What Would War III Look Like? -





A flurry of military maneuvers in the Middle East
increases speculation that conflict with Iran
is no longer quite so unthinkable.

Here's how the U.S. would fight such a war-
-and the huge price it would have to pay to win
it
By MICHAEL DUFFY
http://time-proxy.yaga.com/time/magazine/article/0,9171,1535817,00%20.html

War III: Going to War -

The latest to warn about a War III is former senator
and one-time presidential aspirant Gary Hart, long an expert
on national security issues, who says that targeting drones
and special forces targeting specialists are already operating
over and inside Iran, sizing up and locating as many as
400 targets for U.S. cruise missiles and bombers -

This is in anticipation of an aerial strike which my own
research suggests could come as early as October -

Of course, this could all be bluster-
- a Karl Rove-designed strategy to get the public all worked up
they way they used to do with color-coded terror alerts until
that strategy wore out its effectiveness through overuse.
But the actual sending of Special Forces units into harm's way
in Iran, and the preparation of Navy battle groups for deployment
to the Iran Theater, make it more probable that an actual attack
is in the offing.
Word that regular military units are being prepared for third
tours to the region, that the administration is changing the
guidelines to make possible longer call-ups of National Guard
units for longer and more frequent overseas tours of active duty,
and that units in Iraq are being given stop-loss orders to delay
their return home also suggest something major is brewing.

Otherwise logic would lead to the expectation that the
administration would be announcing a reduction in troop levels
in Iraq before Election Day.

Ordinarily one would say that the real sign of an imminent attack
would be a convening of Congress to consider a use of force
authorization, or perhaps an attempt in the United Nations
to win endorsement for an attack from the UN Security Council,
but clearly this is not happening.
And for good reason.

Who has trashed the Constitution to the point that it is now
little more than a historical artifact, doesn't think the needs
approval from the UN or even from the Congress to embark -
on the dangerous, bloody and immoral war yet.

According to this confirmed White House has the power
as "commander in chief in time of war" to act in violation
of both Constitution and law, as the sees fit -

The "war" in question is the so-called "War on Terror."
The title Commander in Chief derives from the wording of
Article II of the Constitution, in which the Founding Fathers
said that a president would simultaneously be the top general
of the military.

With the backing of his Alberto Gonzales, the head of what used
to be known quaintly as the Justice Department, that when
Congress, in the wake of the 9-11 attacks in 2001, voted
an Authorization for the Use of Military Force against
Al Qaeda-
-it was also giving him the power to act as Commander-in-Chief
in a war on terror that would have no end and that would extend
anywhere and everywhere in the world and within the borders
of the U.S.

In other words, that the October 2001 Congressional AUMF
effectively made him a general, for as long as there were
terrorists foreign or domestic trying to harm -
Americans or American interests -

We need only note how Bush, in his address at the UN General Assembly
last week, was describe the leaders of Iran as
"supporters of terror."

It meant he is asserting his right to attack them as part
of that "war" on terror, based upon the 2001 AUMF -

WAR SIGNALS? Courtesy of The Nation -

As reports circulate of a sharp debate within the White House
over possible US military action against Iran and its nuclear
enrichment facilities -

The Nation has learned that the Bush Administration and
the Pentagon have issued orders for a major "strike group"
of ships, including the nuclear aircraft carrier Eisenhower
as well as a cruiser, destroyer, frigate, submarine escort
and supply ship, to head for the Persian Gulf, just off Iran's
western coast.

This information follows a report in the current issue of
Time magazine, both online and in print, that a group of ships
capable of mining harbors has received orders to be ready
to sail for the Persian Gulf by October 1.

As Time writes in its cover story, "What Would War Look Like?,"
evidence of the forward deployment of minesweepers and word that
the chief of naval operations had asked for a reworking of old
plans for mining Iranian harbors "suggest that a much discussed-
-but until now largely theoretical-
-prospect has become real:
that the U.S. may be preparing for war with Iran."

According to Lieut. Mike Kafka, a spokesman at the headquarters
of the Second Fleet, based in Norfolk, Virginia,
the Eisenhower Strike Group, bristling with Tomahawk cruise missiles,
has received recent orders to depart the United States in a
little over a week.

