PI Newswire

PARADISE — It may not be the official derivation of the word, but Jos Van Hout, an investigator with the Butte County District Attorney’s Office, claims FRAUD should stand for “Financial Rewards Acquired Under Deception.”

At a seminar Wednesday attended mostly by seniors, District Attorney Mike Ramsey reminded them that older generations are often targeted by frauds and scams because they have more disposable income, are more trusting, and are likely to be more polite to scammers over the phone.

“Older folks generally have good names when it comes to credit and these people are after your good name,” Van Hout said.

Ramsey admitted that finding and prosecuting fraudsters, whether they use the Internet, telephone or mail, is difficult and expensive because they usually operate from other states or other countries.

“I told an investigator once who had a good lead about a fraud overseas that we could afford to send him there, but couldn’t afford to bring him back,” Ramsey said.

“Our answer to the problem is to ‘inoculate’ the population by showing them how to avoid being taken,” said Ramsey.

Ramsey and Van Hout said common sense still goes a long way toward avoiding fraud. “If it sounds to good to be true, it is,” Van Hout emphasized.

Among simple things people can do to protect themselves from Internet fraud is to create a password made up of letters and numbers, rather than using something personal, like a birth date or anniversary. The men also said using your mother’s maiden name is a no-no, but said the biggest mistake most victims make is giving out their Social Security numbers.

Thieves can figure out those passwords fairly easily, and getting your Social Security number is like a magic key,” Van Hout said.

Other tips include never putting outgoing mail in an unsecured mail box like the ones most people have in front of their homes, and only doing business with Internet sites you know and that ensure secure transactions.

As commonplace as fraud against the elderly is, Van Hout said it remains one of the most underreported crimes in the U.S. “Only about 65 percent of frauds against the elderly are reported because the victims are embarrassed,” he said. “And even more importantly, they don’t want their children finding out they’ve been taken.”

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Ah, had the world learned its lesson from the Enrons and Worldcoms, we’d have no more accounting fraud. Had Sarbanes-Oxley done the trick, corporate books from coast to coast would be ruler straight.

But alas, that’s not the world we live in. We were reminded of that this morning upon reading the news that computer maker Dell and its founder, Michael Dell (pictured), hid the effect of payments from Intel earlier in the decade in such a way that artificially inflated its earnings. (Plaintiffs lawyers, start your engines.) Click here for the WSJ story; here for the NYT story; here for the complaint.

Dell agreed to pay $100 million to settle Securities & Exchange Commission charges concerning Intel and other alleged accounting fraud. Michael Dell himself agreed to pay a $4 million fine. He too declined to admit or deny guilt.

The SEC complaint alleges a pattern of accounting manipulation that calls into question Dell’s apparent financial success from 2002 to 2006.

During much of that time, Dell’s share price nearly doubled, and investors and professors credited the company’s ultra-efficient supply chain and direct-sales strategy for its fast growth.

A Dell spokesman declined to comment on the allegations in the complaint.

The SEC’s 61-page complaint quotes from internal emails from Dell executives, in some cases discussing the need for larger payments from Intel to hit financial goals.

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The government unveiled two high-profile cases of financial fraud Thursday as federal regulators look to crack down on Wall Street shenanigans.

The Securities and Exchange Commission said Pequot Capital Management, a Connecticut-based hedge fund, agreed to pay $28 million to settle insider trading charges dating back to 2001.

Separately, federal law enforcement officials arrested a New York-based investment advisor, Kenneth Ira Starr, on charges of running a $30 million fraud that implicated a local politician.

According to the SEC’s civil complaint, Pequot’s founder and chief executive, Arthur Samberg, sought inside information from David Zilkha, a former Microsoft employee who had recently been offered a job at Pequot, about the technology company’s quarterly earnings statement.

Samberg closed Pequot last year amid allegations of insider trading. The Connecticut-based fund, founded in 1998, had been among the largest hedge funds in the world, with as much as $15 billion under management at one time.

A spokesman for Samberg and Pequot declined to comment.

Samberg, 69, and Pequot settled the charges without admitting or denying the SEC’s allegations against them.

Zilkha, 41, is being charged in an administrative proceeding on charges he defied a subpoena and direct questions about information he had received regarding Microsoft’s earnings during a previous investigation. A lawyer representing Zilkha was not immediately available to comment on the charges.

“The cases have two particularly troubling aspects,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “A hedge fund manager trading on illegal insider information, and his tipper source who withheld crucial information about the scheme during an SEC investigation.”

Meanwhile, the U.S. Attorney’s Office in New York said Kenneth Starr, who managed money for “high net-worth and celebrity clients,” defrauded his clients of at least $30 million.

Prosecutors said Starr, through his investment firm Starr & Co., transferred funds from clients in a way that was characteristic of a “Ponzi” scheme. He also solicitied money from clients for what he said were “sure deals,” which he used to fund risky investments for his personal gain, prosecutors said.

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The SEC’s Regulation S-P puts many advisers in a bind.

