Sunday, March 04, 2007

White Collar Crime: How Criminals Exploit your Humanity

As a criminal, I considered your humanity as a weakness to be exploited in the commission of my crimes. I have often said that white collar crime is a crime of deceit and white collar criminals are artful liars.

A great President Ronald Reagan once said “Trust, but verify” when dealing with Russia during the cold war. However, as a criminal I took advantage of your initial inclination to trust me. I did anything in my power from charming you to pointing out the good deeds I had done in an effort to corrode your objectivity, professional skepticism, and cynicism.

During my many unpaid speaking engagements people often ask if I am still a criminal today. My answer is that you do not know if I am a criminal today since I live with temptation and sin every day. Just because I travel the country and give unpaid presentations on white collar crime and pay all travel expenses out of pocket, how do you know if I am building a false wall of integrity around me as I did during my criminal years at Crazy Eddie. You never know anyone’s intentions.

Herb Greenberg, Barry Minkow, and I Discuss White Collar Crime

Recently I had lunch with Herb Greenberg a columnist at the Wall Street Journal and and commentator for CNBC and Barry Minkow a former criminal known for the infamous ZZZZ Best fraud. Barry and I have become very good friends over the years. Unlike me, Barry Minkow went to jail for almost 8 years. Barry Minkow is now a Pastor, writer, teacher, and fraud investigator. His Fraud Discovery Institute has uncovered over about 20 frauds totaling over $2 billion. I talk about fraud, Barry uncovers it.

Herb Greenberg was interested in our perspective on criminality. Our conversation is recounted in an article published in the Wall Street Journal on March 3, 2007 entitled “My Lunch with 2 Fraudsters: Food for Thought for Investors” (subscription required) and in his Column: What 2 Crooks Told Me over Lunch - Commentary: You Cannot Accept Information at Face Value.

The most important fact I tried to convey to Herb Greenberg during lunch is quoted his column below:

I don't want to be held up on the pedestal of redemption," he says. "I would rather people learn from my vile, ugly and vicious crimes. It is most important that they understand the ugly nature of criminality. My life is a mistake of history."
A mistake, maybe, but one other people can learn from. "Do not trust -- verify," was his mantra as the meal began.
Verify what?
Even whether Mr. Antar and Mr. Minkow aren't still scamming?
And so it went, with Mr. Antar continuing with emails over several weeks.
"Watch how management handles bad quarters, earnings disappointments, criticism, skepticism and cynicism," he says. "Do they start by saying, 'We take full responsibility and make no excuses' -- only to follow by carefully worded innuendos, excuses and deflection? Do they question the integrity of those who ask questions?"
He continues: "Just because a CEO takes a $1 salary doesn't make that person immune to criminality. Just because I travel the country and teach the government, colleges and universities, and professional groups about white-collar crime and never collect a fee and pay out of my own pocket all travel costs, doesn't mean I am not a criminal today. Remember that many crimes are committed without economic gain for reasons of ego, status and sheer arrogance."

About White Collar Criminals

The Association of Certified Fraud Examiners issues a “Report to the Nation” every year which examines white collar crime. In each report it concludes that over 90% of white collar felons had no previous criminal record. When you exclude low level white collar crimes I’ll bet that the statistic for white collar felons without criminal records is almost 99%.

For example, Bernie Ebbers (WorldCom), Kenneth Lay (Enron), Jeffrey Skilling (Enron), Dennis Kozlowki (Tyco), and Sanjay Kumar (Computer Associates) did not have any criminal records. Until their convictions, they were men known for many of their charitable deeds and community service. However, these men were later convicted of massive frauds.

Did they build a false wall of integrity around them? I explained to Herb Greenberg during lunch as quoted from his article:

He adds: "Criminals are scared of skeptics and cynics," he says. "We are petrified when you verify our representations."
Did he ever have remorse? "Never ... We simply did not care about any one of our victims. We simply committed crime because we could.
"As criminals we built false walls of integrity around us," he adds. "We walked old ladies across the street. We built wings to hospitals. We gave huge amounts of money to charity. We wanted you to trust us.
"Simply said ... if you want to be an investor, you cannot accept information at face value.' Unexamined acceptance' is the greatest cause of investor losses."