Other official sources in the public affairs office of
the Navy Department at the Pentagon confirm that this powerful
armada is scheduled to arrive off the coast of Iran on
or around October 21. -

Expert: Tactical nukes needed to blast Iranian defenses


--------------------------------------------------------------------------------
RYAN NADEL , THE JERUSALEM POST Sep. 19, 2006

--------------------------------------------------------------------------------

Tactical nuclear weapons would be required to penetrate the defenses
Iran has constructed around its nuclear facilities, according to Col.
(res.) Shlomo Mofaz, an international consultant on terrorism and
intelligence and a research fellow at the Institute of
Counterterrorism at the Interdisciplinary Center in Herzliya.

Mofaz argued that any preemptive action - not necessarily launched by
Israel - against Iran's nuclear facilities would need to employ
tactical nuclear weapons.

"The Iranians have invested a lot of money to hide their weapons and
infrastructure underground. The most sensitive items are below the
surface," he said.

"American experts have said they are not sure that conventional
weapons would be able to infiltrate these sites," he said. "Based on
information from public sources, any attack should use tactical
nuclear weapons."

As reported in Time magazine on Monday, a recent Pentagon report
outlining US military options to the Iranian threat mentions the
difficulty of locating all targets. It also states that Iran's
reinforced facilities constitute a strategic challenge to any
military action. The report suggests that repeated air strikes using
laser and satellite guided missiles would be necessary.

Mofaz added that the Iranians have studied US and Israeli techniques
for destroying infrastructure and weapons stores, and therefore have
built these bunkers as a response.

As the UN Security Council begins the process of bringing potential
sanctions against Iran to a vote, Mofaz stressed that the Iranian
strategy in relation to the UN was one of foot-dragging, an attempt
to buy time while the nuclear drive advances.

"The Iranian administration is gaining more time to push forward to
finish its program," said Mofaz, adding that the sanction moves had
come too late.

According to Mofaz, there are two essential aspects to an Israeli
response to the threat from Iran: The need to deploy the Arrow
antimissile system - which would be effective only if Teheran were to
employ a small number of missiles, but not against larger volleys -
and to develop a second-strike capability.

"Second-strike capabilities are based on the assumption that Israel
has nuclear weapons," he noted, "something which has not been
confirmed by the Israeli government."

Regarding a preemptive strike against Iranian nuclear facilities,
Mofaz said that according to the principles of the IDF, as first set
out by David Ben-Gurion, "Israel must have full capability to defend
itself; there must be a program and plan to deal with the Iranian
threat... The IDF needs to have the capability to eliminate this
threat."

Mofaz warned, however, that both the appropriate timing for such a
strike and whether the IDF was capable of destroying Iran's nuclear
program were unknown.

"The difficulty of such a strike stems from the possibility that
there are many unidentified nuclear development sites and the limited
usefulness of conventional air strikes against nuclear facilities,"
he said.

Look for the aircraft carriers info - going to the Gulf? -


Crude Oil in a long Term Bull market -
going to LY $100 ++ soon -

German warships head for Lebanon -

German sailors during a farewell ceremony in Wilhelmshaven -


The German contingent will be the second-largest
in the UN mission
Eight German warships have left for the eastern Mediterranean,
where they will join the United Nations peacekeeping mission
in Lebanon -

http://news.bbc.co.uk/2/hi/europe/5367994.stm

China ups Lebanon force to 1,000 -



UN peacekeeping engineers from China work in the port
in the southern Lebanese city of Naqoura - 17/8/06

China sent 180 engineers to Lebanon before the recent fighting
China will increase its peacekeeping presence in Lebanon
to 1,000 troops, Premier Wen Jiabao has confirmed.

http://news.bbc.co.uk/2/hi/asia-pacific/5355128.stm

China want to play now -
missiles to Iran -
and Iran to continue to feed -
the militant Hezbollah movement etc.? -

Only time will tell if American -
nuclear bunker-buster bombs -
can put an end to this damn madness. ???

