Ponzi Scheme of the Bernard L Madoff Investment Securities LLC - Assignment Example

Fraud Case Studies Name: Instructor: Institution: Date: Case 1: Ponzi scheme of The Bernard L. Madoff Investment Securities LLC Bernie Madoff, the owner of Investment Securities LLC, was arrested in December 2008 for operating the fraudulent investment called the Ponzi scheme which was considered the biggest fraudulent scheme in the history of the United States. The working of the Ponzi investment scheme involved the payments of returns to investors from other investor’s money or their savings with the company. The scheme eventually collapsed because the amount investors were paid surpass the actual earnings the company realized from the scheme (Kennedy, 2012). By the time the scandal was discovered the investor's account had totaled to approximately $67 billion. Also, the assessment conducted indicated that the scheme had been in operation for almost 20 years without being noticed. Charges of federal felony directed to Bernie Madoff totaled to eleven and were summarized as money laundering, perjury and securities fraud. The crimes committed were termed as extraordinary evil, and he was sentenced to serve a 150-year jail term. Peter Madoff, a brother to Bernie Madoff, was also jailed for ten years following the significant role he played in the scandal. Over 33 years, Peter Madoff served a chief compliance officer and a senior lawyer of the company, and it is upon this that he charged for failure to uncover the scandal long before it surfaced. Other individuals convicted alongside Bernie and Peter were David G. Friehling who served as the company’s independent auditor and confirmed to have failed to audit the firm as required and that his independent of work was significantly compromised, and Frank DisPascali who was understood to be a longtime aide of Bernie Madoff and confessed to have extend a hand in the execution of the fraudulent scheme for almost 20 years (Kennedy, 2012. The scandal attracted over 1500 lawsuits, and by May 2010 at least $15.5 billion were settled by the different foreign financial institution. Irving Picard was appointed by the court as a trustee to represent the victims in the United States who fall into the trap of the fraudulent scheme. At the start of recovery mission, Picard was aiming $100 billion in damages, but it comes out that recovering the initial investment of $17.5 billion unattainable. What followed was that the court ruled that the claims Picard raised against third parties and banks were void and thus the $20 billion sought out from UBS, HSBC and JP Morgan Chase will not be paid out. As we speak, approximately $9 billion was recovered out of which $340 million claims have been settled with the rest of the recovered amount waiting for court settlements of pending appeals. Prominent victims of Ponzi scheme included but no limited to Eliot Spitzer Governor of New York whose real estate business plunged into trouble in the awake of the scandal due to its significant involvement, and Elie Weisel former Noble Peace Prize winner (Kennedy, 2012. Case 2: Former Tesco Directors Charged Over Accounting Scandal Information forwarded by the Serious Fraud Office (SFO) outlined significant accounting scandals at Tesco Company. The alleged fraudulent activity was believed to have occurred between the months of February and September 2014. The scandal involved former directors of the company who served different roles. The alleged individuals included John Scouler; who served as a commercial director for food, Carl Rogberg who served as a finance director in the UK headquarter and Christopher Bush who served as the managing director in the UK headquarter. The three were convicted over fraud accounts that were attributed to abuse of individual power and position. Also, they were charged with accounts of false accounting done with the stipulated time of February and September 2014. In October 2014, SFO commenced a criminal investigation into the company’s accounting practices following the admission made by the firm of profit overstatement by 263 million pounds following incorrect book payment it had to anticipate from its suppliers.Following the uncovering of profit overstatement, the three directors were suspended by the company. Personal representatives of the alleged individual expressed their dissatisfactions following the suspension and vehemently contested against the raised allegations to prove their client’s innocence over the matter. Despite pleading guilty the three directors are faced set to stand trials in September this year (2017) (Adibi, Aziz, & Nur). The scandal was uncovered following the whistleblower alert to the then incoming CEO of the company; Dave Lewis who took power in September 2014. What followed was that the company seek a forensic audit that was conducted by Deloitte audit firms who from their reports indicated that the company had inflated its profits estimates for semiannual financial performance in August 2014. Similar trends were discovered in the previous financial reporting period. Following the audit of Irish operation in April 2014 by Tesco, it was discovered that there were 60 million pounds of misstatements recorded from previous year’s operations. Following the overstating profit levels, Tesco is believed to have lost approximately 2 billion pounds in its stock market. Tesco share price fell drastically following the misstatement which eventually caused significant damage to huge investor base. Two years after the accounting scandal a group of over 124 British institutional funds filed court proceeding against Tesco claiming more than 100 million pounds to cater for the damage they incurred following the misleading profit statements in the stock market. The group was funded by Bentham Europe experts in funding litigations (Adibi, Aziz, & Nur). Financial analyst projects that Tesco may face an approximated 500 million pound fine following the accounting scandal. According to market and financial service acts, investors just like any other financial statement user have a right to rely on the financial statement to enable them efficiently allocate their investment capital. Misstatement of profit figures by Tesco is a breach of the above Act. It is upon this that the 125 British institution fund movement is built upon that is a result of misstatement the investors relied on the published statements and ended up incurring a