Lee Distad’s Professional Opinion Blog about a Deloitte & Touche Audit Melt Down

I recently received an e-mail from another blogger, Lee Distad, whose blog is called “Lee Distad’s Professional Opinion.

Mr. Distad had written a previous post on his blog entitled “Sam E. Antar is not afraid to tell you what he thinks!”

In that post he wrote:

The current front runner to receive the award for 2006's (and at this rate 2007 as well) Most Gregarious Internet Citizen may well be Sam E Antar, the former CFO for Crazy Eddie's, who masterminded one of the largest financial frauds in history…. On top of that, he's not afraid to call a spade a spade, giving his opinion on a number of current financial scandals.

He asked me to comment about his latest post “Institute of Chartered Accountants of Ontario Sends a Message” in which he wrote:

The Institute of Chartered Accountants of Ontario quietly dropped a bombshell earlier this month. Buried deep on the website of the professional body is a scathing report finding three senior Deloitte & Touche LLP auditors—including the accounting firm’s former chairman—guilty of professional misconduct in connection with Livent Inc.’s financial statements.
According to the 72-page ruling from the ICAO Discipline Committee, the auditors failed to follow up on accounting red flags, did not follow their own auditing procedures and continued to rely too heavily on the honesty of Livent’s managers—despite repeated instances where executives allegedly lied to them. “The auditors said that their skepticism was ‘sky high,’” reads the ruling. “However, with respect to the impugned conduct, the evidence disclosed that the auditors failed to exercise the professional skepticism required.” (Source: Canadian Business Online - Professional Misconduct by John Gray)

The Crazy Eddie Audit

The events surrounding the actions involving Deloitte & Touch and Livent remind of an award winning article written by Joseph T. Wells (founder of the Association of Certified Fraud Examiners) in October 2000 entitled “So That’s Why They Call it a Pyramid Scheme.” In discussing the conduct of Crazy Eddie’s auditors he wrote:

"....Were the auditors stupid? No, just too trusting. After all, no one wants to think the client is a crook. But it happens too often. That's why the profession requires the auditor to be skeptical."

The accounting profession is still not adequately prepared to do battle with white collar criminals. Today, less than 20% of accounting students ever take a single specific college level course devoted to fraud or criminology before graduation. The American Institute of Certified Public Accountants only “suggests” rather than “requires” that CPAs take a mere 10% of their continuing education credits in fraud subjects.

Audits are too often used as training grounds for relatively inexperienced staff members. I doubt even today from seeing the mistakes of Crazy Eddie’s auditors and other audit melt downs being repeated by other auditors time and time again that the accounting profession really understands their main enemy – the white collar criminal. The unfortunate result of this lack of understanding has resulted in billions of dollars in unnecessary litigation costs and payouts for many accounting firms and even countless billions in shareholder and creditor losses.

When I read from Lee Distad’s post that “… the auditors failed to follow up on accounting red flags, did not follow their own auditing procedures and continued to rely too heavily on the honesty of Livent’s managers—despite repeated instances where executives allegedly lied to them” I am reminded of my own criminal actions.

Crazy Eddie’s auditors ignored many red flags too. However, as evident from Touch Ross’s actions in this case and many other cases I have studied the accounting profession still has problems dealing with skepticism and cynicism. Too often, Crazy Eddie’s auditors relied on the truthfulness of our assertions despite obvious red flags. In too many instances, they did not know how to ask proper questions, whom to ask such questions too, and how too follow up on our deceitful answers.

As criminals we learned that the most effective way to commit our crimes was with a smile. In the Godfather movie Michael Corleone said, “Keep your friend close, but your enemies closer.”

As a criminal I followed Michael Corleone’s philosophy all too well. We corrupted our auditor’s professional skepticism by giving them extraordinarily rich consulting work in addition to their audit engagements. Today, at least under Sarbanes-Oxley accounting firms cannot engage in consulting work for the clients they audit.

