One Whistleblower's Story: Losing a job, but not losing hope

LETTER FROM THE PRESIDENT

James D. Ratley, CFE
ACFE President

You might eventually have to make a tough decision that could jeopardize your job and disrupt your life.

Let's say you find an accounting regulation violation that your organization might have ignored for years. You bring your concerns to your boss who agrees you've discovered a problem. Other accounting department staff members concur until they figure out the restatement costs. You stew over this and realize that your organization is breaking the law.

You secretly report the violation to the U.S. Securities and Exchange Commission (SEC) and the audit committee of your company's board. Somehow your boss finds out and sends an email to the accounting department's executives. The attorneys review and decide that the company is in compliance. The SEC decides not to investigate the case. You lose your job and your hope.

This is the story of Tony Menendez, CFE. Except he never lost his hope. "In 2005, I was asked to approve a bill-and-hold sale [at Halliburton], and it was at least six years after the SEC issued SAB 101," Menendez says during a recent Fraud Magazine interview. This Staff Accounting Bulletin describes regulations on revenue recognition in financial statements.

He says unassembled equipment wasn't even ready to be shipped to a customer. "Halliburton was holding the equipment in anticipation of performing future oil field services for its customer," he says. 

Menendez shared his findings with his bosses, and they initially agreed with him. But they later backpedaled when they realized that correcting the accounting would've required a costly and embarrassing restatement. Menendez went to the SEC, which eventually decided it wouldn't pursue the case. A Halliburton internal investigation cleared the company. Menendez's boss outed him to the company in an email. Halliburton stripped him of many of his duties and banned him from meetings. Colleagues ostracized him. Menendez left Halliburton in 2006 and brought a whistleblower claim under the anti-retaliation provisions of the Sarbanes-Oxley Act.

In September 2008, an administrative law judge determined that Halliburton hadn't retaliated against Menendez. Menendez then represented himself in appealing the case to the Administrative Review Board (ARB). In September 2011, the ARB overturned the original trial judge. Halliburton appealed to the Fifth Circuit Court of Appeals, but the panel ruled that the company had retaliated against Menendez for blowing the whistle. After almost nine years, he'd won his battle.

"The stigma of whistleblowers hasn't changed nearly enough," Menendez says. "As long as employers see whistleblowers as a rare breed to be feared instead of individuals who add great value to the working team as a whole, it can be hard for them to prevail, and society as a whole bears the greater risk."

The ACFE will award Menendez the 2016 Sentinel Award for "Choosing Truth Over Self" at the 27th Annual ACFE Global Fraud Conference. Read more about Menendez's story in the latest issue of Fraud Magazine.

Why No Top Execs Prosecuted After the Great Recession?

LETTER FROM THE PRESIDENT

James D. Ratley, CFE
ACFE President

In the last 30 years, we've seen top executives prosecuted during the S&L debacle, the junk bond scandal, Enron, WorldCom, Tyco and other monumental crimes. However, we never saw prosecutions of any high-level execs after the recent Great Recession. Why?

Jed S. Rakoff, U.S. district judge for the Southern District of New York, says in Fraud Magazine's most recent cover article that the reasons for the government's lack of prosecutions ranged "from the diversion of FBI agents to other priorities to prosecutors' increasing unfamiliarity with how to pursue such cases."

But two primary reasons stand out, he says. "First, beginning in the late 1990s, the Department of Justice became increasingly enamored with the vague — and in my view misguided — notion that prosecuting corporations instead of individuals would affect a change in ‘corporate culture' that would make companies more law-abiding," says Rakoff, a keynoter at the upcoming 27th Annual ACFE Global Fraud Conference, June 12-17 in Las Vegas.

"Second, and probably most important, prosecuting companies is easy — because companies ultimately have to settle or face potential ruin — and enables prosecutors to trumpet quick successes without employing substantial resources or courting defeat," he says.

In a November 2011 ruling, Rakoff tossed out a settlement between the Securities and Exchange Commission (SEC) and Citigroup that allowed the firm, without admitting guilt, to pay a $285 million fine for allegedly selling a billion-dollar fund filled with toxic mortgage debt. On June 4, 2011, the Second Circuit Court of Appeals overturned the Citigroup ruling. But Rakoff was able to say his piece.

In his opinion, he wrote, "The SEC's long-standing policy — hallowed by history, but not by reason — of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact. …

"In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth," Rakoff wrote.

Read Rakoff's full interview on Fraud-Magazine.com.

The ACFE, during the 27th Annual ACFE Global Fraud Conference, will present Rakoff with the Cressey Award.

