White-Collar Crime
By: Sam E. Antar
Website: whitecollarfraud.com
Blog: whitecollarfraud.blogspot.com
Twitter: twitter.com/SamAntar
Facebook: facebook.com/sam.antar
Email: sam@whitecollarfraud.com
© Copyright by Sam Antar. All rights reserved.
Educating Students About White-Collar Crime
“Back to School” starring Rodney Dangerfield
Basic Rules of White-Collar Criminals
White collar criminals consider your humanity,
ethics, morality, and good intentions as weaknesses
to be exploited in the execution of their crimes.
White collar criminals measure their effectiveness
by the comfort level of their victims.
White collar criminals build a wall of false integrity
around themselves to gain the trust of their victims.
Crazy Eddie’s Commercials
We had greater name recognition than Coca-Cola
Splash
Starring: Darryl Hannah and Tom Hanks
Crazy Eddie Fraud
Crazy Eddie crime spree evolved in three phases:
(1) 1969-1979: Skimming and under-reporting income
(tax fraud) prior to planning to go public
(2) 1980-1984: Gradually reducing skimming to increase
profit growth in preparation for the initial public
offering, i.e., committing securities fraud by "going legit“
(3) 1984-1987: As a public company, overstating income
to help insiders sell stock at inflated prices
How did we do it?
As a private company from 1969 to 1979, Crazy Eddie's
primary frauds were:
• tax evasion (skimming cash sales from customers to
evade income taxes and steal sales taxes)
• evading payroll taxes by paying employees in cash
"off the books" rather than reporting their income to
the Internal Revenue Service, and
• reporting phony or exaggerated insurance claims to
increase profits.
Understating Profits vs. Overstating Profits
You get a "bigger bang for the buck" by inflating
earnings and overpaying taxes as a public
company than you get by understating income
and underpaying taxes as a private company.
Gradual Reduction of Skimming
1980-1984: Gradually reducing skimming each year to increase
earnings growth in preparation for the initial public offering, i.e.,
committing securities fraud by “going legit.”
Gradual reduction in skimming inflated earnings growth in five
fiscal year prior to initial public offering.
Overstating Profits as a Public Company
1984-1987: As a public company, overstating income to help insiders
dump stock at inflated prices using a variety of fraudulent tricks:
• "The Panama Pump" -- money laundering to increase revenues and
reported profits
• Fraudulent asset valuations -- inflating inventory assets to increase
reported profits
• Accounts payable cut-off fraud – decreasing accounts payable liabilities
to increase reported profits
• Debit memo fraud -- concealing liabilities and expenses to increase
reported profits
• Covering up crimes by changing financial statement disclosures
Crazy Eddie Masterminds – Part I
Crazy Eddie Masterminds – Part II
The Devil’s Advocate
Starring Al Pacino and Keanu Reeves
Crazy Eddie Masterminds – Part III
Crazy Eddie Masterminds – Part IV
December 7, 2007: Fortune Magazine Interview
INVESTOR BEWARE Sam E.'s five rules for spotting potential fraud in public companies.
Study SEC filings yourself. External auditors, audit committees, and Wall Street analysts cannot
protect you from most fraud. Analysts often do not ask the important questions and are too quick
to accept management's representations.
Read the footnotes first. Tiny things can be huge. In the Crazy Eddie fraud, the change of a single
word (from "purchase discounts and trade allowances are recognized when received" to
"recognized when earned") allowed Sam E. to inflate the company's earnings in fiscal year 1987
by about $20 million.
Watch for inconsistencies. If the CEO tells the press, "We are profitable," make sure the figures
in the 10-Q back up the statement.
Always crosscheck disclosures. Compare Management Discussion & Analysis in the current
report with MD& A sections in past 10-Qs. Look for any changes in disclosure language.
Sound like too much work? If you don't have the time or expertise to do the above, don't buy
individual stocks. Stick with index fund
Debit Memo Fraud
Fiscal year 1986:
"Purchase discounts and trade allowances are
recognized when received."
Fiscal year 1987:
"Purchase discounts and trade allowances are
recognized when earned."