Our auditors felt too comfortable with us as “good, respectable human beings with high integrity.” We would socialize with our auditors by having so-called “three martini lunches” and we would invite them to attend Antar family functions. They believed we were pillars in our community as we gave large amounts of money to charity and were involved in a number of good community causes.

If anyone has ever seen the movie “The Devil’s Advocate” starring Al Pacino they would know that the devil’s favorite sin in vanity. The white collar criminal is equivalent to the devil. We took advantage of the vanity of our auditors.

For example, during the fiscal year end inventory audits, we would climb over stacks of inventory that were piled 10 high and 3 deep and instead of telling the auditor there were 30 items of merchandise in stock we would tell them there was 100 items (10 high and 10 deep).

The different audit staff members in many locations simply never climbed up the stacks of inventory to see what was behind them. It was beneath their dignity to climb boxes and count inventory. After all, they were well dressed in nice suits. As white collar criminals we were all too happy to accommodate their self importance and desire not to get dirty.

When the auditors finally came to our offices to conduct field work we were all too accommodating of their desires. We knew that most of them were relatively young kids who thought their field work was boring. We engaged in a campaign of “obstruction by distraction.”

I instructed Crazy Eddie staff involved in the fraud to do anything to keep audit staff members from focusing on their work. They would talk about baseball, sex, or anything else in an effort to stop them from focusing on the work.

For example, if the auditors had ten weeks to complete an audit, they would be expected to complete about 10% of their field work each week. However, as a result of our “obstruction by distraction” campaign, for example, by the 8th of 10 weeks instead of having 80% of their field work completed they would have only about 25% of it done.

When people have to rush they make mistakes. They skimp over important issues such as red flags and they omit key important work in an effort to make up for lost time and complete their work. The auditors could not blame us for their lack of time. After all we were all too “accommodating” with them.

For the fiscal years 1986 and 1987 the auditors never completed key field work. For example, regarding fiscal year 1986 they failed to conduct proper sales cut-off testing and did not thoroughly review our cash balances.

Had they conducted the required field work for fiscal year 1986 they would have discovered over $1.5 million in fictitious sales. We took money that was previously skimmed from Crazy Eddie as a private company (1969-1984) from secret Antar family bank accounts in Israel and deposited them into the bank accounts of certain stores (included in the computation of comparable store sales) and counted them as sales.

Those deposits of previously skimmed funds were made after the fiscal year closed. Such deposits made after the fiscal year for sales made during the fiscal year would be considered as reconciling items on bank reconciliation. Had the auditors carefully examined our bank reconciliations they would have seen open deposits for drafts in round amounts of $25,000, $50,000, $75,000, and $100,000 for fictitious sales listed side by side with actual sales in amounts of, for example, $318.31, $26.29, $914.26, etc. They were in too much of a rush to complete the audit since they wasted too much time from our distractions.

During audit for the fiscal year 1987 audit the staff member whose job was to audit accounts payable had only 6 months audit experience and no accounts payable experience. He started his major field work on the accounts payable audit on April 27, 1987 – the same day Crazy Eddie’s auditors signed off on a “clean” audit opinion. He did not finished auditing accounts payable until about 3 weeks later. The auditors missed a phony debit memo fraud which reduced accounts payable from about $70 million to $50 million.

The auditors only ended up receiving 3 accounts payable confirmations from hundreds of Crazy Eddie’s vendors. Even those confirmations from vendors showed significant material differences between what we claimed we owed the vendors and what they claimed was the proper amounts owed to them. The auditors failed to adequately investigate those differences.

The Problem with Audit Committees

Auditors are supposed to be monitored by “independent” Audit Committee composed of some members who are supposed to be “financial experts.” Most Audit Committee members including the so-called financial experts know less about accounting, audits, internal controls, and fraud then the independent external auditors they monitor.

Worse yet “independent” Audit Committee members can own stock and have stock options in the company on which they serve as Audit Committee members. The independent external auditors cannot own stock in the clients they audit.