Bribery Not Limited to Envelopes of Cash: BNY Mellon Internships Violated the FCPA

GUEST BLOGGER

Ron Cresswell, J.D., CFE
ACFE Research Specialist

On August 18, 2015, the Securities and Exchange Commission (SEC) announced a $14.8 million settlement with Bank of New York Mellon (BNY Mellon). According to the SEC, the bank violated the Foreign Corrupt Practices Act (FCPA) by giving valuable internships to the relatives of foreign officials. This case is a good reminder that bribery can take many forms. It is not limited to envelopes of cash. Under the FCPA, companies may not offer “anything of value” to improperly influence a foreign public official. Violations may result from expensive gifts, travel and entertainment expenses, charitable contributions or even internships.

The BNY Mellon Case
The case arose from an existing business relationship between BNY Mellon and the sovereign wealth fund of an unnamed Middle Eastern country. A sovereign wealth fund is a government-owned investment fund. BNY Mellon managed and serviced the fund, which held more than $55 billion in assets.

Two officials of the fund repeatedly and aggressively requested student internships for their relatives (two sons and one nephew). BNY Mellon hired the three relatives as interns, even though they did not meet the rigorous admissions criteria for the bank’s internship program. Two of the internships were paid, and one was unpaid. The paid internships were paid at a higher rate than was customary. In addition, the internships were longer than usual, and they were customized to provide a uniquely valuable work experience for the recipients. In emails, high-level BNY Mellon employees made it clear that the relatives were hired in an effort to retain and increase the bank’s business with the fund. One email stated that BNY Mellon “was not in a position to reject the request from a commercial point of view.” Based on this evidence, the SEC found that the internships violated the anti-bribery provisions of the FCPA.

The SEC also determined that BNY Mellon violated the FCPA’s internal controls requirement. While BNY Mellon had a broad FCPA policy, the bank failed to ensure that its employees understood the policy and received appropriate training, especially with respect to hiring. Human resources personnel were not trained to flag potentially problematic hires. Senior managers had the authority to hire individuals without any review by legal or compliance staff. The SEC found that BNY Mellon’s internal controls were not tailored to address the specific corruption risks inherent in the bank’s business.

The settlement with the SEC included $8.3 million in disgorgement and $1.5 million in prejudgment interest. It also included a $5 million penalty. The penalty probably would have been higher if BNY Mellon had not cooperated with the SEC’s investigation.

Takeaways
The BNY Mellon case is an important reminder that bribery is not limited to cash payments. The FCPA prohibits companies from offering anything of value to improperly influence foreign officials, including jobs or internships.

Since the SEC has signaled that hiring practices will be subject to scrutiny, companies must have hiring policies and procedures that take into account FCPA risks. These policies and procedures should include appropriate FCPA training for all employees. Human resources personnel should be trained to flag unusual hires, which should then be reviewed by legal or compliance staff.

As evidenced by the actions of BNY Mellon, broad FCPA policies are insufficient. Businesses should take care to specifically tailor internal controls to the corruption risks faced by their individual business.

Hunting the Big Cats of Fraud: Dewey & LeBoeuf LLP

SPECIAL TO THE WEB

Robert Tie, CFE, CFP
Contributing Editor, Fraud Magazine

Despite the global financial crisis, all seemed to be well at Dewey in 2008. But then cash flow began to drop, which eventually forced the big firm to declare bankruptcy — five years after the 2007 merger that created it. Thousands of Dewey employees lost their jobs, and creditors and investors were out hundreds of millions of dollars.

View fullsize

According to the May 14, 2012 article, Dewey's Bienenstock Discusses Law Firm's Demise, by Peter Lattman in The New York Times, "Several former Dewey partners presented prosecutors with evidence of potential financial improprieties."

After a lengthy investigation, the U.S. Department of Justice (DOJ) on March 6, 2014, indicted the former CEO, CFO, executive director and a lower-level manager of the by then-defunct law firm for intentionally issuing false financial statements. At the same time, the SEC filed a civil complaint against the same four employees. It also filed a separate complaint against seven of their colleagues. The CEO, CFO, executive director and manager pleaded not guilty to all criminal and civil charges, and their seven colleagues all pleaded guilty to the civil charges against them.

One of the seven who pleaded guilty is Francis Canellas, the firm's former finance director, who agreed to testify for the prosecution. According to Canellas' plea and cooperation agreement with the DOJ, he and the other 10 defendants falsified the firm's financial statements to fool lenders and investors into thinking Dewey was profitable, even though it wasn't. Multiple insurance companies, deceived by the doctored records, invested $150 million in a private Dewey bond offering, and three banks gave the firm a $100 million line of credit.

