Saturday, November 18, 2006

Wall Street Journal Law Blog Asks Are Sentences Meted Out for White Collar Felons Too Long and I Answer Their Blog

In a recent commentary written by Peter Lattman in the Wall Street Journal Law Blog entitled “Are Sentences for These Men Too Long?” he listed the following sentences recently given to white collar felons:
Twenty-five years for WorldCom’s Bernie Ebbers. Twenty-four years, four months for Enron’s Jeff Skilling. Twenty years for Adelphia’s Timothy Rigas. Twelve years for CA’s Sanjay Kumar. 8 1/3-to-25 years for Tyco’s Dennis Kozlowski. Six years for Enron’s Andrew Fastow. Five years for WorldCom’s Scott Sullivan.
His commentary was based on an article posted in the Sentencing Law and Commentary blog entitled “The realities of mass US incarceration” which is based on a report by National Council on Crime and Delinquency entitled “US Rates of Incarceration: A Global Perceptive" by Peter Hartney.

The report specified that:
  • The US incarcerates the largest number of people in the world.
  • The incarceration rate in the US is four times the world average.
  • Some individual US states imprison up to six times as many people as do nations of comparable population.
  • The US imprisons the most women in the world.
  • Crime rates do not account for incarceration rates.
  • The US has less than 5% of the world’s population but over 23% of the world's incarcerated people.
Peter Lattman asks his readers the following question:
Law Blog Question of the Day: Is our criminal justice system broken? And specifically in the white-collar realm, are the sentences recently meted to the above individuals too harsh?
I posted the following response on his blog which was followed by some very passionate and sometimes personal debate:
The sentences given to recent white collar felons are not too harsh. White collar crime while not a violent crime can be more brutal to society in its consequences. White collar crime inflicts a collective harm on society far beyond the companies affected.

White collar crime adversely affects the integrity and reliability of financial information which is the main pillar of our great capitalist free market economic system. When the financial markets lose faith in the integrity and reliability of financial information the costs of capital and debt increases and the collective market capitalization of all companies are adversely affected. As a result our national wealth is diminished and pensions, 401 k plans, and life insurance policies lose value. The collective reduction of wealth further erodes tax collections to our government.
Employees lose their jobs and are often faced with the future stigma of having worked for a company affected by massive fraud. Creditors do not get paid and often must lay off employees.
The long prison sentences often given to white collar criminals while serving the purpose of imposing responsibility and accountability for felons does not materially prevent white collar crime. No crimes in progress are stopped and no current criminals find morality after learning about the long sentences given to convicted felons.
To prevent and reduce white collar crime we require strong legislation like Sarbanes-Oxley and strong internal controls reviewed by adequately educated, trained, experienced, and skilled independent external auditors. Companies require effective oversight from independent audit committees composed of members adequately suited to perform their responsibilities and not members who are appointed for “window dressing” purposes. Such audit committee members must not be permitted to hold stock or stock options in companies where they serve on such audit committees. We must require strengthened standards of education and capabilities of those board members who are permitted to serve on audit committees.
Our society is coming to the realization of the collective harshness of white collar crime in the long prison sentences imposed on convicted felons. It must now take appropriate steps to prevent white collar crime from happening. We must eliminate the opportunity to commit white collar crime.
Sam E. Antar (former Crazy Eddie CFO & ex-felon)

I suggest that you read the rest of the comments that followed from other readers.

Crazy Eddie Trademark - Not very Valuable

I read other blogs and from time to time post my comments. Recently I came across the Strategic Name Development blog and took notice of a commentary posted “Trademarks and Superstitions” about trademark issues.

At the bottom of the commentary written by William Lozito published on November 6, 2006 was the following observation:

And sometimes, as is the case with the Crazy Eddie trademark, you may think you have a valuable trademarked brand name… and be unable to sell it.

Recently the owners of the Crazy Eddie trademark attempted to sell it on ebay but were unable to sell it at the price they were seeking.

I posted the following comment on his blog:
It is ironic that you chose November 6 (the same day we lost control of Crazy Eddie in a hostile takeover) for your post about the value of trademarks - specifically ‘Crazy Eddie.’

A trademark is only as good as the public's perception of the integrity behind it. The Crazy Eddie name is and probably always will be associated with one of the greatest securities frauds in corporate history.
For the current owner of the (Crazy Eddie) trademark it is like trying to sell the Enron trademark to an energy company.

Sunday, November 12, 2006

Audit Committees and External Auditors: A Perfect Storm for Disaster

We are supposed to believe that public company external auditors working with audit committees pose an effective deterrent against corporate malfeasance.

However, from my own experience at Crazy Eddie and listening to the experiences of others audits are over-used as training grounds for inexperienced, under trained, and not adequately educated staffers no more than a couple of years out of college.

Worst yet, is the lack of sufficient supervision and oversight their managers and audit partners exercise over them. Many of these managers and partners too suffer from an educational background that did not adequately prepare them to deal with clients such as criminals like I was.

As a result we get “packaged” and “process oriented audits” where a “fill in the blanks” and “check the boxes” approach on audit programs are prevalent. The criminal like I was who always has the initiative and uses a judgment based approach has a fundamental advantage over the external auditors. The external auditors are almost always outmaneuvered by the criminal at every turn.

The external auditors are supposed to be monitored by the Audit Committee of the Board of Directors. In practice such Audit Committees are no better prepared (if not worse) to handle their responsibilities than the external auditors they oversee.

Many Audit Committee members receive compensation in stock options or own company stock of the Board they serve on which provides a disincentive to effective independent oversight and can affect their objectivity and professional skepticism.

In addition, many members of Audit Committees have no formal accounting, auditing, internal control, and fraud education or backgrounds. Their requisite education, skills, training, and experience required to fulfill their responsibilities are lacking.