Therefore, I cannot understand how these Audit Committee members who own such stock and have such stock options in the company Audit Committees they serve on can legitimately call themselves independent. In too many cases “independent” Audit Committee members are unqualified and lack true independence despite compliance with current Securities regulation.

The Problem with Wall Street Financial Analysts and How Companies Handle Them

Companies are watched by Wall Street financial analysts. Recently Herb Greenberg wrote in his “Market Blog” on February 26, 2007 a post entitled “UPDATED: BankUnited: Getting a bit Testy!”

In particular I note the following quote from his post:

BankUnited is hosting and analyst/investor meeting today and tomorrow. However, we were not invited to attend and executive management continues to ignore our phone calls and e-mail messages seeking information about several areas where we have fundamental concerns, including rapidly deteriorating asset quality, an acceleration of negative amortization growth on option ARM loans, lower loan sale gains, and subsiding margin expansion.

I wrote the following comment to his post:

To Wall Street Analysts:
Beware of companies that exclude critics and provide “selective” access to management. Too often, Wall Street analysts in the quest to gain access to management end up corrupting their required professional skepticism and cynicism. I played this game very well with Wall Street analysts as the CFO of Crazy Eddie.
It’s not about gaining access at the cost of your professional integrity. It’s about understanding what is really happening and communicating it to your readers.
I played you guys very well by rewarding you with selective access as the CFO of Crazy Eddie. I had you guys eating out of my hand with “selective” disclosures and “favored” access. While you craved for access and wrote your glowing reports in gratitude for your coveted access you unwittingly helped make the frauds we perpetrated on the public easier.
If you had any backbone, you would all boycott any presentation that excludes the more skeptical professionals among you. Frankly, after reading many transcripts lately you guys look like amateurs with your lack of questioning skills, your inability to ask proper follow through questions, and obtain straight, clear, unambiguous, and honest answers.
You seem like hand picked patsies as I read your unchallenging questions and the lame answers management that responds to you without any challenge or follow up. However, you guys never seem to learn as you compete with one another for the affections of management and let access to them rule at almost any cost.
Eventually you will run into a guy like me. You will wish you asked the proper questions and follow up questions too. You will wish your other peers attended the meetings and asked questions you would not ask or could not ask. The questions that will never be asked by you and others will cause you to miss out on the lies and deceit being spun upon you.
When the “surprises” come out your previous work will be considered negligent and amateurish. Your future work will always be under a cloud of suspicion. You will be remembered for the glowing reports you made as management ran circles around you. Do you want people to think you are fools?
The management’s that spread deceit and lies to the selective few who gain coveted access are not your friends. They are using your humanity against you as a weakness to be exploited in furtherance of their crimes. They know about how your efforts at coveted access end up corrupting your professionalism. They don’t care about what happens to you as a result of their actions. As a criminal, I never cared about you too.
You have been warned.
Sam E. Antar (former Crazy Eddie CFO & convicted felon)
PS: Guys, I see nothing much has changed since my time. Keep it up. When a company you wrote a glowing report on ends up a train wreck

White Collar Crime and Punishment

As a criminal I feared skepticism and cynicism but I never feared going to prison. My good friend Barry Minkow (discussed above) spent about 8 years in prison has said that “The prisons are filled with convicts who never planned on being there.”

Professor Larry E. Ribstein (University of Illinois) wrote a post on my lunch with Herb Greenberg in his Ideoblog entitled “Crazy Eddie speaks.” He wrote:

In general, Antar says corporate criminals will commit crime because they can, and warns investors to distrust financial statements. There are some valuable lessons for the law there.
First, Antar raises questions about the deterrent value of criminalizing corporate behavior, or at least of sentencing. I've focused on the potential for over-deterrence where the conduct is not genuinely criminal. The response I often get is that lighter penalties would under-deter. Yet Antar suggests these criminals aren't thinking much about the penalties when they commit their behavior. Only after the serious fraudsters spend some time in jail do they truly learn they've done something wrong. But do they really need 24 years there?

