Understanding White Collar Crime, a Former Fraudster Speaks Out

Securities fraud cost investors hundreds of millions of dollars, cost many people their life savings, cost many people their jobs and careers, cost creditors hundreds of millions of dollars, and many people’s suffering that cannot be measured.  Sam Antar, a former CPA and former Chief Financial Officer of Crazy Eddie, Inc., who in the 1980s, helped mastermind one of the largest securities frauds of its time was coined by US Attorney Michael Chertoff as, “the Darth Vader of Capitalism”  now educates people about White Collar Crime. 

On his website, www.whitecollarfraud.com, he has a great article about White Collar Crime.  This may help people to understand why Bernie Madoff’s ponzi scheme was able to last as long as it did.  It is also great advice in general, especially when it comes to shopping for financing and investing.  The following is from his website and is used with his permission.

To understand how to stop white collar crime, key thoughts to remember are:

1.       Competence cannot be legislated. However, competence can be learned. New reforms require stronger skills by the profession to be effective.

2.       The criminal always has the initiative. To attack white collar crime, you have to prevent it from happening by creating barriers such as strong internal controls.

3.       Criminals are judgment oriented in their approach to crime. Auditors are process oriented in their approach. Therefore, the criminal has the fundamental advantage over the auditor.

4.       Unexamined acceptance is the auditor’s worst mistake in judgment and the fraudster’s greatest hope.

5.       Critical thinking is an important skill. You cannot stop white collar crime or investigate it credibly with  a “check the boxes” approach. Auditors must be taught investigative skills.

6.       Professional paranoia should be added to professional skepticism in all references in accounting and auditing training literature. Criminals fear skepticism, cynicism, and effective oversight.

7.       Criminal fear people who have good questioning skills.

8.       Auditors and law enforcement professionals should show outward respect but inwardly have none in the conduct of their work. It is also called being “poker faced.”

9.       “Don’t trust, just verify” instead of “trust, but verify” should be the auditor’s mindset.

10.    The word “trust” is a professional liability for accountants, auditors, and other anti-fraud professionals.

11.    White collar crime is about the color green and is not “red” or “blue.” It really does not matter which political party is in power whether it be the Republicans or Democrats.

12.    Most white collar criminals are likable people. They use their personality as a tool. White collar criminals use your humanity, personality, and good intentions against you as weaknesses to be exploited in the execution of their crimes.

13.    Criminals are capable of doing good deeds while they are involved in executing their crimes. For example, many convicted felons were involved in charity work during the same period of time they were committing crimes. Good deeds in one area of life do not prevent a person from being a criminal in another area of their lives.

14.    Criminals try to avoid accountability by showcasing their good deeds. Crimes cannot be excused and scrutiny stopped because of the good deeds people have done in other areas of their lives. White collar criminals often build a false wall of integrity around them by showcasing their good deeds while living a parallel life of crime.

15.    Criminals are not stopped because of well meaning Codes of Ethics. Since they have no respect for the law and their victims, such Codes of Ethics have no effect on them.

16.    White collar crime is a crime a persuasion and gentle and subtle intimidation.

17.    White collar criminals are artful liars.

18.    You can steal more with a smile than you can with a gun. You can steal more with a pencil or a keyboard than you can with a gun. Therefore, smiles, pencils, and key boards can be more dangerous than guns.

19.    White collar crime inflicts collective harm on people and society and should be considered as brutal as violent crime.

 About White Collar Crime and Criminals

 A white collar criminal carries a lethal weapon that any “weapons or metal detector” at an airport or even our nation’s safest installations can prevent them from carrying. That weapon can be in many ways more lethal than a gun. The white collar criminal’s weapon is the intellect within his mind.

 White collar criminals cannot be profiled, since according to most studies over 90% of them have no previous criminal records. Worst yet, the criminals who commit securities fraud and financial statement fraud almost never have previous criminal records.

 White collar crime is a crime of persuasion. It is a crime committed with a smile rather than a gun. Many white collar criminals are likable people. They use their personality as a tool.

 They use your humanity, personality, and good intentions against you. White collar criminals consider your good traits such as goodwill and trust as “weaknesses to be exploited” in the execution of their crimes.

