Memo to President Barack Obama from a Convicted Felon: Be Prepared For an Unprecedented Onslaught of White Collar Crime

To President Barack Obama:

Within a couple of years, you can expect a massive crime wave on an unprecedented scale resulting from spending trillions of extra taxpayer dollars to stimulate the economy and bail out the financial sector in a relatively brief period of time. Not enough attention is being paid to effective internal controls to prevent such crimes. The FBI and other law enforcement agencies do not have enough resources to effectively investigate and prosecute such crimes.

The Republicans will run against you on a simple platform, “The Democrats are responsible for white collar crime, corruption, and waste on an unprecedented scale.” The Republicans will say that you should have cut taxes and simplified the tax system to stimulate the economy and reduce the incentive for criminals to commit fraud.

According to the Wall Street Journal:

The Federal Bureau of Investigation is braced for a potential crime wave involving fraud and corruption related to bank bailout money and the economic stimulus package, FBI director Robert Mueller warned Tuesday.

"These funds are inherently vulnerable to bribery, fraud, conflicts of interest and collusion. There is an old adage, that where there is money to be made, fraud is not far behind, like bees to honey," Mueller told an afternoon gathering of business executives.

According to MarketWatch:

Swindlers, con men, and thieves could siphon off as much as $50 billion of the government's planned stimulus package as the money begins flooding the economy in coming months, according to David Williams, who runs Deloitte Financial Services Advisory and counsels clients on fraud prevention.

"The rule of thumb typically is that of the about $500 billion worth of money that's going to run through the procurement process, somewhere between 5% and 10% of that usually finds its way into potential problems," Williams said. "That's sort of the benchmark that I use."

Companies will face increased pressure to try to stem the tide, and need to be prepared to safeguard data as well as the cash, according to Williams.

David Williams' estimate is too conservative. You can expect hundreds of billions in fraud and waste. Williams based his estimate just on the stimulus package and it does not include the extra trillions of taxpayer dollars to bail out Wall Street, banks, and the rest of the financial sector. According to FBI Director Mueller:

Given the trillions and trillions of dollars involved in the government's current moves to stem the economic crisis, "from the purchase of troubled assets to improvements in infrastructure, health care, energy and education -- even a small percentage of fraud would result in substantial taxpayer losses. [Emphasis added.]

The private sector and government do not have an adequate internal control structure to prevent white collar crime. We cannot rely on legislation mandating effective internal controls and accountability. We require experienced, competent, and well trained CPAs, internal auditors, external auditors, and compliance personnel to insure adequate compliance, transparency, and accountability to prevent white collar crime.

Current college curriculums do not offer enough training in internal controls, forensic accounting, auditing, and criminology for future CPAs, internal and external auditors, and compliance personnel entering the work force. Instead they are forced into battle with well prepared criminals, while slowly training on the job and taking courses in their spare time. We require more up to date education about how criminals execute their crimes, counter measures to prevent such crimes, and an effective streamlined means of disseminating such information to existing professionals in the field.
According to a recent New York Times article:

The F.B.I. is planning to double the number of agents working financial crimes by reassigning several hundred agents amid a mood of national alarm. But some people inside and out of the Justice Department wonder where the agents will come from and whether they will be enough.

Simply reassigning agents and hiring new agents fresh out of school will not solve the main problem of effectively investigating and prosecuting white collar crime. White collar crime investigations are increasingly complex cases that require enormous specialized resources and take long periods of time to successfully prosecute them. It takes years of specialized training for investigators to obtain the necessary skills to competently investigate such complicated crimes.

The FBI and other law enforcement agencies also need to recruit experienced specialized talent from the private sector. The government must offer employment incentives to bring back veteran investigators who left the FBI and other law enforcement agencies to seek better opportunities in the private sector. In addition, we require incentives for other seasoned anti-fraud professionals to leave the private sector for government employment.

Respectfully,

Sam E. Antar

Disclosure:

I am a convicted felon and former CPA. As the criminal CFO of Crazy Eddie, I helped mastermind one of the largest securities frauds uncovered during the 1980s. During the last ten years I have taught law enforcement, professionals, and students about white collar crime, free of charge.

