SEC Fraud

It was announced recently that Monster Worldwide, parent company of the online job-search site Monster.com, agreed to pay $2.5M to settle allegations that they engaged in secretly backdating options for executives and employees. Monster Worldwide admits nor denies any wrongdoing in the matter.

In 2006, Monster Worldwide restated its results for 1997 through 2005 by a cumulative pretax amount of $339.5 million, to record additional noncash charges for options-related compensation expense.

“This is an important step in closing an unfortunate chapter in the company’s history and putting the issue firmly behind us,” said Sal Iannuzzi, Monster’s chairman and chief executive, in a statement. “Our current executive team has spent the last two years refocusing Monster on its customers and shareholders, retooling the day-to-day management, and overhauling governance in an effort to adhere to the highest standards.”

Backdating options is not illegal, it was the fact that they didn’t report it that made it an offense.

Who is David Friehling? Well, David G. Friehling was Bernard Madoff’s accountant! He was arrested last week and charged with securities fraud for his involvement in the $65 million Ponzi scheme orchestrated by Bernard Madoff. The full list of charges includes securities fraud, aiding and abetting investment adviser fraud, plus four counts of filing false audit reports with the Securities and Exchange Commission. He is accused of rubber stamping and filing false certified financial statements for Madoff’s firm, Bernard L. Madoff Investment Securities LLC and is out on $2.5 million bail. If he’s convicted, he could be sentenced to 105 years in prison, compared to the 150 that Madoff could be sentenced to after pleading guilty.

While Friehling wasn’t charged with knowing about Madoff’s admitted scheme, the accountant failed to do tests and run internal controls to see, among other things, if Madoff was purchasing securities on behalf of his clients, according to the complaint. Yet, in financial statements he prepared, and in SEC filings, Friehling said he carried out tests to check the veracity of Madoff’s finances, the complaint said.

Madoff accountant charged with securities fraud [Newsday]

If you’ve been reading the news, you may have seen that on March 12th, the SEC charged Quest Software and three current and former officers for stock option backdating. What is stock option backdating and why is it illegal?

To begin, stock options are used as compensation in many tech startups because they potentially cost the company nothing. An option is the right to buy stock at a predefined price, known as the strike price. If the current price of the stock is $10, giving you stock options today at the strike price of $10 means you can buy the stock for $10. If the price goes down, your options are worthless because it makes no sense to buy them at $10 when you can buy them on the open market for less. If the price goes up, you win because you can buy at $10 and sell on the open market for more.

Why is stock option backdating illegal? It actually isn’t illegal, but what happens is that shareholders aren’t told about it. If I were to offer you stock options and date them in the past, but made all the proper regulatory filings with the SEC, then everything would be fine. The problem is that many of these companies involved in the options backdating scandal didn’t file the proper regulatory papers.

Companies are required to disclose executive pay, including stock options, and when they fail to do that, they run afoul of the regulations. Only then is backdating illegal.

If you visit the whistleblower site, please do so at home and not at work. Your work is probably monitoring your internet communcations and you don’t want to tip your hand by visiting the site.

The government protects whistleblowers. If you see something happening at your company and want to say something about it without the fear of being punished, the government will protect you through OSHA’s Office of the Whistleblower Protection Program at the United States Department of Labor. OSHA stands for Occupational Safety and Health Administration and it was created with the Occupational Safety and Health Act, the two are used interchangeably. The Act provides protection including Whistleblowing.

This is the quick reference Fact Sheet on your rights as a whistleblower.

If you know of something wrong, you should report it!

Harry Markopolos, an independent financial fraud investigator, testified today that he repeatedly warned the Securities and Exchange Commission about Bernard Madoff’s massive Ponzi scheme. Markopolos said that he was warmly received initially by SEC’s Boston Bureau Chief, Edward Manion, but was then rebuked by the New York SEC office.

“In 2000 Mr. Manion warned me that relations between the New York and Boston regional offices was about as warm and friendly as the Yankees-Red Sox rivalry and that New York does not like to receive tips from Boston,” Markopolos testified.

Markopolos said it took him five minutes to conclude that Madoff was a fraud after looking at his reported investment performance, and four hours of actual number-crunching analysis to confirm his suspicions.

It’s absolutely amazing that the SEC knew all this and it just managed to get bogged down in red tape and bureaucratic infighting.

Two Democratic officials told the Wall Street Journal that President-elect Barack Obama has selected Mary Schapiro as the next head of the Securities and Exchange Commission. Schapiro is a 53 year old chief executive of a “securities industry regulator for securities firms” and is credited with “beefing up enforcement while at the National Association of Securities Dealers and guiding the creation of the Financial Industry Regulatory Authority, which she now leads.”

Regulator Schapiro to Run SEC for Obama [Wall Street Journal]

Last week, one of the largest securities frauds was uncovered when Bernard Madof was arrested for allegedly running a Ponzi scheme that has bilked an estimated $50 billion from investor. As a result, the SEC has launched an internal investigation into its own practices and the Wall Street Journal reported (a MarketWatch story is linked because the WSJ version requires subscription) that in 2006 the SEC discovered that Madoff was “misleading” the agency about how he managed his client’s money. Their response? To require him to register as an investment adviser rather than investigate and potentially uncover his Ponzi scheme two years earlier.

Bernard Madoff was arrested and charged with securities fraud yesterday. Madoff was a former Nasdaq chairman and founded Bernard L. Madoff Investment Securities, LLC, and is alleged to have run a Ponzi scheme estimated to have at least $50 billion in losses. The scheme itself involved some major hedge funds as well, to the tune of $10 billion.

The biggest loser may be Walter Noel’s Fairfield Greenwich Group, whose $7.3 billion Fairfield Sentry Ltd. invested with Madoff’s eponymous firm, three people familiar with the matter said. Another client was Kingate Management Ltd., whose $2.8 billion Kingate Global Fund Ltd. invested with Madoff, they said. [Source: Bloomberg]

Madoff had even confessed to his employees right before he was arrested. Yikes.

The Drudge Report has a headline today indicating that Mark Cuban, owner of the Dallas Mavericks, may have been charged with insider trading.

Update: The WSJ is reporting that the SEC filed insider trading charges against Mark Cuban for allegedly selling his entire 6% stake in Mamma.com after learning they were raising money through a private investment in a public entity, PIPE.

This may be linked with Cuban’s Sharesleuth.com website in which they investigate suspect companies and shine a light on their dealings. Cuban has promised to make some actual investments based on the information discovered on that site. The legal issues involved insider trading and non-publicly available information was discussed on numerous sites but many believed it was legally OK, albeit ethically gray and clearly taking advantage of a loophole.

Ponzi Schemes, where early investors are paid using the money given by later investors (very illegal), are alive and well and today the SEC sued a Miami resident for running one. Andres L. Pimstein and two private companies, The Bottom Line of South Florida, Inc. and Summit Trading LLC, were charged with securities fraud in running a $30 million Ponzi scheme.

The SEC’s complaint alleges that from at least 2005 to April 2008, Pimstein and his agents offered and sold more than $30 million in securities to at least 80 investors in at least five states, purportedly to fund an export business that Pimstein operated through Bottom Line and Summit. The Ponzi scheme collapsed when the interest and principal Bottom Line and Summit were obligated to pay investors substantially exceeded the amount of new funds Pimstein and his agents were able to raise from investors.

Pimstein is done since he admitted to police he had operated the scheme in the first place.