostonians waiting to give him their money.

NOTE: At the height of the schemes most fraudsters find that their false promise supported by an illusion and reinforced with trust (many times of well known and influential individuals) drives ever more folks to be sucked into the PIT. (PROMISE, ILLUSION AND TRUST).  Likewise, at its height that is generally when the pendulum is preparing to swing in – well lets say – a more truthful direction.  In other words the house of cards is soon to collapse.

On July 26, the Post started a series of articles that asked hard questions about the operation of Ponzi’s money machine. The Post contacted Clarence Barron, the financial analyst who published the Barron’s financial paper, to examine Ponzi’s scheme. Barron observed that though Ponzi was offering fantastic returns on investments, Ponzi himself was not investing with his own company. Barron then noted that to cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation. However, only about 27,000 actually were. The United States Post Office stated that postal reply coupons were not being bought in quantity at home or abroad.

The stories caused a panic run on the Securities Exchange Company. Ponzi paid out $2 million in three days to a wild crowd outside his office. He canvassed the crowd, passed out coffee and donuts, and cheerfully told them they had nothing to worry about. Many changed their minds and left their money with him. However, this attracted the attention of Daniel Gallagher (no relation by the way – although that would be quite a coincidence), the United States Attorney for the District of Massachusetts. Gallagher commissioned Edwin Pride to audit the Securities Exchange Company’s books—an effort made difficult by the fact his bookkeeping system consisted merely of index cards with investors’ names.

The denouement for Ponzi began in late July, when McMasters found several highly incriminating documents that indicated Ponzi was merely robbing Peter to pay Paul. He went to his former employer, the Post, with this information. The paper offered him $5,000 for his story. On August 2, 1920, McMasters wrote an article for the Post declaring Ponzi hopelessly insolvent. The article claimed that while Ponzi claimed $7 million in liquid funds, he was actually at least $2 million in debt. With interest factored in, McMasters wrote, Ponzi was as much as $4.5 million in the red. The story touched off a massive run, and Ponzi paid off in one day. He then sped up plans to build a massive conglomerate that would engage in banking and import-export operations.

On August 11, it all came crashing down for Ponzi. First, the Post came out with a front-page story about his activities in Montreal 13 years earlier—including his forgery conviction and his role at Zarossi’s scandal-ridden bank. That afternoon, Bank Commissioner Allen seized Hanover Trust after finding numerous irregularities in its books. Although the commissioner did not know it, this move foiled Ponzi’s last-ditch plan to “borrow” funds from the bank vaults after all other efforts to obtain funds failed.

With reports that he was due to be arrested any day, Ponzi surrendered to federal authorities on August 12 and was charged with mail fraud for sending letters to his marks telling them their notes had matured. He was originally released on $25,000 bail, but after the Post released the results of the audit, the bail bondsman withdrew the bail due to concerns he might be a flight risk.

The news brought down five other banks in addition to Hanover Trust. His investors were practically wiped out, receiving less than 30 cents on the dollar. The Post won a Pulitzer Prize in 1921 for its exposure of Ponzi’s fraud.

WHERE ARE WE TODAY?

Same place we were when old Charles created what we now call the “Ponzi scheme.”  Robbing Peter to Pay Paul is the name of this game and unfortunately it existed before Charles Ponzi (he just got the notoriety for it) and continues to this day…and unfortunately will continue.

People get victimized, in a sense, by their own greed – although many don’t wish to admit that.  But, reality is – the investor (victim) wants a better return than he/she can get elsewhere (they fall victim to a false promise).  The illusion that the fraudster creates lures the investor victim into believing that what seemingly can’t be real – in fact is.  And, most fraudsters prey first on those closest to them – their friends, family and close acquaintances people that trust them.

The fraudster typically uses need, opportunity and rationalization to effect their crime while the victim falls into the PIT – or stated this way, they fall victim to a PROMISE supported by an ILLUSION which has a foundation in TRUST.


J. V. Huffman, Jr. Sentenced to 30 years – but I Want My Money!

January 31, 2010

Recently sentenced to more than 30 years in prison, J.V. Huffman Jr., 46, was a Conover, North Carolina, man who defrauded hundreds of people out of their hard-earned money for nearly 20 years.

THE SENTENCING HEARING:

Huffman addressed the judge saying, “I can tell you it was never an intent to rip off the world.”  Huffman said his own financial problems prompted the Ponzi scheme that stole from friends, neighbors and fellow church members.  “I certainly want to say that I’m sorry,” Huffman said.

