Naughty or Nice: Who Made the List in 2016?

GUEST BLOGGER

Emily Primeaux, CFE
Assistant Editor, Fraud Magazine

He sees you when you're sleeping. He knows when you're awake. He knows when you've been bad or good...

"He," or "she," of course, is the ever present fraud fighter. And in 2016, fraud fighters saw a slew of unsavory characters who clearly ignored the elf on the shelf and instead stole, bribed or colluded to illegally line their own pockets. But for every bad apple, there are unsung heroes — the whistleblowers, journalists, investigators ... the list goes on and on. These heroes go to battle in the trenches every day to root out the crooks and thieves.

In honor of the holiday season, let's ruminate on the past year and the characters that made it onto either the naughty or the nice list.

Naughty

1. Wells Fargo: On Sept. 9, 2016, Wells Fargo negotiated a deal to settle a lawsuit filed by the U.S. Consumer Financial Protection Bureau, the Office of Comptroller of Currency, and the City and County of Los Angeles. Though Wells Fargo didn't admit to any wrongdoing, it did confirm that employees had opened more than two million checking, savings and credit card accounts without customer approval. And in a stunning turn of events, former employees then came forward to say they had called the ethics hotline to report dubious sales practices. However, according to these accounts, some whistleblowers claimed that the bank's strategy for dealing with whistleblowers was to find ways to fire them in retaliation. Though the case is ongoing, John Stumpf has stepped down as the bank's chief executive.
    
2. Andrew Caspersen: On Nov. 4, 2016, this disgraced scion of a wealthy Wall Street family was sentenced to four years in prison for robbing his friends, family and a large hedge-fund foundation in a Ponzi-like scheme. The judge who sentenced him? None other than the ACFE's 2016 Cressey Award winner, Senior U.S. District Judge Jed S. Rakoff. Looks like Caspersen most likely received coal in his stocking this year.
    
3. The Panama Papers: A giant leak of more than 11.5 million financial and legal records from the world's fourth biggest offshore law firm, Mossack Fonseca, detailing financial and attorney-client information for more than 214,488 offshore entities ... otherwise known as the Panama Papers. According to the papers, the leak "exposes a system that enables crime, corruption and wrongdoing, hidden by secretive offshore companies." The leaked documents outed scores of politicians, business leaders and celebrities for fraudulent business practices, including Iceland's Prime Minister, Sigmundur David Gunnlaugsson. He stepped down after documents revealed that he and his wealthy wife had sheltered money offshore.

Nice

1. The Panama Papers: The papers themselves were a great feat of international cooperation when the International Consortium of Investigative Journalists, the German newspaper Süddeutsche Zeitung and more than 100 news organizations released the Panama Papers. These are the good guys.
    
2. Tyler Schultz: When he discovered that Theranos, a health technology and blood-testing company, was using proprietary Edison machines that frequently failed quality-control checks and produced widely varying results, Schultz (an employee of the company at the time) decided to speak up. He drafted an email to founder Elizabeth Holmes to complain that Theranos had doctored research and ignored failed quality-control checks. What makes this move even more incredible is that Schultz is the grandson of George Schultz, a Theranos board member. Since then, a major investor has sued Theranos for fraud and the company has had to stop blood tests, shut down labs and cut jobs. 
    
3. Clare Rewcastle Brown: In 2010, Rewcastle Brown founded The Sarawak Report and Radio Free Sarawak to disseminate news that concerned the Sarawak region of Malaysia and eventually, news surrounding the emerging 1MDB (1Malaysia Development Bhd) scandal. 1MDB is currently being investigated by Swiss, Singh and U.S. authorities. And she's not backing down, despite a Malaysian court issuing a warrant for her arrest for "activities detrimental to parliamentary democracy" and the "dissemination of false reports." She'll be speaking about the scandal at the 2017 ACFE Fraud Conference Europe in London, March 19-21.

The naughty list may never be empty, but at least we have those on the nice list to turn to. And while 2016 saw some pretty egregious schemes, we can enter 2017 knowing that there are those willing to investigate and speak up. Here's to the new year!

Indifference to Ethical Business Conduct is Death for Organizations

FROM THE PRESIDENT

James D. Ratley, CFE
ACFE President

In my decades of anti-fraud work I've learned more things than I've taught. Here's one important nugget: Organizations should encourage whistleblowers. (At the ACFE, we like to call them sentinels.) As in years past, the 2016 Report to the Nations says the most common detection method still is tips.

In Fraud Magazine's latest cover article, Top 10 factors leading to hotline distrust: Understanding why no one calls, authors Ryan Hubbs and Julia Kniesche write that whistleblowers have always been subject to false allegations, retribution from management and even dismissal.

I've met few whistleblowers who weren't targets of their organizations after they bravely stepped up to the plate. (Just read the stories of Tony Menendez and James Holzrichter.)

Hubbs and Kniesche write that employees often ignore company hotlines because they witness top management's indifference to ethical business conduct. "When employees see management retaliating against would-be whistleblowers, the message at the operational level is clear: Mind your own business, don't ask questions and keep your head down if you want to keep your job," they write.

