Is your small business ready?

Here are just some of the events that can interfere with the normal operations of your business. 

Air Conditioning Failure  (You would feel that this week in Dallas.)

Acid Leak

Asbestos

Bomb Threat

Bomb Blast

Brown Out  (Certainly possible in the North East.)

Burst Pipe

Cable Cut

Chemical Spill

CO Fire

Condensation

Construction

Coolant Leak

Cooling Tower Leak

Corrupted Data

Diesel Generator

Earthquakes destroy buildings and infrastructure.

Earthquake

Electrical Short

Epidemic

Evacuation

Explosion

Fire

Floods can destroy back up files and tapes.

Flood

Fraud

Frozen Pipes

Hacker

Hail Storm

Halon Discharge

Human Error

Humidity

Hurricane

HVAC Failure

Hardware Error

Hurricanes can cause the most wide spread damage.

Hurricanes

Ice Storm  (Please, this week in Dallas.)

Insects

Lightning

Logic Bomb

Lost Data

Low Voltage

Microwave Fade

Network Failure

PCB Contamination

Plane Crash

Power Outage

Power Spike

Power Surge

Programmer Error

Raw Sewage

Relocation Delay

Rodents

Roof Cave In

Sabotage

Shotgun Blast

Shredded Data

Sick building

Fire and smoke are the most insured against perils.

Smoke Damage

Snow Storm

Faulty Sprinkler

Static Electricity

Strike Action

Software Error

Software Ransom

Terrorism

Theft

Toilet Overflow

Tornado

Train Derailment

Transformer Fire

UPS Failure

Vandalism

Vehicle Crash

Virus

Water Damage

Wind Storm

Volcano 

Against these risks, here are 10 things you can do: 

1.  Assess your risk, both internally and externally.

What could happen as a result of your facility’s location? What types of emergencies could result from the design or construction of your facility? What could result from a process or system failure?  Are you in a flood plain?  Have you been a prior victim of a hacking attack? 

2.      Assess your critical business functions.  What could you not do without?

Safety systems

Telecommunications

Computer system

Power

Heating/Cooling system

Emergency notification system 

3. Prepare your supply chain. Talk to your key vendors and suppliers about their recovery plans.  Ask yourself, “Has it been tested?”  The very important answer is, “Yes!”  Develop relationships with alternate vendors.  Eliminate single points of failure.  Educate your clients about the importance of preparedness.

Insure what can’t be protected. 

4.       Create an emergency management plan. Minimizes the impact, protects and re-assures stakeholders, and prepares for recovery.  Facilitates transition between normal business operations and a catastrophe response.  Includes the notification and management of employees, clients, vendors, suppliers and the media. 

5.      Back-up your data.  We have had two separate posts on this operation.  There are companies who will do this expertly for you at a very reasonable price.  Take advantage of these companies.  We have one on our “Friends” page that we recommend. 

6. Create a crisis communication plan. Develop a process to make sure all stakeholders (internal and external) are aware of decisions and expectations.

24-hour phone tree

Password protected web page

E-mail alert

Call-in recording system

Manage client and key vendor communications.

Prepare a media communications plan. 

7. Assemble an emergency kit. It should include:

Recovery plan

Important records

Insurance policies

Fixed asset inventory

Contracts

Operating system install disks

Licensing keys

Letterhead

Office Supplies

Stamps

Writing Utensils

Stapler/Staples

Tape

Printer Paper

Calculators

Cash

8. Review your insurance coverage. You insurance agent will be happy to do this with you.  Assure you are insured for all potential risks.  Consider business interruption insurance and added expense insurance.  Keep photos of your building, equipment lists and policy information stored in a safe and secure offsite location. 

9. Plan for an alternate locations.  Plan to have critical items delivered to a specific location.  Have a hot site recovery location set up in advance. 

10. Test your plan.  Having a great plan is no good unless you test it.  Many times I have found that clients think they are backing up their data, only to find that what they have saved cannot be restored.