 Criminals are capable of doing good deeds while they are involved in their criminal acts. For example, many convicted felons were involved in charity work during the same period of time that they were committing their crimes. Good deeds in one area of their lives do not prevent a person from being a criminal in another area of their lives. Criminals try to avoid accountability by showcasing their good deeds. Crimes cannot be excused and scrutiny stopped because of the good deeds people have done in other areas of their lives.

In fact, an important tool of a white collar criminal is your gratitude. White collar criminals hope that their “good deeds” will weaken your defenses, professional skepticism, objectivity, and inquiry into their actions. They hope that one day you may come to their aid and publicly defend them. White collar criminals build a wall of false integrity around them by showcasing their good deeds, while living a parallel life of crime.

 White collar criminals commit crimes simply because “they can.” They commit their crimes simply because the incentive and opportunity is available to them.

 The most effective way to reduce white collar crime is by prevention. We must create barriers such as strong internal controls. Such internal controls must be reviewed by competent, educated, skilled, experienced, and truly independent external auditors.

We need to move towards a more preemptive approach to white collar crime. We cannot hope to significantly prevent or reduce white collar crime by relying on the threat of long prison terms for convicted felons.

 The auditor and fraud professional’s biggest mistake is “unexamined acceptance.” No information received during the conduct of their work from any source (human, documentary, and otherwise) can be taken for granted as having truthfulness and integrity without critical analysis.

 I took full advantage of Crazy Eddie’s auditor’s failure to investigate information without critical analysis. In fact, an auditor’s lack of questioning skills is frequently cited in fraud literature as a major factor in failed audits. Most accountants and fraud professionals are never trained in interviewing skills. They do not know how to ask questions, whom to ask questions the proper questions, how to formulate proper follow up questions, and are often too quick to accept false and misleading answers.

 Accounting and auditing students need to be trained in the skill of “critical thinking.” In fact, certain colleges have courses just on that subject. Maybe a new course approach can be geared toward auditing and fraud investigation.  Auditors and fraud professionals must have “professional paranoia” and adopt a no-nonsense “don’t trust, just verify” approach to their work. They must be hard-nosed and cannot be intimidated by the environments around them both from their front and rear. Intimidation can masked with the smile of so-called cooperation.

 The Mindset of a Fraudster

 As a criminal, I used every tool I knew to gain my objectives. I took advantage of people’s weaknesses, niceties, prejudices, etc., in any way I could. I could be any person I had to be as the situation warranted. I was, simply stated, an “economic predator.”

 Joseph T. Wells former Chairman of the Association of Certified Fraud Examiners once wrote in the Journal of Accountancy that Crazy Eddie’s auditors were, “…just too trusting. After all, no one wants to think the client is a crook. But it happens too often. That’s why the profession requires the auditor to be skeptical.”

 As a criminal, I exploited people’s initial inclination to trust me. I played any role I could to gain that person’s confidence. For example, if I needed to be politically correct, than I could be politically correct. If I needed to be politically incorrect, than I could be politically incorrect. I could play any role to take advantage of any individual to further my aims.

 White collar criminals build a wall of false integrity around them to mask their true criminality. Some criminals spend great amounts of money on charity and associating with people of high integrity, hoping to build a wall of integrity and legitimacy around them. Recipients of the criminal’s deceitful largess are conned into making public proclamations and private favorable references before, during, and after the criminality of the person is exposed.

 How many so-called upstanding citizens do we read about or see on television everyday that are indicted and convicted of crimes and still have their supporters in the community? You can steal more with a smile than you can with a gun.

 These supporters will still cling to the person’s innocence, rationalize their guilt, and sometimes even claim that such crimes were mitigated because of the so-called “good deeds” the felon dolled out while committing crimes. White collar criminals carefully distribute the fruits of their crimes in the form of charity in order to build a wall of false integrity. Just ask sentencing judges how many letters they receive prior to sentencing an individual. You can steal more with a smile than you can with a gun. White collar criminals use your gratitude to weaken your skepticism and required cynicism.