On August 5, 2009, I am scheduled to deliver a speech at the United States Securities and Exchange Commission Joint Conference on Fraud Detection in Washington, DC. The Joint Conference on Fraud Detection is a cooperative effort sponsored collectively by the CBOE, NASAA, FINRA and SEC.

On September 30, 2009, I am scheduled to make a fraud presentation at the United States Department of Justice Affirmative Civil Enforcement for Investigators and Auditors Conference in Columbia, South Carolina.

I am a registered Democrat. However, I vote for candidates of each party depending on who I believe is the best candidate. In New York, convicted felons can vote. However, we cannot get jury duty, which I am happy with.

Advice to President-Elect Barack Obama about Combating White Collar Crime From a Convicted Felon

To President-Elect Barack Obama:

While our capital markets require reform, no amount of regulation or oversight can be effective unless those persons charged with carrying it out, have the proper amount experience, knowledge, competence, and professional skepticism to successfully perform their respective jobs and responsibilities. As the cold-blooded and heartless criminal CFO of Crazy Eddie, I had no fear of oversight from outside or independent board members and our external auditors. I took advantage of their lack of requisite skills, knowledge, and experience to effectively carry out my crimes. If you want to see capitalism succeed as an engine for our future economic prosperity, I respectfully ask you to first consider the issue of competence, before looking at the issue of regulation and oversight.

Window Dressing Boards of Directors

We need better standards of qualification for public company board members. Too often, company boards are packed with people with great resumes but such persons have no specialized experience and training to effectively carry out their functions or boards are packed with cronies of company management. Instead, we must require that board members have the proper amount of specialized education, background, and experience necessary to perform their duties effectively. We do not need well meaning, intelligent people, serving in positions they are not well suited for, since in many cases they make ineffective Board members. The time for “window dressing” must end.

Today, too many board members are appointed for “window dressing” purposes, rather than their specific competence to carry out their duties. Michelle Leder’s blog, Footnoted.org once noted:

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? Many of them wind up filling seats on boards of directors.

For example, your new Chief of Staff Rahm Emanuel was appointed by President Bill Clinton to serve on Freddie Mac’s (NYSE: FRE) board of directors, after serving in Clinton's administration. I am assuming that Mr. Emanuel took the job and served on Freddie Mac's board from 2000 to 2001 with the best of intentions. However, like many other well meaning but gullible board members, he found himself in the wrong place at the wrong time, in the hands of an unscrupulous management team.

According to the SEC complaint filed against Freddie Mac:

…Freddie Mac misreported its net income in 2000, 2001 and 2002 by 30.5 percent, 23.9 percent and 42.9 percent, respectively. Furthermore, Freddie Mac’s senior management exerted consistent pressure to have the company report smooth and dependable earnings growth in order to present investors with the image of a company that would continue to generate predictable and growing earnings.

“As has been seen in so many cases, Freddie Mac’s departure from proper accounting practices was the result of a corporate culture that sought stable earnings growth at any cost,” said Linda Chatman Thomsen, the SEC’s Director of Enforcement. “Investors do not benefit when good corporate governance takes a back seat to a single-minded drive to achieve earnings targets.”

Rahm Emanuel was not named in the SEC’s complaint against Freddie Mac. However, in a statement before the Senate Committee on Banking, Housing, and Urban Affairs, Acting Director of the Office of Federal Housing Enterprise Oversight, James B. Lockhart III noted:

For the most part, the same long-tenured shareholder-elected Directors oversaw the same CEO, COO, and General Counsel of Freddie Mac from 1990 to 2003. The non-executive Directors allowed the past performance of those officers to color their oversight. Directors should have asked more questions, pressed harder for resolution of issues, and not automatically accepted the rationale of management for the length of time needed to address identified weaknesses and problems. The oversight exercised by the Board might have been more vigorous if there had been a regular turnover of shareholder-elected Directors or if Directors had not expected to continue to serve on the Board until the mandatory retirement age. Conversely, the terms of the presidentially appointed Directors are far too short, averaging just over 14 months, for them to play a meaningful role on the Board. The position is an anachronism that should be repealed so shareholders can elect all Directors. The Board of Directors was apprised of control weaknesses, the efforts of management to shift income into future periods and other issues that led to the restatement, but did not recognize red flags, failed to make reasonable inquiries of management, or otherwise failed in its duty to follow up on matters brought to its attention. [Emphasis added.]