There are many risks, but there are many solutions.  Having a plan and testing it is what is important for your small business.

iTunes security holes?

iTunes has some serious control issues.

 After one successful hacking attack occurred earlier this month, Apple has tried to minimize the threat.  “The iTunes servers were not compromised”, Apple said on Tuesday, July 6.  “An extremely small percentage of users, about 400 of the 150 million iTunes users, that is less than 0.0003 per cent of iTunes users were impacted.”  So says Apple.

Experts feel, however, that many more iTunes accounts have been hacked than the 400 Apple depicted as an isolated case of fraud by a rogue iPhone application developer.

If all your App Store titles are in Vietnamese, you should worry.

The California-based maker of the iPhone and iPad said this week that it had banned an independent developer using the name Thuat Nguyen from the iTunes App Store, after complaints from US consumers who discovered that their accounts had purchased his Vietnamese-language electronic books.

Charts from AppExplorer show that one of Mr Nguyen’s $4.99 applications, LP Bat Bai P6, leapt to about number 50 on the US book charts by mid-June and eventually reached number 21 about three weeks later. On a recent weekday, a developer said it took 50 downloads to get to No. 38 on that chart, so more than 1,000 purchases would have been needed during that rise.

Mr Nguyen, who failed to respond or comment, had more than 40 such applications in the top 50, suggesting that many thousands of accounts could have been compromised in what security experts said was probably an automated attack.

It is ridiculous to think that Mr Nguyen was the only one who might be pulling such a scam, which has called into question Apple’s security practices such as its use of e-mail addresses as usernames.  Other developers are likely to be flying below the radar by using many hacked accounts for small in-app purchases that do not send the programs onto the very visible bestseller lists.

iTunes users should change passwords frequently.

The Apple web sites have cautioned its customers to be vigilant for suspicious transactions.  “If your credit card or iTunes password is stolen and used on iTunes we recommend that you contact your financial institution and inquire about cancelling the card and issuing a chargeback for any unauthorized transactions,” Apple stated.  “We also recommend that you change your iTunes account password immediately,” Apple added.

Apple has tweaked its ordering process in response to the alleged fraud case, requiring customers to re-enter the numeric security codes on their credit cards more often.

Some think that internal controls are a costly nuisance.  However, when essential controls are not followed it can be very expensive.

It seems the accountants were in charge of approving safety expenditures at BP, not the engineers.  Engineering controls are often expensive.  BP management is currently experiencing the consequences of what appears to have been a “mostly working” approach to offshore oil drilling instead of a a “never failing” approach.

It is the job of senior executives to think the unthinkable, to envision the damage a real catastrophe could do to the company. While few risks truly justify a “never failing” attitude, drilling an oil well in deep water in the environmentally sensitive Gulf of Mexico is one of these risks.  BP executives failed to apprecitate the danger in its project.

The unthinkable happened.

A black future for oily Tony Hayward?

When BP manager Andy Inglis called his boss, Tony Hayward, early April 21, he reported that the Deepwater Horizon had exploded about three and a half hours before, and was still blazing fiercely. Workers on board were missing. It was obvious at once that this was the most serious level of incident that the company could face.  Hayward quickly gathered his team at BP’s headquarters. It included Steve Westwell, Hayward’s chief of staff, Rupert Bondy, the group’s general counsel, and Andrew Gowers, the group head of media. Inglis joined in by telephone.  It is interesting that the group included a lawyer and a media consultant, but NO safety expert.  This was just one small but telling sign of what BP’s priorities were.

Hayward was shocked, sad and angry.  Hayward’s immediate instinct was to blame someone else, namely Transocean, the owner and operator of the rig. In his first public statements on the disaster, he said it was “their people, their processes” at work on the rig, and “not our accident”. What that reaction ignored, however, was BP’s role as overall supervisor and co-ordinator of the project, and those statements have since been qualified by the company, which has accepted that its staff were involved in key decisions on the rig.  Again, these key decisions put saving money over safety.