That attitude is death for organizations. "An ethics hotline reporting system becomes meaningless when employees can't trust that local management will take appropriate action," say the authors.

Some of the factors that lead to ineffective hotlines, they share, include neglecting to train hotline workers well; management that interferes; employees who don't understand the systems; inadequate resources and poor program designs; and retaliation against whistleblowers.

Sometimes, organizations begrudgingly begin hotlines because of stipulations in the U.S. Sarbanes-Oxley Act and the Dodd-Frank Act, or European Union directives.

However, the organizations that see the best hotline results initiate them because they know they'll encourage strong internal cultures and revive flagging morale. As the authors write, employees' lack of trust in the reporting process can create unhealthy work environments, and eventually result in employment lawsuits, legal and regulatory actions, loss of assets, external whistleblower complaints, poor customer perception or brand reputation, and high employee-turnover costs.

Hubbs and Kniesche write that most employees want to do the right thing, and organizations need to do what they can to help support and encourage employees to report. "Failures in employee reporting today can result in significant operational and reputational hurdles tomorrow," they explain. They encourage you to follow their tips to strengthen your reporting program so no top executive ever has to ask the question, "What went wrong?"

One Whistleblower's Story: Losing a job, but not losing hope

LETTER FROM THE PRESIDENT

James D. Ratley, CFE
ACFE President

You might eventually have to make a tough decision that could jeopardize your job and disrupt your life.

Let's say you find an accounting regulation violation that your organization might have ignored for years. You bring your concerns to your boss who agrees you've discovered a problem. Other accounting department staff members concur until they figure out the restatement costs. You stew over this and realize that your organization is breaking the law.

You secretly report the violation to the U.S. Securities and Exchange Commission (SEC) and the audit committee of your company's board. Somehow your boss finds out and sends an email to the accounting department's executives. The attorneys review and decide that the company is in compliance. The SEC decides not to investigate the case. You lose your job and your hope.

This is the story of Tony Menendez, CFE. Except he never lost his hope. "In 2005, I was asked to approve a bill-and-hold sale [at Halliburton], and it was at least six years after the SEC issued SAB 101," Menendez says during a recent Fraud Magazine interview. This Staff Accounting Bulletin describes regulations on revenue recognition in financial statements.

He says unassembled equipment wasn't even ready to be shipped to a customer. "Halliburton was holding the equipment in anticipation of performing future oil field services for its customer," he says. 

Menendez shared his findings with his bosses, and they initially agreed with him. But they later backpedaled when they realized that correcting the accounting would've required a costly and embarrassing restatement. Menendez went to the SEC, which eventually decided it wouldn't pursue the case. A Halliburton internal investigation cleared the company. Menendez's boss outed him to the company in an email. Halliburton stripped him of many of his duties and banned him from meetings. Colleagues ostracized him. Menendez left Halliburton in 2006 and brought a whistleblower claim under the anti-retaliation provisions of the Sarbanes-Oxley Act.

In September 2008, an administrative law judge determined that Halliburton hadn't retaliated against Menendez. Menendez then represented himself in appealing the case to the Administrative Review Board (ARB). In September 2011, the ARB overturned the original trial judge. Halliburton appealed to the Fifth Circuit Court of Appeals, but the panel ruled that the company had retaliated against Menendez for blowing the whistle. After almost nine years, he'd won his battle.

"The stigma of whistleblowers hasn't changed nearly enough," Menendez says. "As long as employers see whistleblowers as a rare breed to be feared instead of individuals who add great value to the working team as a whole, it can be hard for them to prevail, and society as a whole bears the greater risk."

The ACFE will award Menendez the 2016 Sentinel Award for "Choosing Truth Over Self" at the 27th Annual ACFE Global Fraud Conference. Read more about Menendez's story in the latest issue of Fraud Magazine.

Wall Street Jed(i) to Keynote ACFE Global Fraud Conference

AUTHOR'S POST

Mandy Moody, CFE
ACFE Media Manager

The man “waging a one-man war on bank-friendly SEC settlements.”

“The judge known for holding Wall Street to account.”

“He has the courage of his convictions.”

These flattering descriptions tell me a few things about upcoming conference keynote speaker Judge Jed S. Rakoff, the U.S. District Judge of the Southern District of New York. First, there actually is someone out there who is trying to hold Wall Street’s wanderers accountable. Second, the media is capable of paying compliments. And, lastly, that he has a few things in common with many of the attendees I have met at the ACFE Global Fraud Conference over the past few years.

More than 3,000 fraud fighters from the around the world will all come together to network, learn and share war stories exactly like the ones Rakoff has fought at the 27th Annual ACFE Global Fraud Conference, June 12-17, 2016, in Las Vegas.