As a criminal I can tell you that I never thought about going to jail. My co-conspirators and I only thought in terms of whether we could successfully commit our crimes. I believe that no white collar criminal finds new levels of morality by reading or learning about the long prison sentences now being imposed for white collar crime. I believe that no crimes in progress have been stopped or any planned crimes were stopped from being implemented just because of the 20 plus year prison sentences given to many white collar criminals.

The best way to prevent white collar crime is to build strong barriers that limit the opportunity to commit such crimes. Strong internal controls, effective oversight from truly “independent” Audit Committees, a properly trained and experienced accounting profession, and laws like Sarbanes-Oxley stop crime before they happen.

Unfortunately today too many frauds are uncovered through the use of informants and because they implode since they become too large to be sustainable. We have a system from the criminal’s point of view which can be termed:

Catch us when you can, catch us where you can, and catch us if you can.

However, when you catch us it is too late to undo the massive damage done to society.

I respectfully disagree with Professor Ribstein when he writes:

But do they really need 24 years there?

While we both agree that prison sentences have little deterrent effect, it is my belief that they are necessary to impose the proper amount of responsibility and accountability on white collar felons.

White collar crime can be just as brutal as violent crime in that it imposes a collective harm on society. The main pillar of our great capitalist free market economic system is the reliability and integrity of financial information. When our capital markets lose faith in the integrity and reliability of financial information the collective market capitalizations of all companies suffer.

White collar crime not only effects the companies directly victimized. It results in layoffs at the specific company defrauded, losses to the creditors of such companies which in turn result in layoffs at companies who extended credit to the defrauded company.

In the case of Enron thousands lost their jobs at Enron, an entire accounting firm went into dissolution which caused more thousands of jobs to be lost. Pensions lost value and many Wall Street firms paid billions of dollars in litigation. In the early millennium we witnessed a broad decline in the collective market capitalizations of all companies as a result of major securities frauds at several companies.

Do I have any Guilt and Remorse?

In during my lunch Herb Greenberg asked me if I harbor any guilt and remorse for my past vile and malicious criminal acts.

He wrote:

A former CPA, Mr. Antar makes no excuses for his criminal past, referring to himself in emails, casual discussion and his Web site -- -- as a "low life" and "convicted felon." Even the normally loquacious Mr. Minkow appears to enjoy leaving the talking to Mr. Antar, who takes no money for his speeches. "I don't want to be held up on the pedestal of redemption," he says. "I would rather people learn from my vile, ugly and vicious crimes. It is most important that they understand the ugly nature of criminality. My life is a mistake of history."

Later in his column he wrote:

Did he ever have remorse? "Never ... We simply did not care about any one of our victims. We simply committed crime because we could. During the conduct of my crimes I never lost one nights sleep or spent one moment caring about the harm I was inflicting on others.

Apologies are irrelevant. They don’t change anything. It does not undo any crimes. Does an apology really erase the effects of past criminal behavior?

As a person who used words to deceive and lie to others in the commission of my crimes I say you must judge people by their actions and not by their kind words. Too often we are moved by well meaning but empty words.

As a criminal I used well sounding words too exploit you in an effort to commit my crimes. I knew as good human beings you would feel compassion for me.

However, the white collar criminal uses your humanity such as compassion as a weakness to be exploited. For example if I apologize for my actions, how do you really know if I am contrite or if anyone else who apologizes is really contrite? Therefore, judge people more by the actions they take after a mistake or error rather than their well sounding apologies.

I once posted the following comment about guilt and remorse on Jeff Matthew’s blog for his commentary entitled "Weekend Edition: Page Six comes to the Times":

I am fully aware that my sins are unforgivable and am mindful of the pain and suffering I have caused others.
Do I spend these late nights writing these comments to you because of guilt, redemption, or rather the fear of the ultimate punishment that awaits me when my soul parts my body?

This post was written and respectfully submitted by Sam E. Antar (former Crazy Eddie CFO & Convicted Felon)

1 comment:

Anonymous said...

Mr. Antar,

In the comment section of Jeff Mathews blog you mentioned investors need to ask the right questions. Could you pen a blog on the types of questions to ask and the associated follow-ups to those questions.

Much appreciated.

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