Will Gulf rigs be required to fly US flags in the future?

The project was called Macondo, named after the doomed village in Gabriel García Márquez’s One Hundred Years of Solitude.  The doomed project had been a “nightmare”, in the words of one BP engineer working on it. In particular, it was susceptible to gas “kicks”: escapes of gas into the well bore that could cause explosions unless carefully handled. It appears that one of those gas kicks escaped all the way up the drilling pipes to the rig, bypassing several safeguards, where it ignited.

While BP’s accountants were carefully measuring costs, their engineers could not seem to measure oil.  Both BP and the US administration had been aware from the start that an accident in the Gulf could have a significant environmental impact. In seeking permits for wells to be drilled in the region, BP had said it could handle a leak of 250,000 barrels of oil per day (bpd), implying a spill on the scale of the Exxon Valdez every two days. Those claims were later shown to be ludicrously over-confident.

BP circulated an estimate of “up to” 1,000 bpd.  Government scientists had analysed the data and concluded the oil flow was more likely to be 5,000 bpd. It was the difference between expecting an Exxon Valdez-sized spill in up to a year, and expecting one every two months. The latest estimate is now about 35,000 bpd, and it could be as much as 60,000 bpd.

Following expensive but proper safety controls was always an issue at the well.  During March and early April of 2010, several platform workers and supervisors expressed concerns with well control.

At approximately 9:45 PM, Central Daylight time, on April 20, 2010, methane gas from the well, under high pressure, shot all the way up and out of the drill column, expanded onto the platform, and then ignited and exploded.  Fire then engulfed the platform.  Most of the workers were evacuated by lifeboats or were airlifted out by helicopter, but eleven workers were never found despite a three-day Coast Guard search operation, and are presumed to have died in the explosion.  Efforts by multiple ships to douse the flames were unsuccessful. After burning furiously for approximately 36 hours, the Deepwater Horizon sank on the morning of April 22, 2010.  As a result, the drilling riser running from the wellhead on the ocean floor up to the oil rig was destroyed.

On the afternoon of April 22, a large oil slick began to spread at the former rig site.  Two remotely operated underwater vehicles (ROVs) unsuccessfully attempted to cap the well.  US Coast Guard Admiral Landry announced that a damaged wellhead was indeed leaking oil into the Gulf and described it as “a very serious spill”.  According to the US Congressional investigation the rig’s blowout preventer, a fail-safe device fitted at the base of the well, built by Cameron International Corporation, had a hydraulic leak and a failed battery, and had catastrophically failed.

For the want of a battery a coast was lost.

See our other posts about BP at:

Cutting costs:   http://www.johnbrianfastcpa.com/2000/checking-the-rigs-after-the-oil-has-been-spilt/

The collapse of the BP stock price:          http://www.johnbrianfastcpa.com/1945/1945/

Accounting for the oil spill:     http://www.johnbrianfastcpa.com/1773/accounting-for-the-oil-spill/

It is the accountants.  Here are some other surprising facts about fraud.

The Association of Certified Fraud Examiners (ACFE) made a study of 1,843 cases of occupational fraud that occurred worldwide between January 2008 and December 2009.  The Examiners reported in their 2010 Report to the Nations the following results:

Fraud is surprisingly widespread and expensive.  The typical organization loses 5% of its annual revenue to fraud.  Applied to the estimated 2009 Gross World Product, this figure translates to a potential global fraud loss of more than $2.9 trillion per year.  The median loss caused by the occupational fraud cases in the ACFE study was $160,000.  Nearly one-quarter of the frauds studied involved losses of at least $1 million.

Small businesses are more likely to be the victims of fraud.  Small organizations are disproportionately victimized by occupational fraud because these organizations are typically lacking in anti-fraud controls compared to their larger counterparts, which makes them particularly vulnerable to fraud.   They not only have less resources for internal controls, they may be less knowledgeable of fraud risks.

