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.

Skilling's Sentence: What It is Good For and What Is Still Required

White collar crime while not a violent crime can be in many ways more brutal in the collective harm in inflicts on our society. White collar crime harms not only the company and its direct victims (shareholders, employees, and company creditors) but the integrity of our financial markets.

When there is any doubt as to the reliability of financial information the collective market capitalization of our public companies suffer resulting in lost wealth such as reduced pensions benefits to retirees, higher costs of capital, and higher costs of debt. Higher costs of doing business reduce employment and taxes. Therefore, white collar crime is a scourge that destroys our economic fabric.

The sentencing of Jeffrey S. Skilling to 24 years and 4 months in prison recognizes these important facts. White collar crime must be taken seriously for what it is – a brutal crime which inflicts collective harm on the innocent and often inflicts collateral damage on society.

However, while we must hold white collar criminals fully responsible and accountable for their actions long prison terms do not by themselves prevent white collar crime.

The sentencing of Mr. Skilling will not stop any crimes in progress or cause any criminal to wake up the next day with any new found morality. Criminals can only be prevented though effective deterrents though barriers such as strong internal controls, effective oversight, and “checks and balances.”

We must require all organization types (businesses, non-profits, and governmental organizations) to have strong and verifiable internal controls. Such internal controls must be monitored, evaluated, and audited by competent fully independent external auditors.

We cannot retreat from the reforms legislated under Sarbanes-Oxley as some persons have proposed but must instead strengthen them with increased educational standards on the accounting profession that enforces this important law. Auditors must do no consulting work for their clients.

We must require the internal audit function to report to an Audit Committee made up of only independent members of the Board of Directors and not report to the CEO or CFO. The internal audit profession must be licensed by the states similar to way CPAs are.

Punishment and prison are important. However, unless integrated with prevention, professionalism (competence), and power (legislation) there will be many more Enron’s to come.

Memo to Warren Buffett from an Ex-Felon on White Collar Crime

Memo to Warren Buffett from an Ex-felon:

I commend your memo to your managers urging them to be ethical and compliant with the law.

Recently, Alan Greenspan a man like you of high moral character whom I am sure you respect as I do said the only thing good about Sarbanes Oxley is that CEO’s and CFO’s should sign certifying documents and rest of it should be swept away.

However, white collar crime and criminality cannot simply be attacked or prevented with well intentioned memos and directives, codes of ethics, and having CEO’s and CFO’s sign certifying documents.

Criminals (like I was) do not respect memos directing them not to commit crime, codes of ethics, and certainly have no problem signing false certifications in furtherance of their crimes.Simply said, we cannot attack white collar crime with paper.

However, an en ex-felon I can say that criminals fear barriers such as a strong internal control structure, well educated, skilled, and trained external public accountants who are truly independent. Criminals fear oversight.White collar criminals think in terms of the successful execution of their crimes (like a project) and are undeterred by strong prison sentences (which we require to exact responsibility and accountability on criminals, but are not a significant preventive measure).

No criminal changes their moral compass and no crimes in progress are stopped as they read about long prison terms imposed on felon like Bernie Ebbers. White collar crime cannot be attacked simply by saying criminals violated memos, codes of ethics, and signed false certification documents. Such measures while important are means to make criminals responsible and accountable (after being caught) and do not prevent crimes from happening in the first place.

I therefore, respectfully urge you to support legislation like Sarbanes Oxley and take greater measures within your company to increase internal controls such as establishing better procedures and oversight to make sure crime does not happen in the first place, including strengthening its internal audit function, increasing oversight by independent board members.

Furthermore, I urge you to send a memo to your external auditors. Please use your credibility and prestige to urge them to push for reforms in the education of their CPA’s including better training in the areas of fraud and white collar crime. Would you believe most accounting students never even take a fraud course in college? Ask them how much of their required continuing professional education credits taken each year are devoted to fraud? Would you believe that the AICPA only recommends (but does not require) them to take only 10% of such credit hours in the area of fraud?

I respect your intentions but your well intended solutions are not respected by the criminals you are trying to stop. You want to stop white collar crime - then prevent it because a model that relies strictly on prosecution and accountability after the fact cannot reverse damage to investors, creditors, employees, and the integrity of our great capitalist free market economic system.