The judge said he isn’t frequently at a loss for words, but in this case he was.

“These are good, honest, hard-working people who worked their entire lives,” Bell said to Huffman. “You had every opportunity. You didn’t have to work in a mill for 40 years, and there aren’t one, two or 10 (victims), there are hundreds.”

Bell said it is also not just one generation that’s affected, but up to three that could feel the effects of what Huffman’s done. After sentencing Huffman to 30 years, Bell gave him some advice for his time in prison.

“I hope that every day of those 30 years, you think of those people who had their money taken from them,” Bell said.

NOW WHAT?

Victims of Ponzi schemes generally don’t want to hear what’s coming next, but here goes.  Look back and ask yourself, what did you do to find yourself in this mess?  For a Ponzi schemer to defraud you – you had to fall into what I call the PIT.  First, “P” – you fell for the promise.  Likely, think back about it and be honest, you were PROMISED something that seemed really good – perhaps too good to be true.  You were promised a better return than anyone you knew was getting for their investments.

From 8+% to 16% – Huffman followed a tried and true method to defraud – he made a great promise.  He followed human nature – making you think that you were somehow special and that he could get you a better return than most of your friends were getting.  He hooked you right then and there.  And, if there is a lesson from this tragedy it would be DON’T FALL FOR THAT!

Now fairly, once Huffman had you hooked he solidified his position with you by creating the “I” – ILLUSION through fake statements making you feel that what you had was somehow real…and he showed you evidence of his success.  After all, in order for you to feel successful – he must be successful.  Now, I know that many of Huffman’s victims might say, “I never met the man.”  True, but you likely knew someone who did and he created the perfect reputation so that he could continue his scheme.

Lastly, he used “T” – TRUST as his foundation for attracting more victims.  Huffman did exactly the same thing that Bernie Madoff did – just on a smaller scale.  And who did he go after – friends, church members, folks who knew and trusted him.  And not knowing the victims, my guess is – many of you suggested Huffman to your friends – after all, you were getting such great returns.  Victims creating or paving the way for more victims.  And, many of you would now say that this has created painful riffs in your relationships with others.

Simple advice:  (1) If you think you’re getting a better deal than others get – your likely being scammed.  (2) Don’t do investment business with those you know and trust – they are the most likely folks to scam you.

WHAT CAN I DO TO GET MY MONEY BACK?

Perhaps nothing.  But, there are provisions in the federal tax code that might offer some relief.  And, while I hear that you’d want it all back…believe me, something is better than nothing.  For sure, Huffman can’t earn enough in prison to provide any restitution.

A post in my blog that discusses how you can gain some relief can be found here.  NOW LET ME BE CLEAR…it is easy to be defrauded twice by folks who prey on those who have been victims of schemes just like Huffmans.  BE CAREFUL.  That said, I wrote the following and stand behind the author of the blog referenced above:

Moira Souza Shiver, expert on the application of IRC Section 165, has been asked by me to write this guest blog.  The benefits of Section 165 can be substantial, yet there are few who are qualified to understand how to effectively navigate the regulatory maze to gain maximum benefit.  As a business ethics and fraud prevention speaker, I try, through this blog, to provide a useful forum for discussing issues, and there is none more important at this time than the effective use of legal methods to recover loss.

If you’ve been scammed by Huffman and, perhaps, attended the sentencing hearing…I’d welcome your comments.

Finally, regarding financial help…check out Moira and research folks who provide Section 165 help…but be careful, and don’t fall prey to someone who promises more than is reasonable.

YOUR COMMENTS WELCOME!


SEC’s Failure in the Madoff case prompts lawsuit by Citizens for Responsibility and Ethics in Washington (CREW)

January 8, 2010

CREW, since 2003, has closely monitored government ethics, bringing egregious conduct to light and holding public officials accountable for their misconduct.  This statement is made according to their website.

