The Outsider Club: Wall Street's Get Out of Jail Free Card
Posted by Jimmy Mengel - Monday, April 8th, 2013
Let me ask you something...
How many of your coworkers are breaking the law?
Wager a quick guess.
Maybe that quiet fellow who mainly keeps to himself and sits in the back corner is up to something? What about the rambunctious temp, maybe she's got some non-prescription tricks up her sleeve? The wily accountant sure drives a nice car. I wonder if he's cooking the books...
In most office environments, you might chalk such feelings up to paranoia and jealously. Unless you're employed at the local prison, I doubt you work with more than one or two legitimate criminals.
That is, of course, unless you happen to work on Wall Street.
A new survey of hedge fund managers revealed 30% of hedge fund managers have personally witnessed criminal misconduct in their own offices.
Keep in mind those were the 30% who admitted illegal activities were happening.
According to my wife, who designs surveys, that number may be skewed further by the social desirability bias — that is, people don't want the fact that they spend most of their waking hours with known criminals to reflect poorly on them.
In a recent survey about surveys, an astounding 81% answered “yes” when asked if people lie when asked survey questions.
In any case, 30% is a startling and large percentage for such a question, though I suspect the real number is even higher. And there are even more startling results from this poll...
The survey also found:
46% of respondents reported their competitors likely have engaged in unethical or illegal activity in order to be successful.
35% of respondents reported feeling pressured by their compensation
or bonus plan to violate the law or engage in unethical conduct, while
25% of respondents reported other pressures that might lead to
unethical or illegal conduct.
30% of respondents reported they had personally observed or had first-hand knowledge of wrongdoing in the workplace.
29% of respondents reported it was likely they would be retaliated against if they were to report wrongdoing in the workplace.
28% of respondents reported that if leaders of their firm learned
that a top performer had engaged in insider trading, they would be
unlikely to report the misconduct to law enforcement or regulatory
authorities; 13% of respondents reported leaders of their firm would
likely ignore the problem.
13% of respondents reported hedge fund professionals may need to
engage in unethical or illegal activity in order to be successful, and
an equal percentage would commit a crime (insider trading) if they
could make a guaranteed $10 million and get away with it.
87% of respondents would report wrongdoing, given the protections
and incentives such as those offered by the SEC Whistleblower Program,
while 83% of respondents were unaware this important program exists in
the first place.
54% of respondents reported the SEC is ineffective in detecting, investigating, and prosecuting securities violations.
Within the last week alone, we've seen egregious cases of this phenomenon...
Former Goldman Sachs trader Matthew Taylor just pleaded guilty to wire fraud. He defrauded his employer by conducting a $8.3 billion futures trade with no authorization whatsoever. His overall positions at Goldman Sachs exceeded internal risk guidelines “on the order of 10 times.”
This is the type of fraud that goes on supposedly behind the backs of the higher-ups. So you can imagine the type of damage done when firms are all working together...
All in all, Taylor's risky bets cost Goldman $188 million and could land Taylor in prison for up to 41 months, a sentence that seems like child's play for such a large fraud case. (But at least someone may finally going to jail).
Unlike Taylor, former Goldman Sachs chief and governor of New Jersey Jon Corzine is still walking around a free man, despite overseeing the epic MF Global collapse in 2011. While under his control, MF Global lost its clients close to $2.1 billion.
A new FBI report released last week sheds some light on who knew what and when: Investigators discovered an “unprecedented use of money in customer trading accounts to cover liquidity gaps as the company teetered on the brink” and these “glaring deficiencies were long known to Corzine and management, yet they failed to implement sufficient corrective measures promptly," FBI director Louis Freeh wrote in the report.
Yet Corzine is not facing any criminal charges — and continues to blame others outside of the company for its collapse.
I wonder why the Justice Department hasn't stepped forward?
The Washington Time's editorial page has a pretty good idea...
Mr. Corzine raised $500,000 for the president’s re-election campaign. He was even considered for a presidential appointment before MF Global collapsed. Peter Schweizer, president of the Government Accountability Institute, observed in an op-ed column in this newspaper that MF Global was a client of Attorney General Eric Holder’s former law firm, Covington & Burling, where many liberals go to do good and stay to do well. Lanny Breuer, the former head of the Justice Department’s criminal division, has just left the Justice Department to return to Covington & Burling, where he expects to earn $4 million annually. Covington’s list of clients is studded with the elites of Wall Street players.
Jim Chanos, one of America's most famous short sellers and professor of a history of financial fraud course at Yale, gave an interview this week about the systemic fraud plaguing our financial system, long after the 2009 collapse.
Chanos' notes dovetail nicely with the survey results:
They asked these chief financial officers if they’ve ever been asked to falsify their financial statements by their superior. Now, the chief financial officer’s superior is the chief executive officer, or the chief operating officer — basically, the boss.
It was a stunning — of course, anonymous — survey: 55% of the CFOs indicated they’d been asked, but did not do so; 12% admitted that they’d been asked and did so; and then 33% said they’d never been pressured to do that.In effect, only one-third of the companies in the S&P’s 500 at that time did not have a CEO
or COO try to pressure their financial officer to falsify financial results.
So this is agency risk writ large. Investors need to know that. They need to know that an awful lot of games are being played with the numbers and with disclosure, and they’ve got to be on their guard.
Chanos also lamented at how flaccid our regulators and law enforcement are in actually combating fraud:
Too-big-to-fail is also too-big-to-jail. We now have admissions by the federal government that, in fact, this behavior was not extensively examined or investigated because of systemic issues.