The problem is that intelligent and well meaning board of directors are often duped by unscrupulous company management teams who take advantage of their lack of requisite skills and professional cynicism.

Prospective qualified board members must know how to make effective inquiries and spot "red flags." They must know how to ask questions, who to direct their questions to, and how to handle false and misleading answers by management with effective follow up questions. Such skills only come adequately qualified board members who have proper training, education, and experience before joining company boards.

Lack of Truly Independent and Properly Qualified Audit Committee Members

So-called independent audit committee members of boards or directors are less independent and less competent than the external auditors, who they oversee. Too many audit committee members have no formal educational background in accounting and auditing or specialized training in fraud detection. 

Many so-called “independent” board members own stock and receive stock options in their respective companies, while independent external auditors cannot own stock or receive stock-based compensation from their audit clients. Owning company stock and receiving stock-based compensation, provides a disincentive to effective independent audit committee oversight of financial reporting and can adversely affect an audit committee member’s professional skepticism. Therefore, audit committee members cannot be considered truly "independent" if they own company stock or receive stock-based compensation. I suggest that our securities laws be amended to require truly independent and adequately qualified audit committees.

Lack of Properly Trained Auditors

External auditors receive too little or no training in forensic accounting, fraud detection, or criminology. Most Certified Public Accountants never take a single college level course devoted exclusively to issues of white collar crime or internal controls and many important subjects covered in the CPA licensing exam are learned after graduation in a cram CPA exam review course.

College level accounting education needs to be reformed to teach future CPAs the necessary tools to do battle in audits against corporate crooks who take advantage of their lack of skills. We should mandate that a larger proportion of continuing professional education, required by CPAs to maintain their licenses, be devoted to issues of white collar crime and fraud detection.

Not Enough Law Enforcement Resources Devoted to White Collar Crime

While I never feared Crazy Eddie’s board of directors and auditors, I did fear the Securities and Exchange Commission and the Federal Bureau of Investigation. However, I doubt that many criminals have such fear for the SEC and FBI today.

Both the SEC and FBI are under-resourced and overwhelmed and as a result, they are unable to successfully investigate too many complicated white collar crime cases, unless such cases are handed to them on a silver platter by others. The most experienced SEC and FBI personnel are leaving government work for better paying private sector jobs. Therefore, if you really want criminals to think twice before executing their crimes, I suggest that you beef up our nation's investigative and law enforcement resources.

Our capital markets depend on the integrity of financial information that is supposed to be insured by external auditors, audit committees, and consistently effective law enforcement. Inadequately trained independent external auditors, the first line of defense for insuring the integrity of financial reporting, are supervised by even less competent and less independent audit committees. On top of that, our regulators and law enforcement agencies lack the required resources to effectively prosecute many crimes enabled by the lack of effective audits and company oversight by boards of directors. Therefore, we face a perfect storm for disaster, as the cancer of white collar crime destroys our economic fabric and inflicts a collective harm on our great society.

If you want capitalism to succeed as an engine of prosperity for our great nation, I ask you to heed my my advice based on my experience as a cold blooded convicted felon.

Respectfully:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

PS: While Rahm Emanuel may not have been an effective board member of Freddie Mac, he can provide valuable insight to you about the perils of lack of effective oversight by boards of directors. After all, the wisest people are those that learn from past mistakes. In addition, I will continue to provide you with more unsolicited advice from time-to-time. You can learn a lot from a convicted felon who scammed the system and took advantage of gullible human beings in ways your advisors never dreamed of. Disclosure: Registered Democrat (convicted felons can vote in New York State but don't get to serve on juries - which I don't mind) and I vote both Democrat and Republican depending on the best candidate for the job. In addition, I have no position in Freddie Mac securities.

Is New York State Using a "Trust, Don't Verify" Approach Regarding Convicted Felon CPAs?

New York State Catches Up to Convicted Felon and Licensed CPA after 15 Years

Fifteen years after pleading guilty to one of the largest securities frauds of its time, the New York State Education Department - Office of Professional Discipline has finally caught up with a convicted felon who admits to committing his crimes with a "cold, dark, and heartless soul." That convicted felon is me!