 Finding the truth is the auditor and fraud professional’s only objective. As a former criminal, outwardly showed respect to my victims and those monitoring and auditing me but inwardly had none. Likewise, the auditor and antifraud professional in pursuing their work should outwardly show respect but inwardly cannot have any respect for any person while pursuing an audit or fraud. One of Crazy Eddie’s auditor’s failure to investigate information without critical analysis. In fact, an auditor’s lack of questioning skills is frequently cited in fraud literature as a major factor in failed audits. Most accountants and fraud professionals are never trained in interviewing skills. They do not know how to ask questions, whom to ask questions the proper questions, how to formulate proper follow up questions, and are often too quick to accept false and misleading answers.

 White Collar Crime is a Crime a Persuasion and Gentle and Subtle Intimidation

 As a criminal, I used the human element of bonding to prevent critical analysis of my actions. I would use charm as a tool to make our auditors feel guilty about asking critical questions. I hoped that our auditors would be afraid, intimidated, or feel guilty rather than ask proper questions and pursue leads.

 One technique that we used during audits was to “bond” to the audit staff by frequently taking them out to lunch and engaging them in conversation in order to distract them from their work. By unknowingly wasting time, they would be pressured in the final days of the audit to finish their work quickly and thereby be prone to make serious errors without being able to blame Crazy Eddie staff for obstructing them.

 In addition, we were very generous in doling out consulting agreements to our audit firms. In many years, consulting fees paid to our auditors exceeded our audit fees by an excess of six to ten times. We use your gratitude against you.

 A Question for You

 Remember the term “unexamined acceptance.” You may even question the sincerity of my apologies and intentions in publishing this website. What are my real intentions by making uncompensated and unreimbursed speaking appearances? Can it be that I am just trying to gain respectability by building a wall of false integrity for my next criminal scheme? It is very easy for a convicted felon to falsely claim remorse for their crimes and apologize for their criminal actions.

 The assumption of good intentions is professional hazard to any CPA, auditor, law enforcement officer, and anti-fraud professional. In my fraud presentations, I inform people to never assume my good intentions or that I am a “boy scout.” You should never assume that anyone has good intentions. Criminals hope you do.

 What I am saying may scare some people and hopefully it raises everyone’s alert level. Our future auditors and anti-fraud professionals cannot afford the luxury of assuming any person’s good intentions, even mine now.

 All I ask is that you please analyze the logic of my recommendations and intelligently consider them. I do not ask you to “trust” me. Do your own assessment of the integrity of my advice based on your assessment of the facts. Do our accounting and auditing students, who will be our future white collar fraud professionals, receive this kind of education and exposure in their college curriculums? Whose careers get ruined on an audit gone sour?

 What is the ultimate cost to all of us in terms of life savings lost, jobs lost, creditors not paid, destruction of our economy, and lost integrity of the free market system? Remember the concept of “don’t trust, just verify.”

If you are thinking now, then I have begun to succeed.

HOMEOWNERS ARE BEING ILLEGALLY FORECLOSED ON BY THEIR LENDERS

MFI-Miami, LLC is warning consumers facing foreclosure that the lender who is initiating the foreclosure action against them may not have the legal standing to do so. This also means the mortgage servicer may not be legally able to accept payments or negotiate a loan modification.

“It boils down to simple Real Estate 101,” explained MFI-Miami CEO Steve Dibert, “If you don’t own the note, you can’t sell it, modify it or enforce it.”  

This is not just an isolated phenomenon.  It is a nationwide plague that banks and lenders don’t want to talk about.  Homeowners in subprime loans are most susceptible because most subprime lenders did not service the loans they originated.

“Of the nearly 100 foreclosure clients who have come to me for help, nearly 85% of the lenders cannot prove in a court of law that they have the legal standing to enforce the terms of the mortgage and the scary thing is, the lenders know it before they even begin the foreclosure action and they don’t care,” explained Steve Dibert.

This creates a number of serious problems for the homeowner because if a homeowner goes into foreclosure and works out a loan modification with who they think is the lender, the real owner of the note could still initiate a foreclosure six months or a year later.  The homeowner is left with costly civil litigation as their only remedy to keep their home.

