Business_Essay

Running head: BUSINESS ESSAY Legal, Ethical, and Technical Concerns In the Financial Reporting of Businesses There cannot be a complete discussion regarding the legal, ethical, and technical concerns of the accounting and financial reporting of business without examining the responsibilities of the professionals involved in such reporting. As the text states, such critical and sensitive information should be handled with a supreme sense of discretion, acumen, and sound judgment. When looking at the managerial as well as the financial accounting of such companies as the Big 8 energy firms, the major banks, and the Silicon Valley firms, the professionals retained by such firms are privy to information that can negatively impact international markets if handled imprudently or released to unscrupulous parties. To quote directly from the text, “…professionals must act carefully and diligently…A professional must have the skill of the ordinarily prudent person in her profession.” (Mallor, Pg. 1159) It is the experience of most adults based on this reasoning that any individual one may hire will perform to the best of his or her ability. Furthermore, one who hires such a professional usually engages their services based on a written contract that not only spells out the basic requirements of such services but also implies excellence in performance based on the knowledge and tools available to them as well as the training they have received to obtain certification. In other words, it is assumed that one would not knowingly hire an auto mechanic who is either completely incompetent, or worse, intentionally does shoddy work using inferior tools or parts. Such an individual who purposely engages in paid work without care or diligence can and should be held liable. This is precisely the scenario describing the events surrounding the Goldman Sachs fraud. The SEC filed a complaint against the huge investment bank on April 16, 2010, accusing them of fraud for failure to disclose a conflict of interest. The conflict involved mortgage securities Goldman Sachs had pushed on clients as sound investments, while selling these same securities short in the secondary markets knowing these securities would fail. On the face of the evidence presented, the scheme would all but bankrupt the clients, but bring in huge profits for Goldman Sachs. The security, created by the investment bank, was known as a synthetic collateralized debt obligation or CDO which Goldman Sachs called ABACUS 2007-AC1, or Abacus for short. A CDO is similar to a collateralized mortgage obligation or CMO. A CMO is normally created by an investment bank from a large pool of individual mortgages just as a mutual fund is created from a pool of different company stocks and just as the mutual fund is broken up into units or shares of equal value, the CMO pool is broken up into similar shares of equal value. The key in picking the right mortgages to make up the CMO pool is simple; find mortgages (or debts) that have good payment histories and hence, have sound investment value. As the mortgage payments into the pool continue and the value of the underlying properties appreciate’ the value of the associated CMO shares increase as well. This is what the clients holding Abacus shares were lead to believe concerning their investment. According to the SEC charges Goldman Sachs told investors the Abacus shares were chosen and managed by ACA Management LLC, a firm managing 22 CDO’s with close to $16 billion in assets. This is the crux of the fraud. The Abacus shares were chosen and managed by wealthy and powerful hedge fund manager, John Paulson. With an MBA from Harvard, a hedge fund that grew from $2 million to $12.5 billion in less than 15 years, and a personal net worth reported at around $6 billion, one would have the utmost confidence in any investment this individual made or managed. Unfortunately, according to the SEC filing, Mr. Paulson purposely researched and handpicked mortgages that were subprime and destined to fail. His accomplice was another Ivy Leaguer; an investment banker from Stanford University by the name of Fabrice Tourre. The “Fabulous Fab” (as he is now known in the media) was Goldman Sachs’ point man for the Abacus shares. With his polished looks, charisma, wit, and impressive educational background (straight A student in one of the best schools in France as well as math student in one of the nation’s top universities) it was easy for him to woo wealthy and sophisticated clients into buying the shares. According to a Reuters web article, Mr. Tourre is the only Goldman Sachs principal named in the SEC complaint. (Steve Eder, 2010) * * * * Despite the fact that the Goldman Sachs fraud had a devastating impact on the mortgage industry as a whole, it was not the only cause of mortgage fraud with widespread ramifications affecting the entire industry. On June 17, 2010 a web article released by the associated press reported an investigation by the United States Department of Justice aptly named Operation Stolen Dreams. The investigation culminated in a government crackdown that lead to the arrest of nearly 500 individuals, many of whom were real estate professionals, all charged with various counts of mortgage fraud. While the actual crackdown centered around Las Vegas, Nevada (now called mortgage fraud ground zero), the scam itself was nationwide. The schemes at times were so sophisticated that banks as well as would be home owners were