Creation, as does Gula and her dog Fido,
can only sit and wait. (40111)
by Glen Kealey

Kissinger warns of possible "war of civilizations"
Wed Sep 13, 11:54 AM ET

WASHINGTON (AFP) - Former US secretary of state Henry Kissinger
warned that Europe and the United States must unite to head off
a "war of civilizations" arising from a nuclear-armed Middle Eas

In an opinion column in the Washington Post, the renowned foreign
policy expert said the potential for a "global catastrophe" dwarfed
lingering transatlantic mistrust left over from the Iraq war.

"A common Atlantic policy backed by moderate Arab states must become
a top priority, no matter how pessimistic previous experience
with such projects leaves one," Kissinger wrote.

"The debate sparked by the Iraq war over American rashness vs.
European escapism is dwarfed by what the world now faces.

"Both sides of the Atlantic should put their best minds together
on how to deal with the common danger of a wider war merging into
a war of civilizations against the background of a nuclear-armed
Middle East."

Kissinger wrote that the big threat lay in the erosion of nation
states and the emergence of transnational groups. Iran was at the
centre of the challenge, he said, with its support for Hezbollah,
radical Shiite groups in Iraq and its nuclear program.

Washington must accept that many European nations were more
optimistic about talks designed to convince Iran to halt uranium
enrichment -- a process Tehran denies is aimed at making weapons,
he wrote.

But in return, he said, Europe should accept the process must
include a "bottom line" beyond which diplomatic flexibility
must not go and a time limit to ensure talks did not become
a shield for "developing new assaults."


Europe reflexions -


In the article, Kissinger, national security adviser for former
president Richard Nixon, and secretary of state for Nixon and
his successor Gerald Ford, warned the Lebanese Shiite militia
Hezbollah was still dangerous, after its month-long conflict
with Israel.

"Hezbollah's next move is likely to be an attempt to dominate
the Beirut government by intimidation and, using the prestige
gained in the war, manipulating democratic procedures," he said.

He concluded by noting that observers wondered whether, after
the Cold War, trans-Atlantic ties could survive the loss
of a common enemy.

"We now know that we face the imperative of building -
a new world order or potential global catastrophe.

It cannot be done alone by either side of the Atlantic.
Is that realization sufficient to regenerate a common purpose?"









http://www.investorshub.com/boards/board.asp?board_id=6582

Its plenty of FMNJ Cerro Rico - rich Silver area
ore and the Silver Ag - is a Strategic war metal -

RE: Ok its the smelter, pic taken -





many huge pile of tailings -
some on the left and another on the right side
and one in the middle -



Americano thanks - its plenty of rich area
ore and the Silver Ag - is a Strategic war metal -

from another board -

FMNJ - will Go to Moon Soon -
only need a final shakeout of the weak? -
before the storm -

A recovery in crude oil futures enabled Gold and Silver -
futures to bounce back from early losses Monday, traders
and analysts said -

December Gold settled with a gain of 50 cents to $595.90 an
ounce on the Comex division of the New York Mercantile Exchange
after initially trading as low as $587.50.

December Silver added 1.5 cents to $11.325 after a low of $11.13 -

As Comex Gold was closing, the Chicago Board of Trade's full-sized December
Gold futures were up 40 cents to $595.70, while full-sized

December Silver was up 8.1 cents to 11.322 -

Early in the day, several traders blamed weakness in gold and silver on the
soft tone in crude oil at the time, plus strength in the U.S. dollar.

"The energy sector has taken a lot of the inflation fears out of the market,"
said Mike Zarembski, futures analyst with XPRESSTRADE. "Oil was below $60
earlier in the session and took the metals (down) with it."

He also blamed some of the metals' early weakness on a stronger dollar.

However, after trading to a 10-month low of $59.52 a barrel overnight,
November crude oil had snapped back to $62 as Comex gold was closing, which was
a gain for the day of $1.45.

"Some of the strength in the copper, gold and silver is all related to the
turnaround here in the oil markets," said Jim Quinn, commodity floor analyst
with A.G. Edwards.

"The dollar is still a little bit firmer. But for the most part, what we've
been doing in here (with metals) has been oil sensitive."

Energy-market analysts said crude oil snapped back on technically driven
buying and bullishly construed comments from OPEC President Edmund Daukoru, who
said he and other oil ministers from the cartel were "conferring" about the
slump in oil prices over the last six weeks.