But, the agenda doesn’t just stop with Rakoff. He will be joined by other keynote speakers including:

• Steve van Aperen, Body Language Expert
  Van Aperen has appeared on CNN, Access Hollywood, The News Room and many other programs and is affectionately referred to as the “The Human Lie Detector”. He is known as an expert in the field of behavioral interviewing, reading body language, detecting deception and changing behaviors through rapid induction hypnosis. He has conducted behavioral interviews on 68 homicide and two serial killer investigations and consults his services to Fortune 500 companies, police departments, intelligence agencies and government departments throughout the world on how to read body language and detect deception by analyzing verbal, nonverbal and paralinguistic behaviors.
• David Barboza, Investigative Journalist, The New York Times, Pulitzer Prize Winner
  Barboza has been a correspondent for The New York Times based in Shanghai, China, since November 2004. In 2013, Barboza was awarded the Pulitzer Prize for International Reporting “for his striking exposure of corruption at high levels of the Chinese government, including billions in secret wealth owned by relatives of the prime minister, well documented work published in the face of heavy pressure from the Chinese officials.” He was also part of the team that won the Pulitzer Prize for Explanatory Reporting. In 2002, he was part of a team that was named a finalist for a Pulitzer Prize for coverage of the Enron scandal.
• Tony Menendez, the "Accountant who Beat Halliburton"
  Menendez is widely recognized for his decade long legal battle with Halliburton as a corporate whistleblower under Sarbanes-Oxley. Despite having no formal legal training, as a pro-se litigant during the appeals process, he ultimately prevailed in the Fifth Circuit Court of Appeals. An in-depth profile of Menendez published by ProPublica provides insight into what motivated him to stand up against a corporate behemoth while shedding light on the difficult journey so many whistleblowers experience after coming forward.

Along with the keynotes listed above, the ACFE Global Fraud Conference will pack in more than 70 educational sessions, three Pre-Conferences, three Post-Conferences and an unlimited amount of networking into five days. I look forward to seeing you, and hearing even more stories about your individual fight against fraud, at the conference in June. Register by March 28 to reserve your spot and receive the latest savings.

How to Conduct Yourself as a Fraud Examiner in Qui Tam Cases

GUEST BLOGGER

Courtney Babin
ACFE Communications Coordinator

Fraud examiners play a vital role in qui tam lawsuits. According to Whistleblowers.org, "any persons or entities with evidence of fraud against federal programs or contracts may file a qui tam lawsuit.’" The person(s) that bring forward the lawsuit are called “relators,” or are most commonly referred to as whistleblowers. A relator is someone that has worked inside a company and has knowledge that fraudulent activity is being committed. Typically, the relator has tried to get the issue resolved in-house, but for whatever reason has obtained outside counsel. This counsel helps the relator file a lawsuit in the federal court system on behalf of the government. Once the relator’s counsel contacts the government and informs them of the lawsuit, the government then decides whether or not to intervene.

In qui tam cases, having a subject matter expert on your case is crucial; this is the role of the Certified Fraud Examiner (CFE). An expert can make or break the case. “I’ve met experts that have knowledge (or credentials), per se, but they don’t know what they are doing or how to communicate,” said Eileen Leslie, CFE, CPA, Financial Analyst at Forensic Strategic Solutions. “A seasoned Certified Fraud Examiner, especially one focused on forensic accounting, has the education and experience needed to be able to detect and understand an unlimited amount of fraudulent scenarios. But that’s only the beginning.” Leslie shared this and other lessons recently in a Fraud Talk podcast interview, "The Role of a Fraud Examiner in Qui Tam Cases."

She goes on to explain that the CFE is there to first and foremost calculate the single damages. Single damages are the losses sustained as a result of fraud.  “It’s my job to obtain a thorough understanding of the issues to perform an unbiased analysis of the facts and make sure all necessary parties understand my damages calculations and findings,” said Leslie. It is important to calculate damages properly because the government uses that number in their negotiations (the government is allowed to go for three times the amount of the single damages).

Another important role of the fraud examiner is to make the case extremely understandable. “To truly be effective you must have the ability to articulate your findings to people of all understanding and interest levels,” said Leslie. “My personal belief is that as an expert you conduct yourself in an expert manner. I want to conduct myself in having full knowledge of the issues. I want to be unbiased. I want to look at just the facts.”

As a fraud examiner and expert in this matter, you need to prepare your case in a way that convinces the government to intervene. When a case is brought before an attorney, keep in mind that this attorney may have never been exposed to the law or rule that is being violated. It’s important to explain the case easily so that they can process the case appropriately. You can assist them by:

• Knowing the rule or regulation that has been violated.
• Providing a printed copy of the rule to the government.
• Articulating the violation from the relator in a manner that is understandable by judges and juries.
• In a binder, supplying supporting back-up documentation in a structured manner.
• Preparing a visual PowerPoint presentation with diagrams and graphs.

Above all, said Leslie, “Please be responsible. Be real in your expectations of what you can do. Find somebody that has the experience to be able to guide you appropriately so that you are gaining a full understanding of the issues at hand. Be credible, go by the facts, be responsible and make sure that [everything is] right.”

To hear Leslie’s full podcast interview, visit ACFE.com/podcast.