On January 6th, 2010 – some three months after they requested information from the SEC (Securities and Exchange Commission) CREW filed a lawsuit against the SEC, challenging the SEC’s failure to produce records in response to CREW’s October 6, 2009 Freedom of Information Act (FOIA) request for records related to reforms the SEC has taken in the wake of its failure to detect Bernard Madoff’s $65 billion Ponzi scheme. Although the agency received numerous complaints and tips about Mr. Madoff’s activities over a 16-year period, and conducted five major investigations and examinations of Mr. Madoff, the SEC still failed to detect his colossal fraud. In January 2009, the SEC began implementing what it described as “decisive and comprehensive steps” to reduce the chance similar frauds will occur in the future or remain undetected by law enforcement, and an extensive Inspector General report outlining the SEC’s multiple failures suggested 58 more reforms in September. The records CREW seeks will help the public understand the extent to which the SEC has implemented meaningful and necessary reforms.

As a business ethics speaker, and one who is constantly asked about the Madoff scandal, especially how the SEC completely missed this massive fraud conducted right under their nose, I was poised to applaud CREW’s effort in this matter.  It is becoming clear that what is stated is often nothing more than smoke and mirrors.

Then I became confused.  Is CREW after headlines or did they just miss the obvious?  The SEC’s website (see here) states what actions they have taken as a result of the Madoff scandal.  The bullets points are stated below:

Somehow, as I type this, I am sure that someone can provide clarification, but why is a lawsuit necessary when the SEC has published what they are doing following Madoff?

Now if CREW is asking for more specifics than what the SEC has published…then I get it.  But for now, I wonder where the Washington ethics breech is when the SEC has publically stated their intent and actions?

COMMENTS WELCOME


The Great American Ponzi Scheme! Is Bernie Madoff any different than our Government?

January 4, 2010

Wouldn’t it be nice to share some good news?  I’d like to think as we enter this new decade that we could learn from the past and move boldly into the future with the assurance of a bright tomorrow.  Well, tomorrow may not be so bright if we don’t stop and look at our choices.

Every choice has a consequence!  I say that often as I address groups around the nation on ethics and ethical choices. From my perspective it seems that we, as a nation, are facing a serious ethical quandary.  Do we continue the rabid spending that has defined this past decade or do we accept the responsibility for where we are and elect to live within our means?

I know…I know – economists from all parts of the country would quickly argue with me that debt is sustainable and that we only have a problem if we can’t pay it back.  My response:  Bull.  As far as I am concerned…we are acting unethically and the consequences will be disastrous if we don’t soon take corrective action.

Facts: In 2000 our debt was a bit more than $5.5 Trillion.  By 2005 our national debt was around $7.5 Trillion and by the beginning of 2010 – well our national debt had crested above $12 Trillion.  That’s right – our national debt more than doubled in one short decade.  And, with the aging of the largest group of people in the history of this nation – the Baby Boomers – we will see nothing but increased debt for the next several decades unless we take dramatic action.

I ask is Bernie Madoff any different than our Government?  In Bernie’s case his victims didn’t know what was happening.  I bet if they did – they wouldn’t have invested with him.  In the case of our Government – we the taxpayers know – and yet, we still seem to be O.K. with the actions our elected officials take.  The crime is the same…the only difference is – it’s not a crime if you allow it to take place.  Folks, a Ponzi scheme is a Ponzi scheme no matter how you color the picture.

For a quick view of my video blog on this subject click here

The question is – what are we willing to do?  If we pay the promises made in the past to those who are aging to receive them…we might find ourselves bankrupt.

Share your opinions on the solutions to this problem through your comments.  Who knows…perhaps someone in big GOVERNMENT might be reading and take note.


David G. Friehling, CPA for Bernie Madoff Investment Securities Charged with Fraud! And The Dominios Begin To Fall…

March 19, 2009

With a $65 Billion Ponzi scheme in play and Bernie Madoff electing to plead guilty, it is no great surprise that others will being to fall as the government widens the responsibility net for the largest Ponzi scheme in US history.

I must admit this hits home and was something I expected.  Although I wish I could say something different, I, too, was a CPA, created a Ponzi scheme and spent time in Federal prison.  It is no fun.  And, without a doubt, Friehling will spend time there himself – although my guess – his sentence will much longer than mine.

Yesterday, David G. Friehling, CPA (licensed in the State of New York) was charged with securities fraud, aiding and abetting investment adviser fraud, and 19madoff190 four counts of filing false audit reports with theExchange Commission (“SEC”).   Friehling is the sole practitioner at Friehling & Horowitz, CPAs, P.C. in New York.  As a point of reference, Friehling was the son-in-law of Jerome Horowitz (his former accounting partner) who didn’t live to see it all unravel.  He dided on March 12, the day Madoff plead guilty.