"In the case of silver, we were able to work back above the 200-day moving
average," said Quinn. "So technically, we got a little buying in the silver."

The 200-day average for the December silver futures stands at $11.215.

Meanwhile, the Platinum Group Metals - which close earlier than gold and
silver - finished lower for the day, although they did pare their losses at
least some as the other metals had begun their rebound.

"We had some selling in the October platinum on an outright basis," said a
floor trader. Furthermore, with first-notice day for the October futures
approaching at month-end, much of the activity was a rolling, with selling of
October and buying January on a spread basis.

October platinum finished down $14.90 to $1,133.20 an ounce, while January
fell $13.40 to $1,144.20.

Meanwhile, December palladium settled $4.45 lower at $317.20 an ounce.

"In palladium, it looks like we're going to be range-bound for a while here,"
said the floor trader, commenting that support has emerged a couple of dollars
$315 and a little below. The December futures bottomed at $313.25 Monday.

"We did have light commission-house buying in the palladium," said the floor
trader. "There was also a little bit of fund liquidation going on."



Settlements (open-outcry trading only):
London PM Gold Fix: $584.75 versus $589 Friday
U.S. spot gold at 1:52 p.m. ET: $590.10, up $1.80 from previous day; Range:
$582.20-$591.30
December Gold (RGCZ06) $595.90, up 50 cents; Range $587.50-$597
December Silver (RSIZ06) $11.325, up 1.5 cents; Range $11.13-$11.37
October platinum (RPLV06) $1,133.20, down $14.90; Range $1,124-$1,144
December palladium (RPAZ06) $317.20, down $4.45; Range $313.25-$318

FMNJ - Silver LT Strong Bull Trend Started -

1st LT Bull wave - 1st correction -

4 more LT Bull waves to Go -



FMNJ - 1 LT Strong Bull wave start -
vs - 1 fib correction -



FMNJ - 4 LT Bull waves to GO -

FMNJ - 5 LT Strong bear waves -
vs. 5 LT weak bull waves -



Well everyone should be rewarded for efforts -
especially the miners from Bolivia who will -
be very glad to work for all of the family -
to a more fair wages -

Franklin Mining Announces Pulacayo Tailings Program -



LAS VEGAS, NV--(MARKET WIRE)--Sep 12, 2006 --

Franklin Mining, Inc.

(Other OTC:FMNJ.PK - News) announces program -
for funding their mining operations.

The Pulacayo operation is purely tailings
(Tailings are produced when metallic ores are ground
into fine powder to free the metal-bearing mineral.).

The investment for Pulacayo tailings is $1.5 million.

Franklin Mining and Kempf Mining will share -
the partnership as:
Franklin - 51%,
Kempf - 27%
and Peruvian group - 12%.

COMIBOL will be paid 0 to 15 $US/ton of tailings.

Franklin Mining will lease the first mining plant -
from Eco Mining, Inc. of Bolivia.

It should be operational in October and will produce -
up to $200,000 to Franklin Mining per month -
with an increase of up to 10 plants
by January 2007.

The processing will produce 4,000 tons per day.

The existing tailings and metal grades consist
of 4,000,000 tons of tailings.

The total weight of Silver is equal to 248 kg
and 7,973,507 Troy ounce silver ingots.

There will be 400 tons a day,
2nd phase for 1,600 tons a day,
3rd phase 4,000 tons per day.

There is a total of seven million ounces of Silver -
121 proven ounces of Gold -

Franklin Mining announces the first tailings processing
plant will be operational in October and will be -
producing 400 tons per day.

There will be $200,000 to Franklin Mining -
after startup of the plant per month.

The engineers have reported 4,000,000 million tons
of tailings of Silver -

There is also 1 gr/ton of gold that equals -
128.605 Troy ounces of Gold ingots -

DISCLOSURES:

About Franklin Mining, Inc:

Franklin Mining currently has interests in Bolivia
and the United States and opened a wholly owned
subsidiary in Bolivia.
Franklin Mining, Inc Bolivian subsidiaries include -
Franklin Mining, Bolivia -
and Franklin Oil & Gas, Bolivia.

For information about Franklin Mining, Inc.
visit our website:
http://www.franklinmining.com.