"What Canellas told prosecutors about his co-defendants is as yet unproven," Sizemore says. "But we can regard as fact every fraudulent action he admitted taking himself. Each of them is a mirror image of actions taken in virtually every financial statement fraud I've investigated or studied."

As happens in many businesses, Dewey wrote off some of its receivables as bad debt. But the prosecutors and Canellas said that when it became clear the firm wouldn't meet its revenue projections, the defendants fraudulently reversed those write-offs.

"If I were called in to perform a fraud risk assessment at Dewey before the fraud was discovered, I'd want to know how much working capital the firm had and what covenants they had to meet to keep their funding in force," Sizemore says. "And I'd wonder how that firm could pay so many high-priced lawyers, finance its operations and pay its loans — all during a recession."

TIPS FOR FRAUD EXAMINERS

1. Ask as many questions as necessary, and evaluate the answers for reasonability. "If you don't understand something on a financial statement, or it seems unusual, ask for support documentation," Sizemore says. "Test it for reasonableness in terms of your understanding of the company's expenses and income and the business environment in its industry and locality. If your reasonableness test reveals any red flags, perform ratio analyses. Be sure to compare the company with at least two others or with industry-wide values. Company statistics by industry — number of employees, sales and so on — are available online, and I've used them in numerous investigations. Some are available only by subscription, while others are free."
2. Be flexible. Sizemore says no single ratio fits all situations. So choose a ratio appropriate for your client's industry and type of business. If you can't find one, use a universally applicable calculation, such as days' sales outstanding in accounts receivable. He also notes that ratios don't prove fraud, but they can help you detect fraud that otherwise might not be evident.
3. Stay on track. "To conceal red flags, fraudsters will tell you that the support documentation you want isn't available," Sizemore says. "Most red flags have legitimate causes, such as management's inability to run the business effectively. But the only way you can tell is to check the support documentation," he adds.

Read three more tips from Tie and view a table comparing HealthSouth to Dewey & LeBoeuf on Fraud-Magazine.com. 

Riding the Anti-Fraud Career Wave

GUEST BLOGGER

Kathy Lavinder
Owner and Executive Director of Security & Investigative Placement Consultants 

As 2014 begins, it’s a good time to consider the outlook for anti-fraud professionals. As a recruiter, I see the professional opportunities as abundant and improving. Here’s why:

1) There are still a lot of messes to clean up from the financial sector meltdown. As injured parties seek restitution, investigators who can determine if assets still exist, and find them if they’re hidden, are in demand. Professional services firms are doing pre-litigation asset searches across the globe and probing the wreckage of failed businesses and relationships for recoverable funds. Aggrieved parties, stung by Ponzi schemes and other criminal activities, are turning to fraud investigators to ferret out information. 

2) Enforcement activity has ratcheted up and will continue to be aggressive. The Securities and Exchange Commission made it clear that it intends to pursue more cases against individuals, not just corporations, and it will litigate more cases in court, and pursue larger fines against companies. The U.S. Dodd-Frank Act will present new challenges for businesses and new enforcement avenues. 

3) The playing field is global. Internet frauds obliterate boundaries and will continue to proliferate. If anything, online fraudsters exhibit extreme creativity and are usually several steps ahead of even the most cautious of consumers and most aggressive investigators and law enforcement personnel.

In tandem, corporations looking for growth in new international markets have hurdled into problematic areas that are rife with audacious frauds and endemic corruption, which increase corporate exposures and put financial and reputational assets at risk. As a result, multi-nationals are confronting substantial operating issues and potential landmines relative to fraud and potential violations of the U.S. Foreign Corrupt Practices Act and the UK Bribery Act. 

4) Data is leaking all over the place. There’s no need to rob a bank when you can get more information, and therefore more funds, by stealing electronic data. Criminals know this and are exploiting weak defenses everywhere they can. With so much data being stored in the cloud, expect this trend to intensify. And hackers aren’t just attacking big businesses. They are hacking networks of small businesses and stealing proprietary data for fraudulent uses. Don’t expect that to change. There are too many potential targets to attack, and the barricades are too easy to overrun. 

As a fraud fighter, you’ll need to stay abreast of developments in this dynamic landscape in real time. Certainly there are geographical and industry variation as the marketplace calls for more specialized knowledge, education and experience. Therefore, continuing education, specialized training, networking with peers, and monitoring relevant publications and websites will be critically important in the year ahead. The key to long-term career success as a fraud expert is to remain highly engaged in the professional community and to be alert to emerging trends and systemic vulnerabilities.