taken as fraud victims. The main goal in these schemes was simple; unscrupulous mortgage lenders would work with or deceive what the industry refers to as “straw buyers”. These straw buyers would either be collaborators who would take out mortgages based on outrageously inflated home prices in order to obtain a percentage of the “rake off”, or they would be unknowing victims who would overstate their income or falsify their credit in order to buy a more expensive home. In many cases, the fraud was committed by an entire team of unscrupulous buyers, brokers, and appraisers in order to convince the banks to sign over the mortgage money. What makes these cases even more appalling is the fact that these were crimes of patience. The fraud perpetrators knew that quick turnovers would arouse suspicion among the banks. Therefore, they would purposely make payments on many of the mortgages for periods of 6 months to a year to create the illusion of a legitimate real estate transaction. The scam would be further concealed in an appreciating realty market. In one USA today article covering the mortgage fraud, Jenny Brawley chief mortgage fraud investigator at Freddie Mac said in an interview that because of an appreciating market, the orchestrator of a fraud could flip 50 to 100 houses and do very well. * * * * Finally, we have the case of Port Authority union chief Daniel Hughes, the former head of the Field Supervisory Association, Local 111-S. This individual was given fiduciary authority over the union account of 250 members who perform roadway and tarmac work at the PA airports and pay dues regularly into the account. He abused that authority and embezzled $300,000 of union money from January 2005 to December 2009. An article in the New York Post stated that the money was used to indulge “his carnal and gastronomic appetites”. His criminal activity was facilitated by the fact that he had easy access to the union account through ATM’s throughout the city and also had the authority to write checks against the account in his own name. According to the article, Daniel also has been diagnosed with Post Traumatic Stress Disorder and depression and has also used the union funds for prescription drugs and treatment. Conclusion The case filed by the SEC against Fabrice Tourre is a civil case only and therefore simply looks to seek financial recovery for damages as a result of fraud. The SEC according to the text cannot file criminal charges against an individual or a firm and therefore no criminal charges have been filed as of this writing. The Department of Justice has filed criminal and civil charges against the 500 defendants. The DOJ is engaged in civil actions designed to recover more than $147 million from the fraud operation. One defendant in Minnesota, Michael Fiorito, has been convicted and is sentenced to serve more than 22 years in prison for conspiracy and mail fraud. Daniel Hughes’s conviction by Brooklyn Federal Court Judge Eric Vitaliano has earned him 46 to 57 months in prison, which equates to less than 4 to 5 years. In discussing tort liability and negligence, the text states that with respect to investment professionals, a securities broker is required to know the financial circumstances and investment objectives of his client before recommending securities. In the fraud cases discussed, the client awareness of the accused is not the question here. The question here is was there ever a moral compass in the hearts and minds of these individuals to start with' Based on the education and professional training of some of these individuals, they were certainly aware of the consequences with regard to the financial suffering of their clients' Were they also at least vaguely aware of the damage their actions would have on the national economy as well' Finally, if the accused were even remotely aware of the compounded effects of their actions, what type of person having that awareness would still continue in such a course of action' In this writer’s opinion, the answer is unthinkable. References. Mallor, Jane P., Barnes, A. James, Bowers, Thomas, Langvardt, Arlen W. , et al (2010). Business Law: The Ethical, Global, and E-Commerce Environment, New York, N.Y.: McGraw-Hill Irwin. BIO: John Alfred Paulson (April 2010). Retrieved June 18, 2010 from http/::connect.in.com/john-paulson/biography-148663.html Churcher, Sharon (April 2010). Revealed: British banker ‘Fabulous Fab’ – the high-flier at centre of huge Goldman ‘fraud’. Retrieved June 18, 2010 from http://www.dailymail.co.uk/news/article-1266831/Fabrice-Tourre-Banker-centre-Goldman Eder, Steve, Wutkowski, Karey (April 2010). Goldman’s Fabulous Fab. Retrieved June 18, 2010 from http://www.reuters.com/article/idUSTERE63026E2010425 Farrell, Greg (2008). Las Vegas called ‘mortgage fraud ground zero’. Retrieved from http://www.usatoday.com/money/economy/housing/2008-06-02-mortgage-fraud-las-vegas Messing, Phillip (2010). Port Authority union chief admits he embezzled $300K. Retrieved from http://www.mypost.com/news/local/port_authority_union_chief_admits_GRMCSeRAHy… Ritter, Ken (June 2010). ‘Operation Stolen Dreams’: DOJ Arrests Nearly 500 In Mortgage Fraud Crackdown. Retrieved June 17, 2010 from http://www.huffingtonpost.com/2010/06/17/operation-stolen-dreams U.S. Securities and Exchange Commission (2010). SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO tied to Subprime Mortgages. Retrieved June 17, 2010 from http://www.sec.gov/news/press/2010/2010-59.htm