On one hand, the rule gives advisers a threefold responsibility: insuring the security and confidentiality of customer records, protecting against any anticipated threats or hazards to that information, and preventing, if at all possible, unauthorized access to and use of those records.

At the same time, the Securities and Exchange Commission provides little or no practical direction as to how advisers should carry out their responsibilities.

So what are average advisers supposed to do to protect their firms, themselves and their client data?

Here are some practical tips.

As simple and rudimentary as it might seem, the humble password is a good and often overlooked place to start.

Avoid using passwords that are easy to figure out. Believe it or not, among the most common passwords, as noted by several security experts and security websites, are “password,” “123456,” “abc123” or simply a person’s name.

The strongest passwords are typically considered to be at least eight characters long, have a mix of upper- and lowercase letters, numbers and even punctuation marks just to add to the complexity.

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The reemergence of a Securities and Exchange Commission porn scandal may be political payback for the agency’s fraud suit against Goldman Sachs, some officials suspect.

News of salacious Internet sex surfing by dozens of SEC supervisors actually broke months ago, but it got new life after the commission’s April 16 vote to act against the financial powerhouse.

GOP lawmakers have loudly slammed the decision, government sources noted.

Asked whether there was any connection between the lawsuit and the recently leaked inspector general’s report on downloading porn, SEC spokesman John Nester declined to comment.

But he said the agency has been explaining since February that it looked into every report of “inappropriate” behavior. The report named 33 officials. “Each of the offending employees has been disciplined,” Nester said. “Some have already been suspended or dismissed.”

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A former enforcement attorney for the Securities and Exchange Commission was sentenced Friday to eight years in prison for his role in a a series of multimillion dollar pump-and-dump stock fraud schemes.

Dallas-based attorney Phillip Offill Jr., 51, was convicted by a jury earlier this year on 10 counts of wire fraud and conspiracy. He testified that he was acting within the law, but the jury rejected his defense, and so too did U.S. District Judge Liam O’Grady.

“Your testimony … was an affront to justice,” O’Grady told Offill at Friday’s sentencing hearing. “It was one of the biggest pack of lies I’ve ever heard.”

Offill, who worked at the SEC for 15 years before taking a job at the Godwin Gruber law firm in Dallas, aided schemes that by conservative estimates cheated more than 1,500 investors out of at least $2.4 million. The fraudsters would pump up the value of dubious penny stocks and then sell the shares at inflated prices to unwitting buyers.

Eight other co-conspirators have already been convicted and sentenced in a case that has been under investigation for more than three years. Most of the illegal transactions took place in 2004.

The eight-year term imposed on Offill was one of the most severe. Prosecutor Ed Power said the tougher sentence was deserved because Offill lied on the witness stand and because his status as a respected attorney helped provide cover for the fraud.

“If anyone knew that these actions were wrong, this defendant did,” Power and prosecutor Patrick Stokes wrote in a sentencing memo.

Prosecutors had wanted the judge to impose a sentence within federal guidelines, which called for 14 to 17 years. The defense asked for no more than three years.

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U.S. authorities on Wednesday accused a Miami Beach, Florida, businessman of allegedly running a $900 million investment scam in which some of the defrauded investors’ money was used to make donations to a local university

Nevin K. Shapiro, whose name is enshrined in a University of Miami athletic lounge, was charged with one count of securities fraud and one count of money laundering in connection with operating a Ponzi scheme.

Shapiro faces a maximum of 20 years in prison and $5 million fine on the securities fraud charge. He also faces civil fraud charges filed Wednesday by the Securities and Exchange Commission.

Shapiro surrendered to authorities earlier on Wednesday and is now in jail on a $10 million bond, according to a spokeswoman for the U.S. attorney’s office in New Jersey.

U.S. authorities allege that the 41-year-old Shapiro sold investors securities that he claimed would fund his Capitol Investments firm’s wholesale grocery distribution business and touted returns as high as 26 percent annually.

Instead, Shapiro redirected funds, making donations to charities, funding his lavish lifestyle and running a Ponzi scheme in which he used funds from new investors to pay the principal and interest to earlier investors, U.S. authorities said.

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It was only a matter of time before another banker, lured by the prospects of riches, would get busted on allegations of stealing source code connected to a high-frequency, stock-and-commodities trading platform.

The latest arrest concerns a former Societe Generale trader who was being detained Tuesday on New York federal court charges of stealing the computer code of the Paris-based banking concern’s high-frequency trading software.

Monday’s arrest of Samarth Agrawal, 26, came nine months after a Goldman Sachs programmer was arrested on similar charges that he, too, stole his employer’s source code for software his employer used to make sophisticated, high-speed, high-volume stock and commodities trades.

The Securities and Exchange Commission is investigating the use of these programs that many believe give their users an unfair advantage over other traders. Nevertheless, stealing the code to these suspect programs remains illegal.

When Sergey Aleynikov, the Goldman Sachs computer programmer, was arrested in July, the authorities said the software at issue could “manipulate markets in unfair ways.”