According to a news release issued by the US Attorney’s office:

From 1991 through 2008, F&H was the accounting firm retained by BLMIS (Bernie L. Madoff Investment Securities) purportedly to audit BLMIS’s financial statements. FRIEHLING created BLMIS’s certified and purportedly audited financial statements, including balance sheets, statements of income, statements of cash flows, and reports on internal control. FRIEHLING falsely certified that he had prepared such statements in accordance with Generally Accepted Auditing Standards (“GAAS”) and in conformity with Generally Accepted Accounting Principles (“GAAP”). Those financial  statements were filed with the SEC and sent to clients of BLMIS.   BLMIS paid FRIEHLING approximately $12,000 to $14,500 per month for his services between 2004 and 2007.

Sorry, but before going any further, one must question the payment.  $14,500 a month is a small price to pay for disgusing a fraud considering that Friehling will be facing certain loss of his license and a lot of time in Federal Prison.  But, there is more…  the news release goes on to say:

FRIEHLING failed to conduct audits that complied with GAAS and GAAP by, among other things, failing to: (a) conduct independent verification of BLMIS assets; (b) review material sources of BLMIS revenue, including commissions; (c) examine a bank account through which billions of dollars of BLMIS client funds flowed; (d) verify liabilities related to BLMIS client accounts; or (e) verify the purchase and custody of securities by BLMIS. FRIEHLING also failed to test internal controls as required under GAAP and GAAS standards. For example, FRIEHLING did not take any steps to test internal controls over areas such as BLMIS’s redemption of client funds, the payment of invoices for corporate expenses, or the purchase of securities by BLMIS on behalf of its clients. Further, commencing at least as far back as 1995, FRIEHLING did not maintain professional independence from his audit client, BLMIS.   Specifically, FRIEHLING and/or his wife had an account at BLMIS with a year-end net equity of more than $500,000 — the maximum amount that, under SEC rules, he could have invested with a broker-dealer client and still maintain his independence.

According to the SEC’s complaint, Friehling similarly did not conduct any audit procedures with respect to BMIS internal controls, and had no basis to represent that BMIS had no material inadequacies. Afraid that his work for BMIS would be subject to peer review, as required of accountants who conduct audits, Friehling lied to the American Institute of Certified Public Accountants for years and denied that he conducted any audit work.

Articles in Forbes stated the following:

“Friehling essentially sold his license to Madoff for more than 17 years while Madoff’s Ponzi scheme went undetected,” said James Clarkson, acting director of the SEC’s New York Regional Office. “For all those years, Friehling deceived investors and regulators by declaring that Madoff’s enterprise had a clean audit record.”

Madoff has said his business didn’t become a Ponzi scheme until the early 1990s, around the time that Horowitz retired and Friehling took over. He was not accused of wrongdoing in the court complaint.

Numerous reports claim that Friehling and family had $14 million invested with Madoff two months before his confession to the largest financial fraud in US history.  Since 2000, Friehling withdrew about $5.5 million from those accounts, the SEC stated.

WHERE FROM HERE?

Bernie Madoff, while perhaps brilliant (in his own way) is not capable – in my opinion – of pulling off a fraud of this magnitude without help.  I am not suggesting that Friehling knew about the Ponzi scheme (he says he didn’t), but it is likely that he’ll be found guilty on most of the charges as there is no doubt that he’s (at a minimum) negligent.  Selling his license for money seems very clear.

But, from these headlines, I suspect there will be a demand for more “accountability” for audited financial statements and regulations placed on compliant CPA’s.  That is not the answer.  I have stated before and will again, you cannot legislate or regulate ethics or morality.  If a person elects to be dishonest…they will be dishonest regardless of the rules in place.

Friehling was a puppet for Bernard Madoff.  Most people (although most will deny it) have a price.  It appears that Friehling’s price wasn’t all that much.  Comfortable yes – rich no!  And knowing that his reputation is ruined, his license all but gone and many many years in prison facing him, I know that Friehling wishes he’d never met Bernie Madoff.  Hind sight is 20/20 and there is no doubt with all that is facing this CPA – Friehling is just beginning to face the consequences of his choices.

Every choice has a consequence!

My prediction – Friehling isn’t the only pawn is this massive fraud to fall.  There will be others so stay tuned…

FRIEHLING, 49, faces a statutory maximum sentence of 105 years in prison.

YOUR COMMENTS WELCOME!

Read the rest of this entry »