The frauds lasted a median of 18 months before being detected (if they ever are detected.)  The fraudster is very devious and very capable of hiding his thefts.

Whistle-blowers are important.  Occupational frauds are much more likely to be detected by tip than by any other means.  Having a whistle-blower hot line is one of the most important controls you can have.

Anti-fraud controls appear to help reduce the cost and duration of occupational fraud schemes. We looked at the effect of 15 common controls on the median loss and duration of the frauds. Victim organizations that had these controls in place had significantly lower losses and time-to-detection than those organizations without the controls.

The C-level fraudsters do the most harm.  High-level perpetrators cause the greatest damage to their organizations. Frauds committed by owners/executives were more than three times as costly as frauds committed by managers, and more than nine times as costly as low-level employee frauds.  Executive-level frauds also took much longer to detect.  Executives are less likely to be investigated and are less likely to be investigated aggressively.

The higher in the organization, the more damaging the fraudster.

More than 80% of the frauds in the ACFE study were committed by individuals in one of six departments: accounting, operations, sales, executive/upper management, customer service or purchasing.  Accountants were the most likely group of professionals to commit fraud.  The bean counters have the most opportunity and the greatest availability of tools to hide their thefts.

Most white-collar thieves are virgins (at least fraud virgins.)  More than 85% of fraudsters in the ACFE study had never been previously charged or convicted for a fraud-related offense.

Beware of the bookkeeper driving the Rolls Royce.  Fraud perpetrators often display warning signs that they are engaging in illicit activity. The most common behavioral red flags displayed by the perpetrators in the ACFE study were living beyond their means (43% of cases) and experiencing financial difficulties (36% of cases.)

Maybe we need regulations over the oil industry after all.  Better late than never.

The Minerals Management Service is now the Bureau of Ocean Energy Management

US Minerals Management Service inspectors say there is no urgent cause for concern regarding 30 deep-water drilling rigs that they have finished inspecting in the Gulf of Mexico in the wake of the massive oil spill.  The inspectors now plan to examine all deep-water production facilities in the Gulf. The inspection of the drilling rigs began after an oilrig operated by BP PLC exploded and sunk on April 20 in the Gulf, killing 11 people.

The exploded facility has been spilling at least 210,000 gallons of oil a day in the nation’s biggest oil spill since the Exxon Valdez disaster in Alaska in 1989.

Congress is considering requiring that all drilling in US Coastal Waters be done by US flagged ships only.  This will permit inspections of the rigs by the Coast Guard. The Coast Guard will need more money, manpower and training to conduct inspections if Congress decides to impose these limits.

The Coast Guard has only 69 inspectors qualified to inspect deep-water drilling rigs like Deepwater Horizon, the BP rig that failed two months ago. That rig was flagged by the Marshall Islands and is owned by Transocean, based in Switzerland.

Is Vanuatu known for its oil field safety?

There are 275 oil rigs involved in US offshore drilling, at least 80 of which are foreign-flagged, according to information the Coast Guard and the Congressional Research Service. Among the countries flagging the rigs are Panama, Liberia, the Marshall Islands and Vanuatu, a volcanic island chain in the southwest Pacific Ocean. Most of the rigs are in the Gulf of Mexico, although a few are off the coast of Alaska and in other US waters.  There are 442 other vessels that service and supply rigs in the Gulf of Mexico, more than 60 of which are foreign-flagged.

Sixty-seven percent of Americans believe it is likely the BP oil spill could have been prevented if the government did a better job of inspecting offshore oil drilling rigs. Only twenty-four percent say it’s not likely the leak could have been prevented if the government handled this properly.  The same number of adults from both parties believes the incident could have been prevented if rigs received better inspections by the government.

