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


Jimmy Choo shoes and Million Dollar Home – Chad Read and Emily Read now sentenced to Federal Prison!

January 5, 2010

From California to Lubbock, Texas – Chad and Emily Read lived a modest life.  Then Emily began working for Reaction Fitness Clubs (a modest health club chain) – and things changed.

From living with Emily’s mother to owning a series of large homes and a condo in Dallas, the Reads had a dramatic change in lifestyle.  From a $1.2 million home, to expensive cars, to a recreational vehicle, to designer clothes and Jimmy Choo shoes – the Reads enjoyed life in a way few experience.  But where did the money come from?  According to the Reads their new found wealth came from a trust fund her father left to her.  Reality…well there was no trust fund only embezzlement or theft!

Seems that Emily worked as a bookeeper for the fitness clubs referred to as the Reaction Fitness Clubs.  During that time she wrote a large number of checks from the club and either would cash the checks or deposit them into their personal accounts.  Likewise, they used funds from the club accounts to pay for their personal credit cards and purchase other luxury items.

EVERY CHOICE HAS A CONSEQUENCE!

Emily J. Read – now Chad Read’s ex-wife – was sentenced in September 2009 to 41 months in federal prison and ordered to pay more than $670,000 in restitution.

Chad Read was sentenced in December 2009 to 18 months in federal prison and ordered to pay restitution remaining of $15,000.

WHAT HAPPENED?

Obviously, both husband and wife were convicted and sentenced.  But, since Chad received a substantially lower sentence (in terms of time spent in prison), was it possible that he was not fully aware of the crime being committed by his (now) ex-wife?  And, what motivated Emily to change her former lifestyle and enter into an obvious life of crime?  Lastly, how was she so easily able to effect the crime?

There are three components of a white collar crime – NEED – OPPORTUNITY and RATIONALIZATION.  In this case, it is clear that Reaction Fitness Clubs did not have sufficient internal controls opening the door to “opportunity”.  Seems that Read had free reign and, management must have been asleep at the wheel in order for a fraud of this magnitude to have gone undetected for so long.

LESSON

To avoid fraud you either have to have someone so strong in their ethical beliefs or foundation that they won’t cross the line or you have to eliminate one of the three components – and in this case the easiest way to have avoided this disastrous consequence would have been the elimination of opportunity.  Any good CPA or business owner knows that internal controls are there to protect the business assets and preclude the likelihood of succumbing to temptation.

I can’t address the Read’s need or rationalization, but had sufficient controls been put in place, Emily would not have easily had the opportunity to effect her massive life changing fraud.

Your comments are welcome!


Reginald Davis Sentenced to Prison for Mortgage Fraud…there’s a lesson here!

January 5, 2010

If you want to buy a home or investment real estate – YOU BETTER BE HONEST.

As we approached the height of the real estate bubble it seems that Reginald Davis, formerly of Dallas, TX, conspired with Michaiah Pruitt, a real estate investor from Dallas, to make false statements in mortgage applications in order to obtain mortgage loans for Davis to purchase two residential properties from Pruitt.  He admitted that he overstated his income, had funds in a bank account and intended to occupy the houses as a primary residence.

So, now some three years later, it seems that Reginald Davis is on the receiving end of his consequences.  That little scheme earned him: (1) a felony conviction; (2) six months in federal prison; (3) 6 months of home confinement and (4) restitution of $176,000.

Two other individuals who pled guilty are awaiting sentencing:  Jeanelle Richardson and Pierre Sowell.

LESSON:  If you’re applying for a loan it is best to be honest, cause EVERY CHOICE HAS A CONSEQUENCE and the consequence of faking a mortgage application to buy real estate is not worth time in federal prison.

Read the rest of this entry »


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.


Sujata Sachdeva, Koss Corporation Vice President of Finance Arrested for Embezzlement and Fired!

December 31, 2009

As the year and decade draw to a close the news of unethical activity just keeps on coming.  And…as a business ethics speaker who studies ethics and ethical trends, I don’t see any end to these type of reports.  Whether we have a robust economy or an economic crisis, it seems that the personal motivation for money (or what it represents) outweighs the simple ethical choices that should be made daily.

According to a report in the New York Times, “the Koss Corporation, a maker of headphones and equipment, said it fired its vice president of finance after she was accused of embezzling more than $20 million from the company for a multiyear shopping spree of expensive clothes, jewelry and other personal items.”

Sujata Sachdeva, vice president of finance at Koss since 1992, was charged with wire fraud, said Assistant U.S. Attorney Matthew Jacobs, prosecutor in the case. She appeared in federal courtand was released on an unsecured bond, Jacobs said.

The maker of stereo headphones said in a brief statement that the request to halt trading followed its discovery of “unauthorized transactions” and fired Sachdeva following the discovery of unauthorized financial transactions.  Sachdeva served as the company’s Principal Accounting Officer. Also, two members of the company’s accounting staff who served under Sachdeva were placed on unpaid administrative leave.

The firm said its board has appointed a special committee of independent directors to internally investigate the transactions and determine their effect, if any, on Koss’ financial statements.  Preliminary estimates indicate that the amount of unauthorized transactions since fiscal year 2006 through the present may exceed $20 million.

According to a Forbes report – Sachdeva’s income was slightly in excess of $170,000 per year.

WHY – WHY – WHY?

Whenever there is such a high profile ethics breech and fraud the question that is often asked is why?  What would cause someone, who otherwise knows better, to do such a thing?  Much as I hate to admit it…that question was asked of me many years ago when my fraud scheme came to light.  And like Sachdeva…I, too, lived an illusory life style.