About Cerro Rico Mine:

The Cerro Rico Mine -
is considered by many to be the richest Silver Mine -
in the world.

Rich in Zinc and Silver -
it has been actively mined since the 1500's
and is in operation today -

Cerro Rico is owned by Bolivia's
national mining company, COMIBOL.

About COMIBOL:

COMIBOL is the government owned mining company -
in Bolivia.

COMIBOL owns the CERRO RICO Mines -
as well as many other properties -
and mineral rights in Bolivia.

"Safe Harbor" statement under the Private Securities Litigation
Reform Act of 1995: ----These risks could cause Franklin
Mining Inc.'s actual results to differ materially from those
expressed in any forward-looking statements made by, or on
behalf of, Franklin Mining Inc.


Contact:

Contact:
Franklin Mining, Inc.
Andrew Austin
1-702-386-5379


Source: Franklin Mining, Inc.

winifred, great move -
catch it before it fly away -









Silver will always be part of "The Real Gold & Silver Money" -
Some defend a fraud system with that, "its far too small
a market for large, modern economies" -

Well, its only to put a higher fair value on the Silver money -
it used to be worth $800/oz 500 years ago -



take the inflasion into the picture and Silver maybe worth -
a fair market value $80,000/oz sooner or later? -

Silver will do far better than any fiat fraud paper asset -
it will serve better as a "personal holding" and as
the major Real Money when its valued to its fair market value -

If it is of your way to balance wealth, then Silver will show
the LT Real value -

Metals have not shown their true worth for many years as
the world has done very well with manipulations of fiat fraud
paper money schemes -

This is very good some say - outside of ex. FMNJ Potosi -

But, all things do change! -


As it is our time and place to live this change -
our thoughts must view the future as it must be! -

Who can know the minds of men and countries -
as the 666 fiat paper burns? -

In our present system - all fiat currencies are
backed by the US$ -

as long as the US$ is on an "oil standard" of backing -
no other country can change -

the BIS would destroy their economy in a second of storm -

Many think that a country may sell or cut it's CB/US debt
backing at will! -

They cannot? - they will not! -
Oil will not accept another system? -
as long as the Oil/Gold bond works? -

the world currency system is somewhat in a counterfeited
owg order? -

If a crisis erupts and Gold breaks the bond with oil -
then a change must take place! -

We will no doubt see a mass run of CBs into Gold -
at ANY price! - this we know! - as for now -
each person must protect your worth -

as the nation/state is locked from change? -
You still may have a little bit of some time -


FMNJ - need an 'every day Update' on the -
Silver Companies > Market cap's (updated?) -

FMNJ - Franklin Mining, Inc. = $45 MILLION?

http://www.investorshub.com/boards/board.asp?board_id=2957
http://www.investorshub.com/boards/board.asp?board_id=5406

vs. compare to -

ECU - ECU Silver = $488 MILLION

http://www.investorshub.com/boards/quotes.asp?ticker=v.ecu
http://www.investorshub.com/boards/board.asp?board_id=6098


HL - Hecla Mining Co = $681.71 MILLION
http://www.investorshub.com/boards/quotes.asp?ticker=cde&qm_page=64251&qm_symbol=hl
http://www.investorshub.com/boards/board.asp?board_id=6097


SIL - Apex Silver Mines Ltd. = $905.33 MILLION
http://www.investorshub.com/boards/quotes.asp?ticker=v.ecu&qm_page=4079&qm_symbol=sil
http://www.investorshub.com/boards/board.asp?board_id=5810


SLW - Silver Wheatonfiltered= $2.06 BILLION

http://www.investorshub.com/boards/quotes.asp?ticker=v.ecu&qm_page=98063&qm_symbol=slw
http://www.investorshub.com/boards/board.asp?board_id=4338


SSRI - Silver Standard Resources Inc. = $1.16 BILLION
http://www.investorshub.com/boards/quotes.asp?ticker=v.ecu&qm_page=17190&qm_symbol=ssri
http://www.investorshub.com/boards/board.asp?board_id=6095


CDE - Coeur d'Alene Mines Corp = $1.47 BILLION
http://www.investorshub.com/boards/quotes.asp?ticker=v.ecu&qm_page=35188&qm_symbol=cde
http://www.investorshub.com/boards/board.asp?board_id=5237