Respectfully,

Sam E. Antar (Former Crazy Eddie CFO and Ex-felon)

Note: I have posted this memo on various blogs that have covered Mr. Buffett's memo.

To view his memo in its entirety see ProfessorBainbridge.com

Former Federal Reserve Chairman Alan Greenspan Speaks Out about Sarbanes Oxley and I Answer Him Back

Dear Alan Greenspan:

I have read recent accounts in the press about your views on Sarbanes-Oxley. According to an article in the Boston Herald in an article entitled, “Greenspan Unleashed” written by Brett Arends and published on September 26, 2006:

The only part he praised was the rule that chief executives had to certify their companies’ accounts personally.

‘‘The rest we could do without,’’ he said.

As an ex-felon, former CPA, and former Chief Financial Officer of Crazy Eddie who helped mastermind one of the largest securities uncovered in the 1980’s I believe, respectfully, that I am uniquely qualified to address this specific issue.

Criminals have no problem signing false certification documents in furtherance of their crimes. It is simply a natural extension of the deceit and lies we use to successfully execute our crimes.

If you also mean that regulations under Sarbanes Oxley which prevent public accounting firms from offering consulting services to the client’s they audit should be scrapped (as implied in your remarks and the article quoted above) than I feel I must share my specific experiences as a criminal with you to understand why I respectfully disagree with your views.

White collar criminals use your humanity against you. One of our tools is the use of your gratitude towards us as a means of reducing your objectivity and weakening your skepticism of us. We believe that our victims become so intoxicated with our generosity and largess that they become resistant, scared, and embarrassed to ask critical questions as “red flags” are raised.

For over 15 years Crazy Eddie had certified financial statements. In the early years audited by a small accounting firm and in later years as a public company were audited by a firm which is part of the “big four” accounting firms.

With regards to the smaller firm (by the way I got my CPA experience working for them) Crazy Eddie was the largest client and awarded them consulting agreements whose monetary value was way in excess of their auditing fees. When the larger accounting firm succeeded the smaller firm of auditors we continued to award that firm consulting agreements as much as six times the value of the audits.

Both firms knew that we as “customers” could go else where for such consulting agreements. As a result we as criminals used their gratitude against them.

Whenever “red flags” came up they always accepted management’s version of the truth where any reasonable person would not. As a result they surrendered their “professional skepticism” and required healthy dose of cynicism to conduct their audits in a professional and effective manner.

An additional strength of Sarbanes Oxley is the requirement that companies have strong external controls which are reviewed by independent external auditors. Strong internal controls are the most effective means of preventing white collar crime.

Strong punishment while necessary is not by itself an effective deterrent to crime. Most white collar criminals think in terms of whether they can successfully execute their frauds. We require barriers such as strong internal controls to frustrate such plans.

Audits cannot be effectively conducted in the absence of strong internal controls. Even if the auditors could count even asset and liability to the penny issues remain about how such assets and liabilities were generated.

For example with the absence of effective internal controls the auditor cannot determine if all cash came from sales rather than laundered funds or other means.

Above I have used only a few examples to respectfully criticize your remarks. Please read my submission of comments to the Securities and Exchange Commission and the Public Accounting Oversight Board for in my whitecollarfraud.com web site for additional details.

I am willing to approach your remarks with an open mind. However, as a criminal who admits that my crimes were committed “just because I could” with “no rationalization I caution you that the public would not be swayed by my endorsing your position on Sarbanes Oxley.

Rather as a person who has no qualms telling people about the brutal nature of my criminality (from the collective harm it has caused many victims) I believe the public understands that my position carries more credibility than yours by my opposition to any weakening of Sarbanes Oxley.

We both have common ground in understanding that the reliability of financial information is the main pillar that supports of great free market capitalist economic system. I hope that you realize that white collar criminals subvert confidence in our financial markets and economy and as a result we inflict collective harm well beyond our defrauded companies.

I am also unhappy with Sarbanes Oxley as it should include effective competency mandates for an accounting profession that is not adequately educated, lacks necessary skills, and training to effectively implement this legislation.

You are surely a decent person and intelligent person who has lived a far more greater and productive life than a disgraced ex-felon like me. Therefore, when you hear my caution about the dangers of gutting Sarbanes Oxley and its reforms from a criminal it is designed to protect you from, you should carefully heed my warnings.