And on Monday, Manhattan federal prosecutors wrote in Agrawal’s complaint that Societe Generale “believes that, if competing firms were to obtain the code and use its features, the financial institution’s ability to profit from trades using the code would be significantly diminished” (.pdf).

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The Securities and Exchange Commission announced Monday it had begun an inquiry into two dozen financial companies to determine whether they followed accounting practices similar to those recently disclosed in an investigation of Lehman Brothers.

Where on earth has the SEC been?

It’s now clear Lehman Brothers’ balance sheet was bogus before the bank collapsed in 2008, catapulting the Street and the world into the worst financial crisis since 1929. The Lehman bankruptcy examiner’s recent report details what just about everyone on the Street has known since the firm imploded – that Lehman defrauded its investors. Even Hank Paulson, in his recent memoir, referred to Lehman’s balance sheet as bogus.

In order to look like it could borrow $30 for every dollar of its own money, Lehman shifted liabilities off its books at the end of each quarter. Its CPA, Ernst and Young, approved of this fraud against the advice of its own whistle blower, whom Ernst and Young fired.

Lehman’s practices couldn’t have been all that different from those of every other big bank on the Street. After all, they were all competing for the same business, and using many of the same techniques. Lehman was just the first to go under, causing a financial run that led George W. to warn “this sucker could go down” unless the federal government came up with hundreds of billions to bail out the others.

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The U.S. was sued by a charity and two individual investors for alleged negligence by the Securities and Exchange Commission in failing to uncover Bernard Madoff’s fraud scheme.

The Michael and Ruth Slade Foundation and Alan and Blayne Goldman filed separate complaints today in New York federal court. In December, the SEC asked for the dismissal of a similar case that was brought the previous month by an individual investor.

Through its negligence, “the SEC caused Madoff’s scheme to continue, perpetrate and expand, eventually resulting in billions in losses by investors, and directly caused plaintiff to lose $2.5 million,” the Slade Foundation wrote in its complaint. The Goldmans said they lost $2.4 million.

Madoff, 71, is serving a 150-year prison sentence for conducting the biggest Ponzi scheme in history.

John Heine, a spokesman for the SEC, declined to comment on the suits. Both were filed by Herrick, Feinstein LLP in New York.

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U.S. regulators are moving to freeze the assets and trading accounts of a Russian accused of hacking into personal online portfolios and manipulating the price of dozens of stocks listed on the Nasdaq Stock Market and New York Stock Exchange.

A New York federal judge on Tuesday sided with the Securities and Exchange Commission and froze the assets of Broco Investments, believed to be a one-trader operation based in St. Petersburg, Russia. The SEC said Broco capitalized by artificially moving prices of more 38 thinly traded securities — enabling Broco to profit from up-or-down price swings.

“These transactions have created the appearance of legitimate trading activity and have artificially affected the prices of at least 38 issuers,” (.pdf) the Securities and Exchange Commission said in court filing.

The so-called “hack, pump and dump” scheme is among the latest illicit methods of gaming the market though hacking.

An Indian man was sentenced to two years in prison for undertaking a similar scam in 2008. That same year, a Ukrainian hacked into Thomson Financial to get a peek about an upcoming negative earnings report for IMS Health, earning nearly $300,000 for a few minutes’ work.

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The Securities and Exchange Commission’s insider trading case against Galleon Group hedge fund is out of the ordinary in at least one respect: It is based in part on the use of wiretaps and recordings of conversations.

This strikes legal experts as unusual for an SEC investigation, since the agency has no wiretapping authority.

“It is unusual,’’ said Robert S. Khuzami, director of enforcement at the SEC, at a November discussion of hedge fund regulation before the Practising Law Institute in New York. But, within a year, he said, “I hope it’s more common.’’

Khuzami noted that the SEC has no wiretapping authority. That belongs to the Justice Department, which has considerable experience in that regard and works closely with the SEC in investigating potentially illegal activity such as insider trading at Galleon.

SEC watchers should not be surprised if more creative techniques involving the capturing of electronic messages and other evidence are forthcoming, as the SEC works to erase the perception that it stumbled badly by failing to uncover the massive Ponzi scheme run by Bernard L. Madoff, Khuzami said, however.

“We will do everything we can to adopt whatever creative investigation techniques that appear appropriate to the case” being pursued, Khuzami said.

Arrows in the Quiver

When the SEC was established by Congress in 1934, a primary motivator for its creation was to prevent corporate abuses relating to the offering and sale of securities and corporate reporting.

As such, the agency has a number of arrows in its quiver. The SEC was given the power to license and regulate stock exchanges, the companies whose securities trade on them, and the brokers-dealers who conduct the trading.

Also, unlike self-regulatory organizations such as the Financial Industry Regulatory Authority (FINRA), Congress gave the SEC the right to issue investigative subpoenas for documents and testimony.

The SEC also has considerable authority in the increasingly important area of electronic communications. The agency requires email messages to be preserved for three years. Any firm reasonably on notice of a potential claim or lawsuit must take reasonable steps to preserve potentially relevant emails.

The duty to produce those emails depends on a variety of factors, including relevancy and privilege, the same as with any other type of document.

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