PAAS - Pan American Silver Corp. = $1.59 BILLION

http://www.investorshub.com/boards/quotes.asp?ticker=v.ecu&qm_page=63958&qm_symbol=paas
http://www.investorshub.com/boards/board.asp?board_id=4490

UCOI (UNCN) - Unico Inc. = $1.8 MILLION -
(only $1.8 is very oversold - undervalued) -



http://www.investorshub.com/boards/quotes.asp?ticker=ucoi
http://www.investorshub.com/boards/board.asp?board_id=6582

Including - The Silver Bell Mine -
The Deer Trail Gold & Silver Mines -
The Bromide Gold Mines -

Note. if You have more updated info -
Silver comp. market cap. please, don't
hesitate to let us know -
tia.

SILVER Chart TA LT - Strong Bullrun Long Overdue -


http://www.investorshub.com/boards/board.asp?board_id=5406

SILVER used to be worth -
more than GOLD -
history often repeat itself -



Do not let any volatility shake You out -
the more volatility the higher it will go -

the new trend waves will often be -
Fibonacci - 162% of the previous correction -

when the weak hands exhaust themselves -
we'll see the next waves up -

U.S. NATIONAL DEBT CLOCK

The Outstanding Public Debt -
as of Aug. 2006:


http://www.alkalizeforhealth.net/Ldebtclock.htm

Unless the United States gets all of its economic
house in order ? -

Gold will become the basic real money again -
(which Gold has been for 1000's of years)
and national currencies will only be money -
if backed by - Gold.

With the exception only of the periods of -

- The Great Gold Standard -

practically all governments of history -

have used their exclusive power to issue fiat money -

to defraud with totalitarian bureaucratic powers -
rob, plunder and to make slaves -
of most the people -



http://www.goldrush21.com/

Thanks for your participations -
Brgds
Bob

hi there
how's it going

Interesting looking blog: http://www.stock-market-crash.net/blog.htm

I'll have to take a good look at it and see what I think.

While searching the Net for info. on shorting in the US during the 1920's, I found this account of the period. It seems to me that we still have similar problems now. The complete posting is here: http://www.emayzine.com/lectures/1920s193.htm

(Part of the article is below)


The center piece of the New Era government was the tax policy sponsored by the secretary of Treasury Andrew Mellon. Mellon was one of the three or four richest men in the world who was a banker with close ties to the steel industry.

Mellon believed that economic prosperity depended on the extent to which capitalists reinvested their profits in economic growth Mellon favored the rich by slashing taxes that fell most heavily on them.

He reduced the personal income tax for people who made more than $60,000 a year and by 1929 the Treasury was actually refunding money to the largest corporations in the US. US Steel received a refund of $15 million in 1929.

To compensate for this loss in revenues Mellon cut government expenditures. To Pay for government Mellon raised the tariff on imported products. Second Mellon sponsored a regressive tax bill so that taxes fell harder on the middle and lower classes of the US. Also there were many new excise taxes such as on autos and cigarettes.

Mellon contended that when businessmen reinvested their government-sponsored windfalls they created jobs which led to a better standard of living for all Americans. This was the famous trickle down theory.

From 1923 to 1929 Mellon appeared to be correct in his assessment and people called Mellon the greatest Secretary of the Treasury since Alexander Hamilton.

Just how much damage his policies did to the national economy would not be realized until after 1929.

But as early as 1924 the policy of subordinating federal policy to the short-term interests of big business and banking was helping to make a shambles out of the international economy.

The key problem of the international economy was due to the cost of the war. The war had pushed every major European power to brink of bankruptcy. Britain and France were deeply in debt to the US some $10 billion and since France had been the battlefield for most of the war France demanded that Germany pay france and Britain each $13 million. As the Germans paid Britain and France these countries would pay back the US.

Thus, the flow of international payments was from Germany to France and Britain and then to the US. The problem lay in the fact that Germany was being drained of wealth for an industrial nation to exist. German gold was used to pay the debt and inflation went crazy in Germany. Many economists warned that if the European continued to bleed Germany of its wealth this would serve to promote political extremism and threaten the economies of all the European nations.