The problem was created by Wall Street firms who traded mortgage backed securities with each other.  They would package mortgages in pools and sell them, repackage them and sell them again and again.  Through this maze of trades and counter trades, the mortgage and the note are moved upstream but in no case are all of the transfers of ownership recorded in the local property records.  Although a fund manager could offer a plethora of reasons as to why, the real reason is, fund managers wanted to save a few dollars by avoiding taxes and filing fees that would apply to each recording.   Without recording these transfers in the public record, the right to enforce the mortgage and note is nullified because that recording is what proves ownership.

“Basically Wall Street traded mortgage portfolios like kids trading baseball cards, explained Steve Dibert, “the only problem was, no one kept track of what mortgages were being sold to whom.”   

MFI-Miami is working with two clients in particular, Nickie Struthers of Bradenton, Florida whose mortgage that was originated by Quicken Loans of Livonia, Michigan appears to have been sold by Quicken Loans to two different servicing entities.  Quicken sold the loan to EMC Mortgage in February of 2007 and then sold it a second time to LaSalle Bank of Troy, Michigan in June of 2008.  Quicken Loans and LaSalle Bank refused to cooperate with MFI-Miami’s investigation into this matter as did LaSalle Bank’s attorney, Marshall Watson and Associates of Ft. Lauderdale, Florida.  Mr. Watson’s firm even attempted to block MFI-Miami and Ms. Struthers from having access to her file and now is attempting to launch a second foreclosure action against Ms. Struthers.

“If Quicken Loans, LaSalle Bank and their attorneys would co-operate with our investigation, it would avoid a lot of legal fees for all the parties involved because now Ms. Struthers has to retain legal counsel just to get access to documents that she has a right to have. These are copies Quicken Loans is legally mandated by federal law to give her when she signed her application and their refusal to co-operate just reinforces the impression they are hiding something,” said Steve Dibert.

The second client is Cynthia King of Jamaica, New York whose lender, Deutsche Bank, began foreclosure proceedings against Ms. King and her husband in April of 2008. Deutsche Bank garnished her wages for her delinquent payments.  The only problem was the mortgage Deutsche Bank was attempting to foreclose on and garnishing wages on was paid off in February of 2007. 

“The crazy thing about this file was no one caught the fact the complaint had the wrong dollar amount, interest rate, or loan number,” said Steve Dibert, “The bank, their attorney and the judge all missed it.  MFI-Miami was the only one who caught it and with the help of Gerard Sweet at Foreclosure Hotline USA in West Babylon, New York, we were able to save the house.”  

Florida Lending Groups Agree To Halt Foreclosures for 45 Days!

Two groups of Florida lenders announced today they will voluntarily agree not to file new foreclosure petitions on primary homes for the next 45 days.

The Florida Bankers Association and the Florida Credit Union League made the announcement Monday in a press conference with Gov. Charlie Crist in Tallahassee. They also volunteered not to schedule foreclosure sales during that period.

White House Mod Proposal: Political Illusion or Act of Self-Preservation?

There has been a lot of talk over the past few days about the new proposal by the Bush Administration to help stabilize the housing market by encouraging banks to modify loans for at-risk homeowners.  The plan is to secure 31 million mortgages worth approximately $5 trillion which were underwritten by Fannie Mae and Freddie Mac and prevent them from going into default.  The federal government took control of Fannie Mae and Freddie Mac in September when waves of foreclosures resulted in mounting losses on their portfolios.  The Bush proposal mirrors what Citigroup, JPMorgan-Chase, and Bank of America have already been doing with their at-risk mortgages backed by Fannie Mae and Freddie Mac.

In order for homeowners to be eligible, they must meet the following criteria: they must be over 90 days behind on their mortgage payments, owe at least 90% of their homes current value, have not filed bankruptcy and it must be their primary residence. 

Like a standard modification program, the payments would be adjusted either one of three ways; lower interest rates, longer repayment schedules or shifting the difference of the modified payment after being adjusted to below 38-40% of the homeowner’s monthly income and amount of what the payment actually should be to the payoff of the loan.

James Lockhart, the director of the new Federal Housing Finance Agency which was created to oversee Fannie Mae and Freddie Mac, was quoted as saying, “We expect that it could significantly increase the number of modifications completed.”