Deposition Testimony
Auditor started examining accounts payable on April 28, 1987, the same day PMM signed
off on a clean opinion for fiscal year ended March 1, 1987 financial reports.
Question: There’s a date at the bottom of the page which appears to be 4/28/87. Do you
see that?
PMM staffer: Yes, I do.
Question: Is that your handwriting.
PMM staffer: Yes, it is.
Question: What does that signify?
PMM staffer: It was my policy to date my workpapers when I began to perform test work.
Question: So that tells us you started this work on the 28th but it doesn’t tell us when you
finished it?
PMM staffer: That is correct.
CNBC: A Story Full of Ironies
Overstock.com
CEO Patrick Byrne
Overstock.com
GAAP Violations
In the fourth quarter ended December 31, 2008,
Overstock.com reported a $1.014 million net profit.
On January 30, 2009, during Q4 2008 earnings call
Overstock.com CFO Steve Chesnut said:
“This included a one-time gain of $1.8 million relating to
payments from partners who were under-billed earlier in
the year.”
February 4, 2009: White Collar Fraud Blog
By Sam E. Antar
Under GAAP, we are required to use an accrual basis of accounting.
Income is recognized when it is earned and not when it is later billed or
when amounts are collected.
The “one-time gain of $1.8 million relating to payments from partners
who were under-billed earlier in the year” was earned before Q4 2008
and should have been recognized in prior periods.
Since the accounting error is material under SAB No. 99, Overstock.com is
required to restate prior period financial reports under SFAS No. 154 and
cannot use a “one-time gain” to correct its error.
February 6, 2009: Patrick Byrne
responds:
“Antar's ramblings are gibberish. Show them to any
accountant and they will confirm. He has no clue
what he is talking about.”
Selling America Short:
by Richard C. Sauer
“This dispute did not end happily for Byrne. KPMG
sided with ex-felon Antar. In early February 2010,
Overstock announced that its financial statements for
the period at issue should no longer be relied upon…. ”
Inventory Inflation to Overstate Earnings
In an inventory fraud, a company inflates its inventory levels to overstate its reported gross profits and
earnings. See the computations below:
Revenue minus Cost of Goods Sold = Gross Profit
Cost of Goods Sold = Beginning Inventory plus Purchases (including costs capitalized to purchases)
minus Ending Inventory.
If you inflate ending inventory, cost of goods sold is understated and gross profit is overstated. However,
if you inflate ending inventory in one period, then the beginning inventory in the next period is
automatically inflated and gross profits are understated in that subsequent period. Therefore, if you
inflate ending inventory and overstate gross profit in one period, it automatically reverses itself in the
next period. See the computation below:
Cost of Goods Sold = Beginning Inventory plus Purchases (including costs capitalized costs) minus
Ending Inventory.
To maintain an inventory inflation fraud, the perpetrator needs to continue inflating inventory in each
subsequent period or suffer a reduction of earnings that is equivalent to the prior inflation of earnings.
In other words, the perpetrator needs to continually “feed the beast” by overstating inventory in
subsequent periods or suffer a reduction of earnings.
The only way to unwind an inventory fraud is to reduce reported inventory levels in subsequent periods
and suffer a decline in gross profits to reverse previous overstatements of earnings.
Red Flags to Identify Inventory Fraud
Is inventory growing faster than revenues over an
extended period of time?
For example, in fiscal year 1987 Crazy Eddie’s reported
revenues increased 34% while its inventories increased
82% when compared to the previous fiscal year. Its
reported inventories grew at more than twice the rate of
reported revenues.
In November 1987, new management ousted the Antar's
from Crazy Eddie and discovered that most of the
inventory on its books did not exist!
Green Mountain Coffee Roasters
Is Green Mountain Coffee Another Crazy Eddie?
Most Frauds Detected by Tip or By
Accident
Blue-Collar vs. White Collar
NYC Police Officers: 34,500
FBI Special Agents: 13,890
IRS Criminal Investigative Division: 2,800
SEC Employees: 3,800
Mark Twain
“A man is never more truthful than when he
acknowledges himself a liar.”