After pleading guilty to three felonies in late 1992, the American Institute of Certified Public Accountants (AICPA) and the New York State Society of CPA's (NYSSCPA) booted me from their respective professional organizations. They informed me that they were referring my case to the New York State Education Department - Office of Professional Discipline, to have my license revoked. I knew that NY State automatically revoked CPA licenses for convicted felons. Since I believed that I was losing my license anyway, I simply let my registration to practice public accounting expire to put the situation behind me. In any case, I thought that my failure to re-register my license would result in it being revoked.

After I let my registration expire, I had no contact with NY State. I believed that NY State knew about my criminal record or at least that my license had expired upon my failure to re-register it. I assumed that I was no longer a CPA. I have since referred to myself as a former CPA in my fraud presentations. My whitecollarfraud.com web site refers to me as a former CPA, too.

A few years later, NY State published an on-line database of licensed CPAs. I found out that I was still a licensed CPA but not registered to practice public accounting! Since my registration to practice public accounting expired, I was considered an "inactive" but licensed CPA. In other states, if you fail to register your license, you lose it. However, I later found out that in New York a failure to register your license puts you on inactive status and does not revoke your license.

It turns out that the AICPA and/or the NYSSCPA either did not refer my criminal record to the New York State Education Department or if they did make a referral, New York State failed to act on the matter. Whether or not the AICPA or the NYSSCPA made a referral, it appears that NY State had no record of my criminal conviction. NY State never revoked my license.

Now that I found out that I was still a licensed but "inactive" CPA, I had openly disclosed my situation to most people in the profession that I had contact with and in most of my fraud presentations during the last several years to thousands of people. I invited people in the audience to rat me out to NY State. I wanted to see how long it would take for NY State to finally get around to actually revoking my license.

On Monday, October 22, 2007, I received an email from Lewis Antine at the NYS Education Department -- Office of Professional Discipline, asking me to contact him concerning my CPA license.

I immediately called Mr. Antine from the NY State Education Department anticipating the subject matter of the call. I asked him, "What took them so long to get to me?"

A person attending one of my fraud presentations had informed his office that I told an audience the fact that NY State had never disciplined me nor revoked my CPA license, despite the fact that I have a criminal record and that the AICPA and NYSSCPA booted me. He seemed to be quite embarrassed about the episode and the fact that NY State was the last to know that I was still a licensed but "inactive" CPA despite my criminal record.

Mr. Antine acknowledged the fact that I never publicly held myself out as a CPA by always calling myself a "former CPA" in public, such as during my fraud presentations, and on my whitecollarfraud.com web site. As a convicted felon, I never used my CPA credentials in private industry or anywhere else. I was publicly open about the fact that I did not face any disciplinary action to revoke my license. Mr. Antine was thankful to me for my public candor about the matter.

The problem of criminal CPAs and a solution

I hope that NY State has not adopted a "trust, don't verify" approach honor system regarding disclosure of criminal records for CPAs. There is a big hole in the system for screening out CPAs with criminal records. After meeting certain educational requirements, passing the CPA exam, and meeting experience requirements a qualified person can apply for a CPA license and register to practice public accounting. When a person applies for a CPA license, registers to practice public accounting, renews his registration to practice, or re-activates it after letting his registration lapse, he is required to disclose any criminal record.

The NY State Education Department should have access to criminal record information and conduct periodic checks for criminal records with the FBI. If anyone is naïve enough to believe that many criminals would disclose their criminal records, they are fooling themselves, since such a disclosure would red flag their licenses for revocation. A person convicted of a felony after obtaining a CPA license can simply let their registration to practice lapse and still be a licensed but inactive CPA, so long as NY State fails to institute a disciplinary proceeding to revoke his license. While such a criminal cannot practice public accounting, he can still call himself a CPA in working in private industry (something that I did not do).

I asked Mr. Antine if there was anything NY State needed from me. He asked me for copies of my criminal record, since NY State could not easily obtain any copies. I guess as a convicted felon, the least I could do is to help NY State prove that I am actually a criminal, so that they can discipline me and finally revoke my license.

As Herb Greenberg would say, "The beat goes on" and as Jeff Matthews would say, "I am not making this up."

Written by:

Sam E. Antar (former Crazy Eddie CFO & convicted felon)