This all sounds good and seems to be getting a lot of positive media coverage.  However, there are major issues with this plan that need to be resolved. 

The main problem with this plan is the Bush Administration doesn’t know if it will work because they are unable to determine the number of homeowners who will be eligible. Faith Schwartz, executive director of HOPE NOW was quoted in CNN Money as saying, “We think over time this going to affect a couple hundred thousand homeowners.” This would equate to about 1% of the total number of mortgages Fannie Mae and Freddie Mac currently have in their portfolio. 

Second, the majority of homeowners with Fannie Mae and Freddie Mac backed mortgages are not at risk because of the guidelines that Fannie and Freddie had in place for years.  Unless the homeowner suffers a job loss or some other catastrophic event, his/her primary concern is being upside down and this plan does not address that issue.

Robert Van Order, an adjunct finance professor at the University of Michigan, who was chief economist for Fannie Mae until 2003, told the Detroit Free Press that he thinks the loan modification plans could be somewhat effective but it is not the solution to the housing problem.  “There is an underlying problem they can’t fix with this and that is people who are underwater on their mortgages.  More people are going to be in trouble because they have negative equity.”

It also doesn’t address the issue of homeowners whose mortgages were not backed by Fannie Mae and Freddie Mac. Many of these toxic mortgages were acquired in the past two years when JP Morgan-Chase took control of Washington Mutual and their subprime division Long Beach Mortgage, Bank of America bought Countrywide and Merrill-Lynch (owners of sub-prime lender First Franklin), Citigroup bought Ameriquest and its wholesale operation Argent Mortgage.  Many of these consumers were put in stated deals, adjustable rates, sub-prime loans or were improperly qualified for Option-ARM programs.   These loans have a value of over $1.3 Trillion with over 7.5 million first lien sub-prime mortgages outstanding. Yet, these homeowners are considered low priority.  

Another problem with the proposal is it encourages homeowners to destroy their credit ratings by telling them to fall 90+ days behind on their mortgage in order to get help.  American Home Mortgage Servicing and Countrywide, among other sub-prime lenders are telling homeowners not to make their mortgage payments if they want a loan modification.  Yet, they continue to report the delinquencies to the major credit bureaus. 

There is a definite benefit to banks that modify these loans and on the surface it looks like a benefit to the homeowner.  However, the banks are not promoting, and are not disclosing to the homeowner, the indemnification clauses in these agreements that hold the banks and servicers harmless for any fraud or misrepresentation that may have been used to induce the homeowner into signing the original mortgage.   This means the homeowner is prevented from exercising their rights under TILA, RESPA and many other Consumer Protection laws. 

One of first people to criticize this plan was Senator Chuck Schumer, D-NY, who says the plan does not go far enough.  He said that too many of these loans won’t be modified because the investors who own the loan will be able to block any arrangements made by the servicer and the homeowner.  Schumer said, “These voluntary plans sound nice, but they don’t do the job.”

This initiative doesn’t help the nearly one million people in non-Fannie Mae and Freddie Mac backed mortgages whose payments are set to recast by the end of the year or people who were victims of fraud-fraud that was committed by the same companies that now want to help these homeowners. With that said, the actions of the Bush Administration could be seen as something a bit more Machiavellian. 

First, it gives the impression to the public something is being done when it really isn’t.  Perception is politics and politics is perception. What is more Machiavellian than the idea that deceit being a legitimate tool of statecraft? Henry Paulson was after all an assistant to Watergate conspirator and convicted felon, John Erlichman, who created, “The Plumbers” for Richard Nixon.

Second, the credit crisis has created an atmosphere of self-preservation with executives and managers of the major financial institutions.  As mentioned, because these loan modifications have indemnification clauses in them, they are a way to insulate these executives from lengthy and costly litigation whose final judgment would rest in the hands of an unfriendly jury. 

Right now, it is quite possible that juries are the homeowner’s best and last hope to keep their homes.  If lenders and banks are refusing to atone for their past sins by not offering all at-risk homeowners a viable opportunity to keep their homes then shouldn’t lenders feel the wrath of the consumer? 

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