The price the Gulf Coast is paying for a lack of inspections before the spill is catastrophic.  There is a place for sensible rules and regulations in our society.

See our previous post on the BP oil spill at:

http://www.johnbrianfastcpa.com/1773/accounting-for-the-oil-spill/

Who will stop the crime in Dallas Crime Stoppers?

We have reported on the City Hall scandal that sent Councilman Hill to prison.  We also investigated how the Dallas Police Department has been fudging crime statistics.  Now there have been reported thefts of cash within the Crime Stoppers program.  Instead of Crime Stoppers, they are Crime Starters.

Thousands of dollars of Crime Stoppers cash is missing.

Crime Stoppers works by soliciting anonymous tips from the public. If a tip leads to prosecution of a suspect, the successful tipster can receive up to $5,000. On average, the program, which uses money from fees paid by probationers, pays informants about $150,000 annually.

Dallas City Manager Mary Suhm stops crime by not counting it.

You would think that a city program of this size would have good internal controls.  But the City Manager, Mary Suhm, has other priorities and has given short thrift to protecting city property and property and currency under city control.

The Dallas police senior corporal who heads the Crime Stoppers program was placed on administrative leave and another woman has been arrested in connection with an on-going investigation into missing funds from the popular tips-for-cash program.

Dallas police public integrity investigators on Wednesday served a search warrant at the office of Senior Corporal Theadora Ross, 49, where she oversees the department’s Crime Stoppers program in the basement of the Bank of America building at 400 S. Zang Boulevard in Dallas.

Ross, a 25-year department veteran, has not been charged with a crime but has been placed on leave since May 27 pending a public integrity unit criminal investigation. She has led the Crime Stoppers program for the department since 2003 and previously spent seven years as an internal affairs investigator.

An associate of Corporal Ross, Malva Delley, 35, of Dallas, was arrested on May 27, the same day Ross was placed on leave, and booked into Lew Sterrett Justice Center on suspicion of misdemeanor attempted theft.

Delley has cooperated with investigators and gave them a written statement, according to court documents. She told authorities that it was Ross who provided her with confidential Crime Stoppers information, which she used in an attempt to collect Crime Stoppers reward money that did not belong to either of them.

On June 1, another Crime Stoppers officer, Senior Corporal Jose Jimenez, had discovered that confidential documents were missing from the office, court records show.  Investigators reviewed surveillance footage from the Crime Stoppers office on Zang.  Images from between 8 and 8:25 p.m. on May 27 showed Ross and an unidentified woman leaving the office with a cardboard file box and dragging a large garbage bag full of unknown property, court records state, possibly attempting to cover their tracks.

The city desperately needs a special prosecutor to investigate the Dallas Police Department and some outside group to impose controls and standards on this out-of control-group.

Let us stop the crime in Crime Stoppers.

Many who work for corporations are required to sign that they have read and understand the company’s code of ethics.  This is not a trivial exercise.  Having employees understand and follow a firm’s code of ethics is an important control.

One of the most important sections of a code of ethics is the prohibition of excepting gifts from vendors and/or related parties.  Federal regulations and agency ethics rules bar employees from accepting or soliciting gifts, including meals, worth more than $20 per instance or $50 in a year. Federal employees also are prohibited from accepting gifts in association with their official position and are required to disclose gifts and travel reimbursements totaling more than $335 during various reporting periods.

Employees of the federal regulatory agency that oversees offshore drilling, Minerals Management Service (MMS), accepted lunches, football tickets, hunting trips and other gifts from the oil and gas companies they were in charge of policing. 

In 2008, federal inspectors reprimanded workers in the MMS’ Lakewood, Colorado office for having sexual relationships with and accepting gifts from energy company representatives.  Federal investigators also documented millions of uncollected oil and gas royalties because of accounting problems at MMS.

The lack of oversight of the employees of this important federal agency may have led to the worst environmental catastrophe in this nation’s history.  Did these gifts motivate the employees of MMS to take it easy on violations they found?  There have been serious questions about whether the agency was lax in setting requirements for safety devices and practices.