According to published reports, Sachdeva reportedly used much of the money to purchase luxury items, and was ballsy enough to often leave her price-tagged clothes casually strewn about her office. When confronted by authorities, Sachdeva confessed, saying she covered up her two years of embezzlement by falsifying company financial statements.  Ouch…  I can speak from experience, the comfort that she might have enjoyed from her high flying lifestyle bring no lasting joy when facing the reality of prison – a place she is most certainly headed.

QUESTIONS:

1.  For those close to the situation, is it possible that Sujata Sachdeva suffered from Oniomania. (Oniomania is the technical term for the compulsive desire to shop, more commonly referred to as compulsive shopping, compulsive buying, shopping addiction or shopaholism.)

2.  Do you believe that others were involved in the fraudulent cover up associated with Sachdeva’s scheme?

As always…YOUR COMMENTS ARE WELCOME.


R. Allen Stanford’s Court Date 2011 – Stanford Financial Group fraud case takes Years – Madoff takes Months?

December 31, 2009

According to the Dallas Business Journal – U.S. District Judge David Hittner has decreed that Stanford’s trial on charges that he led a $7 billion fraud scheme would begin in January 2011.

The Securities and Exchange Commission, on February 17, 2009, charged Robert Allen Stanford and three of his companies for orchestrating a fraudulent, multi-billion dollar investment scheme centering on an $8 billion CD program.

“As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors.”

Rose Romero, Regional Director of the SEC’s Fort Worth Regional Office, added, “We are alleging a fraud of shocking magnitude that has spread its tentacles throughout the world.”

Stanford’s lawyer, Kent Schaffer, had asked Judge Hittner not to schedule the trial until the summer of 2011. If defense lawyers must prepare the case without funding from Stanford’s insurance policies, Schaffer reportedly said it could take as long as two and a half years to get ready for trial.  Meanwhile, according to documents filed with the Texas Workforce Commission confirmed earlier this year Stanford closed its facilities and effectively had to dismiss 1,022 employees across the United States. About 297 workers in Houston, the headquarters of Stanford Financial Group, lost their jobs.

Bernie Madoff knew that he was toast in December of ’08 when he admitted that the financial empire that he build was built based on fraud.  While he did wrong, at least he knew when to admit his guilt.  He saved the taxpayers millions by avoiding a long protracted trial.  In less than a year Madoff knew his fate – the rest of his life in prison.

Stanford – well he is still attempting to prove his innocence.  And, while in this country you are innocent until proven guilty, the bulk of the evidence suggests that Sir Allen Stanford will likely face a similar fate to that of Bernie.  I suspect that Stanford will, too, face the rest of his life in prison.  As a business ethics speaker I have to say, I at least respect that Madoff accepted his fate instead of making the process a circus.

DO YOU THINK THAT STANFORD IS RIGHT IN TRYING TO PROVE HIS INNOCENCE OR SHOULD HE PLEAD GUILTY AND MOVE ON?  Your comments are welcome.


Ethics Speaker Chuck Gallagher to Address University of South Dakota Business Ethics Symposium

April 26, 2009

VERMILLION, S.D. – During troubled economic times, Chuck Gallagher isn’t afraid to share his story of success – and how he lost it all. Gallagher, a business executive and motivational speaker, will be a guest of the Beacom School of Business of The University of South Dakota on Monday, April 27 at 7 p.m. in the Wayne S. Knutson Theatre.

Gallagher, a former CPA who lost everything because of poor choices, will present the program “Choices: Negative Consequences, Positive Results” where he will discuss some of the decisions he made in his attempts to make a better life for he and his family. Gallagher eventually lost it all, spent time in federal prison, but has found success again by making the right choices – personally and professionally.

“My lecture deals with issues of business ethics, particularly the choices we make in life and the consequences that follow,” says Gallagher. “Having been a successful CPA in the 80s, spent time in federal prison in the 90s and risen to the level of senior VP in a public company in the 2000s, I can speak from experience that I’ve lived with negative consequences thanks to some very stupid choices I made. But I’ve also had some incredible positive results based on the choices I made after spending time in a federal prison.”

Gallagher’s message is sure to resonate with students who are seeking answers on what it takes to be successful in today’s business world despite the presence of poor ethics and negative consequences. Ultimately, he explains, it’s about students differentiating themselves – positively – from their peers.

“I’m the poster child of what not to do,” he admits. “Ethical issues aren’t always black and white. If you want to be successful, ask the question ‘what are you doing to differentiate yourself?’”

A professional speaker, business entrepreneur, and sales executive, Gallagher has led a $40 million sales region with 125 sales representatives and started his own training business with projects in 30 states. Gallagher currently helps employees increase their sales results and skills while realizing the ramifications of their ethical choices. In addition to addressing students and audiences at colleges and universities throughout the United States, Gallagher also shares his business ethics message with business-related and health care related organizations.

“Choices: Negative Consequences, Positive Results” is made possible by the Beacom Opportunity Fund and the Arthur A. Volk Symposium. The Beacom Opportunity Fund provides resources for initiatives that promote the Beacom School of Business’s students and programs. Funding from the Volk Symposium affords opportunities for the business school to bring together students, academicians, and business leaders for discussion of current topics of interest. For more information about “Choices: Negative Consequences, Positive Results,” please contact the Beacom School of Business at (605) 677-5455.

A photograph of Gallagher is available for download at http://www.usd.edu/urelations/images/Chuck_Gallagher.jpg.

About The University of South Dakota
Founded in 1862, The University of South Dakota is designated as the only public liberal arts university in the state and is home to a comprehensive College of Arts and Sciences, School of Education, the state’s only School of Law, School of Medicine, School of Health Sciences, the accredited Beacom School of Business and the College of Fine Arts. It has an enrollment of approximately 9,200 students taught by 400 faculty members. More information is available at http://www.usd.edu/press/news.