There were several ways out of this morass. First the US could import more European products but Mellon’s policies shut the door on that idea. Alternatively the US could forgive France and Britain their war debts and they in turn would cancel their Germany’s reparations. But thanks to Mellon and others in the administration the government was too closely allied with banking interests to do that.

At the same time American bankers were profiting doubly from the European financial mess by loaning money to the Germans to subsidize their reparations payments. And as far as the Republicans were concerned the profiteering was good enough for the Republican administrations of the 1920’s.

The circular flow of payments continued as American bankers loaned money to Germany; Germany paid 2.5 billion in reparations to France and Britain and they, in turn, paid $2.6 billion to the US.

The European economy was becoming sapped of its vitality and the American economy was becoming indirectly damaged by this arrangement for the capital that was to trickle down to ma and pa in middle America or be reinvested in the American economy was going abroad to Germany.

After the Washington Treaty the Harding and Coolidge administrations returned to a policy of isolationism. Still, in 1928 Senator Kellog and the French Foreign Minister created the Kellog-Briand Pact which outlawed war and 62 nations signed this pact.

In terms of Latin America the Harding and Coolidge administrations were anything but isolationist especially when it came to Nicaragua and other Caribbean Basin countries.

Part of the reason for this was the US investments in Latin America climb from $800 million in 1914 to 5.4 billion in 1929.

Industrial and agricultural productivity soared in the 1920’s but the size of the workforce remained the same.’

And while dividends on stocks rose 65% in the years between 1920 and 1929 wages increased only 25%.

Before the 1920’s people only borrowed money to start a business or buy a house for in theory borrowing money should only be invested in something that would be productive, make more money and then you could retire the debt. But this was to change in the 1920’s

For the first time in history American began to borrow money simply to live more pleasantly and they went into debt, not to produce but to consume.

The chief agency of consumer borrowing during the 1920’s was the installment plan with E-Z payments. In the 1920’s 60% of all autos were bought on credit, 70% of the furniture, 80% of heavy electrical appliances and radios and 90% of sewing machines, pianos and washing machines.

This was also the great period of consumer advertisements of buy, buy, buy and advertising became a profession.

Chain stores became common, image advertising was used, anxiety advertising was used and the automobile became the cultural symbol the New Era.

A Major weakness of the Coolidge economic approach was that significant numbers of Americans were left out of the buying spree and people in the rural areas may actually have been getting poorer during this orgy of consumer credit spending.

Since economically deprived groups are rarely politically articulate or listened too in our political system mainstream America was quite at ease. Businessman’s clubs flourished, and Henry Ford was seen as the great American wise man, afterall anyone who made $25,000 net per day must be wise most American figured.

Business was worshipped, as was conspicuous consumption, crass materialism had become the new religion of America.

There was a real estate boom in Florida and thousands of get rich quick schemes and as we have seen land in Florida became more expensive not because of tourism and it being a vacation paradise, but because each speculator sold the land to another speculator. perhaps as much as 40% of all the real estate in certain areas of Florida changed hands over a dozen times in a month. In the relatively small city of Miami there were over 2,000 real estate offices.

Every acre in Florida was skyrocketing many northern investors were willing to buy the property sight unseen and this led to much fraud.

The crash came when a hurricane that hit Miami and the price of land plunged.

In the 1920’s even the Middle Class was (s)peculating on the stock market since stock brokers offered middle class investors the option of purchasing stock on the installment plan and the brokers made it out to look that with the appreciation of the stock there would almost no payments to pay. Money for nothing, you cant go wrong.

Thus, investors with just a few hundred dollars of investment cash could buy shares of RCA Victor by paying out as little as 10% of the quoted price of that companies shares.

And in this way there were able to hold 10 times as many shares and they could buy in reality.. A banker or a broker would loan the speculator the balance of the stocks actual price with the stock themselves serving as collateral.

When the shares were sold, presumably at a high profit the loan was paid off and the shrewd speculator pocketed the difference which was also close to ten times what they would have made had they paid for them in cash. In 1926 1.5 million Americans were playing the market.

In 1927 during a bull market it did work this way for hundreds of thousands of people.