significant loss that calls for compensation (Adibi, Aziz, & Nur). Case 3: Fraudulent Tax Accounting at Weatherford Oil industry major player Weatherford International Plc. was convicted of inflating its earnings through the application of deceptive income tax accounting procedure. As a result, the company was charged with a $140 million fine of which it accepted to pay. As a result of fraudulent income tax accounting, it was noted that the inflated earnings stood at approximately $900 million. Two senior accounting were identified to be behind the fraudulent act. These were James Hudgins who served the position of Vice President and Darryl Kitay who served as a tax manager for the company. The two arranged a fraud that was to run for four financial years. They also reduced the firm’s end of year provision for income taxes by $100m to $154m for each year. The impact of these adjustments is that it allowed the earning results and reported Effective Tax Rate (ETR) for the company to significantly align with the analysis of various financial users with the subsequent projections made and the firm’s previously declared projected outcome. The company at the end benefited from the fraudulent activity of the two senior executives since it used the inflated stock price that was artificially generated to acquire a range of companies as well earning the firm large bonus in 2010. The fraud was brought to light by the external auditor of the firm Ernst & Young in 2011 while they were investigating a range of other errors in the income tax accounting (Searcey, 2009).The two executive are believed to have repeated the same fraudulent activity in 2008, 2009 and 2010 fixing the gap between the amount that were projected and actual effective tax rate by generating unsupported adjustments that were approximated to range from $287 million to $304 million which ended up reducing significantly the tax expenses of the company and therefore ETR. From the adjustments made a debit balance was created that intensified to approximately $461 million (Searcey, 2009). The firm was required to pay $140 million as a civil penalty to settle the charges. Out of this amount Hudgins was charged $334,067 in interest, penalty, and disgorgement while Kitay was required to pay $30000 as fine. Following the alleged fraudulent activity by the company, it had to restate its reports on three occasions between 2011 and 2012. Also, in 2012 following the scandal, Kitay was relieved of his supervisory roles to do with income tax accounting while Hudgins voluntarily resigned. Weatherford International denied the investors the access to accurate and reliable reports by permitting the two senior officials to manipulate the financial results by choosing their own cooked figures when the legit results were less than what was earlier announced to the public and analyst (Searcey, 2009). Case 4: Fraudulent Undertaking of Two Tyco Executive Officials Tyco International Plc. Is a global company that runs two principal business segments fire protection and security solution. The firm was incorporated in the Republic of Ireland with functional headquarters in the United States, New Jersey, and Princeton. In 2002, two of the company’s top management officials were alleged to have reaped the company over $ 600 million through a series of racketeering scheme of activities that involved unauthorized bonuses, falsified expense account, and stock fraud. The two Dennis Kozlowski who used to serve as the company’s chief executive and Mark H. Swartz who served as the chief financial officer were accused of using the proceeds from the fraudulent transactions to pay for entire costs of apartments and homes (Pillmore, 2003). The financial fraud at Tyco first came to light in 2002 after a tip indicated that a less that legal transaction had been occurring. By June 2002, for Mr. Kozlowski resigned from his position just before tax evasion accusation were directed to him over the purchase of a range of expensive apartments and homes that were allegedly believed to be funded by the company revenue.Mr. Kozlowski was accused of influencing the company to incur half the expenses on the multi-billion birthday party for his wife that was carried out on the Italian island of Sardinia who was a waitress. The two executive officials were also accused of bribing the board members of the firm as well as some of the key employees of the enterprise who were considered to have significant influence with a primary objective of keeping their fraudulent executions under cover. This indictment was charged with enterprise corruption commonly attributed to Mafia prosecutions. The Manhattan district attorney; Robert Morgenthau in his accusations justified that the two generated an elaborate covert scheme that dates back in 1995 that enable them to lavishly spend millions of the firm's capital for theirown personal interests. Further, he highlighted that the two officials protected their tracks and expenditure by limiting internal audit scope and circumventing the internal legal department of the company when filing the required disclosure items with the Security and Exchange Commission (SEC) (Pillmore, 2003). The two officials were accused of stealing approximately $175 million from the firm and further reaping over $425 million by covertly selling the company’s stock while maintaining an inflated price for the stocks. Mark Belnick who was part of the investigator team in 1987 together with two officials were also accused over selling of the firm’s stock without the consent of the investors significantly breaching the Security and Exchange Commission (SEC) rules. As a result, the company stock value falls by 70%.What followed is that $600 million worth of assets for Mr. Swartz and Mr. Kozlowski were frozen while court proceedings were underway. During the trial at the State Supreme Court in Manhattan, Justice Michael Obus concluded a subjective recognizance bond of $50 million and $100 million for Mr. Swartz and Mr. Kozlowski respectively (Pillmore, 2003). References Adibi, D., Aziz, J., & Nur, G. Do markets react to fraudulent financial reporting: a study of Tesco’s overestimation of revenue. Kennedy, K. A. (2012). An Analysis of Fraud: Causes, Prevention, and Notable Cases. Pillmore, E. M. (2003). How we're fixing up Tyco. Harvard Business Review, 81(12), 96-103. Searcey, D. (2009). The US cracks down on corporate bribes. The Wall Street Journal, 26. Read More