Interior Secretary Ken Salazar said these actions were fresh evidence of a dangerously “cozy relationship” between federal regulators and the energy industry. He vowed to follow up with “any and all appropriate personnel actions, including termination, discipline and referrals of any wrongdoing for criminal prosecution.” 

Obviously, in retrospect, a rigorous preventive review is much better than taking action after improper conduct has occurred.

Government to industry to catastrophe

There are so prohibitions in the federal government about going to work for the industry you have been regulating.  Critics have been calling for the end to these “revolving doors” for years.  See our post on similar problems at the SEC at:     http://www.johnbrianfastcpa.com/1659/the-revolving-door-at-the-sec-hurts-its-effectiveness/    

At least one MMS inspector was negotiating employment with an energy company while simultaneously inspecting its platforms in the Gulf of Mexico.

Salazar last week signed an order to carve MMS into three bureaus to remove conflicts of interest. One bureau would oversee development of offshore energy resources, a second would collect royalties from oil and gas produced on federal property and a third would impose safety and environmental regulations on offshore energy activity.

Many codes have prohibitions of excessive personal use of computers owned by the firm.  At the extreme, some employees use company computers to access porn sites. This was a problem at the SEC.  Problems can cause a company to be charged with providing a hostile sexual environment for employees.

Even in the most benign cases, excessive accessing of social networking sites like Facebook and Twitter can seriously reduce an employee’s productivity.

No porn at the SEC. No porn at MMS.

Investigators have found that many of the inspectors of Minerals Management Service had inappropriate humor and pornography on their government computers.  They also exchanged pornography-filled e-mails.  More than 300 e-mails were discovered with pornographic images and links.

Having and following a code of ethics at your company is important.  Ignoring the code can have serious consequences for you and your company.

The City of Dallas has employed this simple technique.

The City of Dallas finished 2009 with a 6.4 percent drop in reported crime from the year before, according to the figures released by the Dallas police.  However, the 2009 total count of 81,585 crimes does not include some crimes that should have been counted, according to federal guidelines.

Police are supposed to collect crime statistics in accordance with federal guidelines in the Uniform Crime Reporting Program (UCR), which is run by the FBI Law Enforcement Agencies.  The Dallas Police Department’s reporting system deviates from federal guidelines in several areas that would undercount crimes and reduce the overall crime rate.

The Police Department understates and misclassifies many aggravated assaults so they are not included in the city’s violent crime tally.  And, the department continues a long-standing practice of classifying break-ins as vandalism, not burglary, if someone kicks in the door of a residence but is scared away by a person or an alarm.

As a result of reporting changes made in 2008, Dallas Police are discarding legitimate car burglary reports as “untrustworthy” even though an epidemic of broken car windows has led to the proliferation of “Lock and Hide” signs throughout the city.

All of these manipulations in Dallas are deviations from federal guidelines. 

New Dallas Police Chief David Brown

Mr. David Brown was named chief of the Dallas Police Department by City Manager Mary Suhm, replacing retired Chief David Kunkle.  Suhm said Brown’s wealth of experience would serve him well when he tackles the challenges facing the city.  “He has carried out the actions that have gone on in the last six years to bring the department to the point it is now,” she said. “We face economic challenges, and crime’s still got to go down. It is a difficult balance.” 

As one part of his experience, David Brown was in charge of the program to reduce counting some crimes in Dallas.  In 2007, Brown directly supervised the lieutenant who made key changes in how the department collects aggravated-assault statistics. The changes, which deviate from UCR guidelines, significantly lowered the city’s violent crime numbers.

Is Brown’s promotion a pay off for running the system that stopped counting all crimes?

Brown said while although the department may not always follow UCR guidelines, neither do police in other cities. He said the criticisms unfairly single out Dallas police, while it’s the UCR system that needs fixing.  “I challenge you to pull the same category of reports from other major cities for the same week you pulled ours,” he said.