Over the last week two blogs I read were Jeff Matthews Is Not Making This Up (It Took Apollo Group How Long to Figure This Out?) and (The Political Graveyard?).

Their commentary reinforced to me that the “perfect storm” of convergence of ill trained auditors and “window dressed” Audit Committees is a built in recipe for more massive fraud to come.

In Jeffrey Matthew’s blog when discussing possible stock option back dating he asked:

“So it took the educational geniuses at Apollo Group how long to figure this out and hold somebody accountable?
My detailed answer to Mr. Matthews was contained in a four part post on his site discussing at length the issues outlined above (see my comments to Mr. Matthews post).

In the basic question asked was:

“So where do former members of the House and Senate, not to mention Governors and former Cabinet members go when they exit from the political stage?”
Well, many of these former politician’s end up on company Boards and their Audit Committees.

My short answer to is that I am reminded of what General Douglas MacArthur once said “"old soldiers never die; they just fade away.”

I say we should not let these politician’s fade away on our company Boards especially Audit Committees unless they are fully specifically qualified to serve their functions.

With regards to both blog commentaries I am reminded of the “Peter Principle” that people rise to their level of incompetence.

No doubt that many such Audit Committee members will defend their status saying the have complied with applicable laws.

However I ask you as it is written in The Apollo Group’s 10-k (and many other company 10 – ks too) what level of education, knowledge, training, and skills would you demand of Audit Committee members who job function is:

“…reviewing the financial information which will be provided to shareholders and others, the systems of internal controls, which management and the Board of Directors have established, the performance and selection of independent registered public accounting firm, and our audit and financial reporting processes.”
Would you want Audit Committees composed of members with an accounting, auditing, internal control, and fraud background at the very least? Mere exposure to these issues in their past by such members does not cut it with me.

Under the item 401 (h) of SEC Rule S-K at least one Audit Committee member must be a “financial expert.”

The problem with that rule is that it allows persons who have experience in supervising people more qualified than them for their specific functions to be considered a “financial expert.”

A good CEO without an educational background in accounting, auditing, internal controls, and fraud hardly qualifies to serve on an Audit Committee. Too make matters worse many such persons in Committees have no background in the business the company operates.

From inadequately prepared accountants to inadequately staffed Audit Committees I see here is a “perfect storm” for the future massive financial frauds that surely will occur.

Therefore, anyone reading this post be forewarned – the worse is yet to come!

Friday, November 03, 2006

Response to Senator Schumer and Mayor Bloomberg Commentary on Sarbanes-Oxley “Reform”

Dear Senator Charles E. Schumer and Mayor Michael R. Bloomberg:

I read with great interest you commentary entitled “To Save New York, Learn from London” published in the Wall Street Journal on November 1, 2006.

While your commentary raises many valid issues, there are some issues I respectfully ask you to consider before you decide on any “reform” of the Sarbanes-Oxley Act.

In your commentary you wrote:

Since its passage, auditing expenses for companies doing business in the U.S. have grown far beyond anything Congress had anticipated.

Prior to Sarbanes Oxley accounting firms used to offer consulting services to the client’s they audited. I ask you to consider that prior to Sarbanes Oxley accounting firms would keep audit fees artificially low (as a loss leader) so they could attract higher margin consulting business from their current and future clients.

In addition I would caution against “turning back the clock” and having the inherent “conflict of interest” of having such accounting firms offer consulting services to the client’s they audit.

I agree with your commentary that:

…we must not in any way diminish our ability to detect corporate fraud and protect investors.

However, any “reform” of Sarbanes Oxley must include higher educational standards for the accounting profession.

Today a significant majority of accounting students prior to obtaining their CPA license never take a single specific college level course in white collar crime, fraud, securities law, internal controls, criminology and other crucial subject areas they require to be effective auditors. Even as licensed certified public accountants they are only recommended (and not even required) by the American Institute of Certified Public Accountants (AICPA) to take 10% of their continuing education requirement courses in fraud (at most 4 hours a year). We must require as a minimum more a more educated, trained, skilled, and experienced accounting profession as part of any “reforms.”

Legislation like Sarbanes-Oxley can only be as good as the profession who is called on to police it – our accounting profession.

Senator Schumer, you may seek the advice of your brother Robert B. Schumer now a partner at Paul, Weiss, Rifkind, Wharton, and Garrison. Before, becoming a partner he handled Crazy Eddie’s securities issues on behalf of his law firm.

Robert Schumer and the other attorneys at Paul, Weiss, Rifkind and Garrison asked many important questions to Crazy Eddie management and its auditors. Such questions made my co-conspirators and I fear the consequences of their determined efforts to obtain the truthful answers.

However, at almost every turn we found our auditors unwittingly aiding us because the corrosive affects their lack of independence (from consulting work which impeded their objectivity and professional skepticism) and their lack of enough education, skills, training, and knowledge which caused them to give inaccurate answers to the attorney’s very good questions.

While the law firm of Paul, Weiss, Rifkind, Wharton, and Garrison was rightfully never held in any way responsible or negligent regarding the Crazy Eddie fraud, as innocent victims of our lies, they paid a heavy price in legal fees defending their competence.

Senator Schumer and Mayor Bloomberg, I am quite sure you agree that the main pillar of great free market capitalist economic system is the integrity and reliability of financial information.

As an ex-felon I caution you to be very careful that any steps taken to “reform” Sarbanes Oxley do not have the unintended result of later causing our financial markets to lose faith in the reliability and effectiveness of external audits performed by competent independent external auditors. Any loss in the faith of our financial markets in the integrity of financial information will cost much more than the compliance costs of Sarbanes-Oxley that certain people are trying to reduce.


Sam E. Antar (former Crazy Eddie CFO and ex-felon)