Andrea Black (Lacuna) Memo to White-Collar Criminals:

If the Feds come knocking, just tell them that you will conduct an “internal investigation” into your suspected wrongdoing. They may be gullible enough to believe whatever you report. At worst, you can throw them some crumbs and admit to some mistakes to avoid a wider investigation into your unlawful activities. I'm not kidding!

Sam E. Antar (Convicted Felon, Graduating Class of 1992)

Sarcasm aside, back in my criminal days at Crazy Eddie, we pulled that stunt on our auditors at Peat Marwick Main (now KPMG). They were dumb enough to believe the results of our internal investigation clearing us of wrongdoing. Now it seems that in certain instances, the Feds are drinking the same Kool-Aid as Crazy Eddie's former auditors. It's INSANE!

Yesterday, David S. Hilzenrath from the Washington Post reported:

As the U.S. government steps up investigations of companies suspected of paying bribes overseas, law enforcement officials are leaving much of the detective work to the very corporations under suspicion.

The probes are so costly and wide-ranging that the Justice Department and Securities and Exchange Commission often let the companies investigate themselves and then share the results.

The strategy is especially common in cases of foreign corruption but also extends to domestic investigations involving issues as varied as health-care fraud and shady accounting.

The corporations, sometimes at the request of the government, hire teams of lawyers and accountants to interview employees, gather electronic records and sift through documents. The government reviews the results and decides whether further legwork is warranted — and, ultimately, whether to pursue charges.

The private investigators help determine what evidence the government sees. They typically turn over only a small subset of the many documents they collect. Sometimes the lawyers who conduct the investigation are the same ones who represent the company in negotiations with the government over charges and penalties. [Emphasis added.]

Hilzenrath asked one insider about the government's reliance on internal investigations:

What prevents the internal investigators from airbrushing the facts or, say, omitting evidence that might implicate the chief executive?

“You mean other than integrity?” one former federal prosecutor replied. “Very little.” The former prosecutor, who now works on internal investigations, spoke on the condition of anonymity to avoid having his comments used against him in future cases. [Emphasis added.]

Further, Nathan Koppel reported in the Wall Street Journal Blog that:

In a recent proposal explaining how it plans to act on tips from corporate insiders and whistleblowers, the SEC said that it may “give the company an opportunity to investigate the matter and report back.”

“This has been the approach of the Enforcement staff in the past, and the Commission expects that it will continue in the future,” the agency said.

Are the people running the Justice Department and the Securities and Exchange Commission completely out of their minds? They should know better than to ever rely on anyone's “integrity” when conducting an investigation. White-collar criminals cloak themselves in a “wall of false integrity” to increase the comfort level of their victims and avoid action from law enforcement agencies and regulators. While the Justice Department and SEC are busy relying on the integrity of internal investigations by companies suspected of wrongdoing, they often ignore crucial information provided by whistleblowers.

For example, Bernie Madoff used his stature as the former Chairman of NASD to lure investors into a sense of false security and to avoid action by regulators. The Securities and Exchange Commission gave Bernie Madoff the benefit of any doubt and ignored warnings from whistleblower Harry Markopolos that Madoff was conducting a massive Ponzi scheme.

Like Madoff, sub-prime lender NovaStar Financial apparently used the "wall of false integrity" tactic to successfully avoid action from regulators, too. Last Sunday, Gretchen Morgenson and Joshua Rosner from the New York Times reported how the SEC repeatedly ignored warnings by short-seller Marc Cohodes about aggressive accounting tactics used by NovaStar to cook its books. The company hired Lanny Davis, former special counsel to President Clinton during the Monica Lewinski scandal to "run interference" with regulators:

So in February 2003, Mr. Cohodes started corresponding with the S.E.C. about NovaStar. He began “throwing things over the wall,” as he put it, to Amy Miller, a lawyer in the division of enforcement.

[Snip]

Taking his pencil to NovaStar’s statements, Mr. Cohodes found a raft of red flags. “They made their numbers look however they wanted to,” he recalls. “Not even remotely realistic.”

One tactic gave the company lots of leeway in how it valued the loans held on its books. Another allowed it to record immediately all the income that a loan would generate over its life, even if that was decades. This accounting method ignored the possibility that some of the company’s loans might default. NovaStar assumed that losses on all of its loans would be nonexistent.

[Snip]

The company hired Lanny Davis, a well-connected lobbyist and public relations operative, to run interference. Mr. Davis was used to operating in a crucible; he had been special counsel to President Bill Clinton during the Monica Lewinsky scandal. [Emphasis added].

Ultimately, NovaStar's stock price collapsed and shareholders unnecessarily lost over a billion dollars because of SEC inaction:

At the end of 2009, NovaStar management concluded that the company’s financial reporting was “not effective.”

NovaStar had, in essence, confirmed what Mr. Cohodes had been telling the S.E.C. all along. The company’s financial reports just couldn’t be trusted. [Emphasis added]

The Feds listened to Lanny and ignored Cohodes.

Our government is making it easier for criminals to commit white-collar crime. The Obama Administration is permitting the Justice Department and SEC to rely on internal investigations by suspected wrongdoers. Republican Congressman Darrell Issa wants to gut the SEC to make it completely ineffective in policing the capital markets. Republican Presidential hopeful Michelle Bachmann wants to completely repeal Dodd-Frank, so white-collar criminals will never have to worry about potential whistleblowers. Small cap companies have been exempted from certain internal control provisions of Sarbanes-Oxley .The Supreme Court has narrowed the definition of honest services fraud. New York City has ten times more cops than the SEC has employees and twice as many cops than Special Agents employed by the FBI.

I should have been a criminal today, rather than in the 1980s. I could have avoided prosecution for my crimes. Maybe, it's time to end my retirement from white-collar crime?



Recommended reading



Reuters - Special Report: From Hannibal Lecter to Bernie Madoff by Matthew Goldstein



Dag Blog - "Crazy Eddie" Fraudster Sam Antar To Return To Crime - Thanks to Darrell Issa & Anti-Regulation Republicans by William K. Wolfrum



Gary Weiss - Novastar and Overstock in the News



Crowe Horwath - Putting the Freud in Fraud: Focus on the Human Element, Catching a Crook Isn't Only a Numbers Game By Jonathan T. Marks, CPA/CFF, CFE, CITP



Disclosure

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes in cold-blood for fun and profit, and simply because I could.

If it weren't for the heroic efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals. Often, I refer cases to them as an independent whistleblower. I teach about white-collar crime for professional organizations, businesses, and colleges and universities.

Recently, I exposed GAAP violations by Overstock.com which caused the company to restate its financial reports for the third time in three years. The SEC is now investigating Overstock.com and its CEO Patrick Byrne for securities law violations (Details here, here, and here).

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time.

I do not own any Overstock.com securities long or short. My investigation of this company is a freebie for securities regulators to try to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.