The Dallas total of 81,585 crimes for 2009 does not reflect some crimes that appear to be undercounted according to federal guidelines.  An investigation into crime-reporting practices by The Dallas Morning News in 2009 found that the Police Department’s reporting system deviates from federal guidelines in several areas that would affect the overall crime rate.

The News found that as a result of reporting changes made in 2008, police were discarding seemingly legitimate car burglaries as untrustworthy.  The News also found that, as a result of changes made in 2007, the Police Department misclassifies many aggravated assaults, meaning they don’t go into the city’s violent crime tally.

And The News found that the department continues a practice of classifying it as vandalism, not burglary, if someone kicks in the door of a residence but is scared away by a person or alarm.  Again, in doing so, the Police Department’s reporting system deviates from federal guidelines.

Kunkle giving Brown the party line.

Former Chief David Kunkle is taking responsibility for the lower crime statistics.  He and new Chief David Brown are responsible.  The question is:  “Does Dallas really have less crime?”

This is an update of a post previously published on February 8, 2010

How did Allen Stanford get away with his Ponzi scheme for so long?  Was someone in the Security Exchange Commission (SEC) covering for him?

The SEC said Spencer Barasch's actions were suspect.

A report by the SEC’s inspector-general says that a former leading lawyer for the SEC blocked several investigations of Allen Stanford, the financier charged with defrauding investors of $7 billion, and then went through the notorious “revolving door” to goo work for him.  Spencer Barasch, the former head of enforcement for the SEC in Fort Worth, Texas, “repeatedly attempted to represent Mr Stanford in connection with the investigation he had blocked for seven years.”

The Securities and Exchange Commission’s inspector general has a 151-page report that says that over a seven-year period Barasch rebuffed repeated pleas from agency staff to investigate Stanford’s offshore bank. An SEC inquiry likely would have stopped the alleged Ponzi scheme as early as 1998, the inspector general said.

The report raises questions about the tone at the top of the SEC’s Fort Worth office, which is charged with regulating securities trading in Texas and three other states.  The office was tarnished previously when one of its top trial attorneys, Phillip Offill, was convicted of masterminding penny stock fraud after he left the commission. Offill, a former close associate of Barasch’s, was sentenced to eight years in federal prison Friday, 4/23.

No more cricket for Stanford.

Federal officials contend that Stanford orchestrated a Ponzi scheme by advising clients to invest more than $7 billion in supposed certificates of deposit from the Stanford International Bank on the Caribbean island of Antigua.  Stanford promised of outlandish returns when interest rates were falling.  Stanford claimed his portfolio returned better than 12 percent, a claim that SEC lawyers found to be fraudulent.

In 1998, Barasch’s first year as enforcement chief, an SEC examiner recommended pursuing evidence that Stanford was promising investors unlikely rates of return.  Barasch declined to pursue Stanford or to take any action whatsoever.  For an enforcement chief to turn down an examiner’s recommendation was unprecedented.

The inspectors report also said Barasch dismissed investor complaints about Stanford in 2002 and 2003 and squashed two other staff efforts to investigate Stanford.  One investigation was made 2002 and another immediately before Barasch left the SEC in April 2005.  Barasch was successfully able to deflect all of these investigations.

Barasch’s behavior after leaving the SEC concerned regulators.  Just two months after leaving the agency, he asked its ethics branch for permission to represent Stanford.  The request was denied. Agency officials believed that Barasch’s involvement with the Stanford deliberations while at the SEC permanently barred him from doing work for Stanford. Despite that legal opinion, Barasch did do a small amount of work for Stanford in October 2006, in apparent violation of rules.  The SEC has referred the matter to the State Bar of Texas.

Spencer Barasch

According to the inspector’s report, when asked by the inspector-general why he was so insistent on representing Stanford, Mr Barasch replied, “Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines.”