It raises an interesting point, doesn’t it? Because if now, as the senior member of a bank, or the board of a bank, I know that there are no criminal penalties for breaking the rules, don’t I have a fiduciary responsibility to my shareholders to actually play fast and loose? Because if I get caught, that’s just the cost of doing business?
I know it’s a frightening thought, but if carried to its logical extreme — if truly people believe that because of their size, they can’t be prosecuted, it actually brings forth a new issue of moral hazard extreme: illegal behavior. That’s why equality under the law is an important concept, one that is being violated now.
Chanos ended his interview by invoking legendary TV mobster Tony Soprano. While cautioning his thugs about expanding their system of rackets, he warns them to be careful because: “We don’t got one of these Enron things going.”
And neither do you nor I.
It's Insider examples like these that further disenfranchise individual investors like you and me.
They serve as yet another reason to maintain financial independence.
And that's why we prefer to live life on the Outside. Because if we got busted behaving like these Wall Streeters, the only insider trading we'd be doing is bartering for hooch in prison.Godspeed,
Jimmy Mengel for The Outsider Club
A recent survey revealed that a majority of Americans lie to poll takers. The survey, conducted by the Institute of Things You Already Know, found that a whopping 81% responded “Yes” when asked if people lie when asked survey questions.
“We were surprised by their frankness,” said Dr. Umberto Hackbert, founder of ITYAK. “We suspected that Americans believe that poll respondents may sometimes lie, but we never expected the belief to be so widespread.”
The survey was conducted in early January, 2012, just after the Iowa caucuses but before the New Hampshire primaries. 13 American citizens were polled at random, and the margin of error was +/- 18 percentage points.
“We take great care in selecting a representative sample,” said Virginia Futz, research associate. “DUH insists on it.” Futz expressed confidence that the survey results accurately reflected the whole of the American public.
Both Futz and Hackbert cited comments that many respondents made. “Many not only said ‘Yes’, but ‘Hell, yes’” said Hackbert. Futz added, “One respondent told us that she has been polled by our organization on numerous occasions, and that she lied every time. By extrapolation, she represents 23 million Americans. That’s a lot of liars.”
The ITYAK has been conducting polls of this type since 1985, producing such findings as high school students want less homework, people like Sundays better than Mondays and cold sufferers describe how they feel as “lousy.” In their most recent survey, researchers found that 73.2% of respondents felt all statistics were made up.
20% of all road accidents in Sweden involve a moose.
Fiduciary Duty to Cheat? Stock Market Super-Star Jim Chanos Reveals the Perverse New Mindset of Financial Fraudsters
Photo Credit: Shutterstock.com
April 1, 2013 |
Hustlers. Cheaters. Crooks. American business has always had them, and sometimes they’ve been punished. But today, those who cheat and put the rest of us at risk are often getting off scot-free. The recent admission of Attorney General Eric Holder that systemically dangerous megabanks may escape prosecution because of their size has opened a new chapter in fraud history. If you know your company won’t be prosecuted, a perverse logic says that you should cheat and make as much money for shareholders as you can.
Jim Chanos is one of America’s best-known short-sellers, famed for his early detection of Enron’s fraudulent practices. In deciding which companies to short (short-sellers make their money when the price of a stock or security goes down), Chanos acts as a kind of financial detective, scrutinizing companies for signs of overvaluation and shady practices that fool outsiders into tlhinking that they are prospering when they may be on shaky financial footing. Chanos teaches a class at Yale on the history of financial fraud, instructing students in how to look for signs of cheating and criminal activity. I caught up with Chanos in his New York office to ask what’s driving the current era of rampant fraud, who is to blame, what can be done, and the ways in which fraud costs us financially and socially.
Jim Chanos: One of things we like to say is that in virtually all cases of major financial market fraud over the past 20 years, the only people who really brought forth the fraud into the light were either internal whistleblowers, the press, and/or short-sellers. It was not the normal guardians of the marketplace – regulators, law enforcement, external auditors or people like that -- that did it. It was people who had an incentive to come forward either for personal reasons or for profit to point out what was going on at the Enrons and the Sunbeams and Worldcoms. Short-sellers played an important role in the marketplace not only in terms of capping, sometimes, irrational exuberance in terms of prices, but also in ferreting out wrongdoing.
LP: Researchers have created all kinds of tools, like software to detect speech patterns associated with lying, to try to detect fraud. What are some of the best tools for catching financial fraudsters?
JC: There’s no single tool that works all the time, and some of them are kind of interesting, like the voice detection, or Bedford’s law, which looks at numbers and repetition patterns in accounting. But we have seen some models that we work with and I teach in my class-- frameworks of fraud and fraud analysis – that have been helpful in looking down through the years where we’ve seen patterns continue. One is a wonderful checklist, the Seven Signs of Ethical Collapse in an organization. Some are clearly intuitive, such as a board full of one’s cronies or an obsession with making earnings forecasts. But some are not so obvious, for example, doing good to mask doing bad.
LP: Good deeds can be a sign of fraud?
JC: One of the more interesting observations in the world of fraud is that some of the most egregious frauds were some of the most philanthropic companies in their communities. In some ways, if you look at Bill Black’s theory of the corporation as both a weapon and shield (we teach a lot of Bill Black’s things in my class), you can begin to see that that would be one way in which the bad guys in corporate suites would basically use the corporation as a shield. They’d say, well, look at all the wonderful things we do in the community, how many people we employ. We give to hospitals, we give to the Little League team, and so on. Not all these things would be immediately obvious to the casual observer.