See related posts at:

http://www.johnbrianfastcpa.com/1659/the-revolving-door-at-the-sec-hurts-its-effectiveness/

http://www.johnbrianfastcpa.com/1395/pete-sessions-told-allen-stanford-that-he-loved-him/

http://www.johnbrianfastcpa.com/994/dissecting-allen-stanford/

Goldman sold fire insurance to its customers on a house it had designed to burn.

Buying some collaterised debt obligations is like betting that your neighbor’s house will burn down.  Wall Street was selling exotic bets.  “Get rich off your neighbor’s impending misery.”  The reputation of the Street reached a new low last week when it was revealed that Goldman Sachs was working with an arsonist to design your neighbor’s house so that it was almost certain to burn down.  Then, Goldman Sachs turned around and sold the fire insurance on the house to its own customers.

The Security and Exchange Commission (SEC) on Friday, 4/16, accused Goldman Sachs of securities fraud that caused investor losses of more than $1 billion.  The SEC accused Goldman and one of its vice-presidents, Fabrice Tourre, of failing to disclose that in 2007 the hedge fund Paulson & Co had a major role in creating Abacus 2007-AC1, a collaterised debt obligation (CDO), a security backed by subprime mortgages, so that Goldman and Paulson could bet against it.

The SEC’s conclusions: “Goldman’s marketing materials for Abacus 2007-AC1 were false and misleading because they represented that others selected the reference portfolio while omitting any mention that Paulson, a party with economic interests adverse to CDO investors, played a significant role in the selection of the reference portfolio.”

In fact, says the SEC complaint, Goldman made investors think the reverse, that Paulson, widely respected for its shrewd investment views, was buying into the equity of the CDO to the tune of $200 million, not betting against it.  Investors, especially naïve investors, around the world were sent terms sheets, flip charts and offering memorandums.

An official of the SEC said, “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio” which was offered to customers.

Within nine months of the creation of the CDO, 99 per cent of its loans had been downgraded, yielding Paulson & Co a profit of $1 billion.  Investors around the globe lost $1 billion. 

John Paulson, the arsonist that burned down your neighbor's house.

Mr. John Paulson personally took home $4 billion in 2007 for correctly betting that housing  prices would collapse.  The firm, Paulson & Co, earned $15 billion

Goldman is facing actions from politicians on both sides of the Atlantic as they push for tougher financial regulation.

The German government said it would consider legal steps against Goldman.  IKB, a German bank that was one of the first casualties of the global crisis in 2007, was one of three investors in the collateralised debt obligation and lost about $150 million.

British premier Gordon Brown attacked the “moral bankruptcy” of Goldman Sachs on Sunday after the US Securities and Exchange Commission accused the world’s most famous bank of fraud.  Mr Brown, who is campaigning for re-election, demanded that the UK’s Financial Services Authority launch its own investigation. “The banks are still an issue. They are a risk to the economy,” he said.

Lloyd of Leverage.

Under the leadership of Lloyd Blankfein, the Bronx-born son of a postal worker, who rose to the top via Goldman’s cut-throat trading floors, the bank started using intelligence gleaned from its market operations and corporate sources to use in both its own trading accounts and that of its clients.  Goldman’s status as a trader is self-perpetuating, as clients find themselves having to share information with the bank in order to get valuable ideas on what everyone else is doing. People trade with Goldman not because they want to but because they have to.

People close to the board, which meets this week to discuss Goldman’s first-quarter results, say there is little immediate pressure on Mr Blankfein but admit some members are getting worried about Goldman’s repeated mishaps. Goldman insiders believe Mr Blankfein’s near-term future will hinge on the share price, which lost more than 12 per cent on Friday. But in the long run, the chief executive’s hold on the job will depend on whether Goldman’s two factions, the investment banking dealmakers as well as the traders that he grew up with, will still unite behind him.