In the summer of 1929 values went crazy; ATT climbed from $209 to 303, GM went from 268 to 391 and then to $452. Overnight people were becoming millionaires.

But like land in Florida the price of stocks did not reflect their true value which was the productive and earning capacity of the corporation. By 1927 prices were rising because of the speculative mania, entire companies put their capital assets into this bull market in order to make a quick killing. At one point Coolidge told people publicly that he thought that stock prices were cheap and this stimulated another great wave of stock buying and even more inflationary stock prices.

Joseph P. Kennedy said in later years that he had sold all of his stocks in the summer of 1929 after the man who shined his shoes told him that he had invested in the stock exchange. Kennedy correctly reasoned that if such a poorly paid person was buying stock there was no one out there left to bid prices higher and he was right.

On September 3, 1929 the average price of shares on the market peaked and then dipped sharply. Then on Black Friday of October 24 a record 13 million shares changed hands and values collapsed. GE dropped 47 points that day as did most major corporations.

On Tuesday, October 29 the wreckage was worse as panicked speculators dumped 16 million shares on the market and when the dust settled the following morning more than $30 billion had been lost.

The eradication of so many dollars shattered Americas trust in the business world and culture of the 1920’s.

The Great Crash of 1929 did not cause the Great Depression of the 1930’s but it exacerbated its impact on average Americans. The Great Depression was a result of the fundamental weakness and contradictions of the world economy.

Middle class families lost their savings, Banks went broke and closed up in the middle of the night and as they closed throughout the country the average and poor American lost their life savings.

With the economic contraction corporations cut back on production, throwing people out of work or cutting wages in half or worse.

People who had mortgages contracted in the high days of 1928 and 1929 were ruined, people lost their homes and farmers their farms.

And foreclosures contributed to further bank failures. As people cut back on consumption, farmers and corporations were forced to produce less and less and even more people were thrown out of work and so it went, down, down, down.

By the end of 1930 the depression had engulfed the nation and the bad times did not really lift until 1940 after the economy had been jolted back into full productivity by the outbreak of war in Europe.

The Great Depression was the most serious economic collapse in American history but it was also the most jarring psychological and moral experience that the American people had ever to face except for the Civil War. At least 50% of all Americans were out of work 90% were underemployed and in some areas close to 85% were completely out of work. There were homeless everywhere. It was estimated that there may have been 200,000 to 300,000 homeless people within one year by 1930. In one bank alone in NY over 400,000 people lost their life savings.

Shantytowns were everywhere. It was so bad that the USSR said there 6,000 skilled jobs for Americans in the machine industries and over 100,000 people applied for these jobs to leave the US. There were over 1.5 million people who would do any job just to eat and this number excluded children who numbered just as many.

__________________________________

ps. The highlighting is mine and I fixed 2 spelling errors...although there are still more of these. The info. and it's message are what is important in mind.

Posted by: Alex Chory
In reply to: bartermania who wrote msg# 1155 Date:12/18/2005 7:11:34 PM
Post #of 1157

A year of reckoning

-------------------------------------------------------------

A year of reckoning for scandal-tainted CEOs in the United States
December 18, 2005 - 15:44
By ERIN MCCLAM

NEW YORK (AP) - The scene said everything about the year in white-collar crime: Bernard Ebbers, the jocular, folksy former boss of WorldCom Inc., hunched forward in a courtroom chair, quietly crying.

He had just been sentenced to 25 years in prison for orchestrating the record $11-billion-US accounting fraud at the toppled telecom - essentially a life term for a man 63 years old and with a history of heart trouble.

It was a startling punishment, but far from extraordinary in 2005: In the cavalcade of recent corporate scandals, this was the year the hammer finally fell on top executives. Hard.

And the trend toward harsher sentencings for corporate crooks comes just as the curtain goes up on what's expected to be the most complex of the white-collar cases to date, the fraud trial of Enron founder Kenneth Lay and two other former officials.

Set to get underway Jan. 17, the Enron trial brings the corporate crime era full-circle: Enron's crash into bankruptcy in 2001 predates scandals at WorldCom, Adelphia Communications Corp. and Tyco International Ltd.

It also promises to be intriguing: Lay has already mounted a public defence that rivalled Martha Stewart's, including a blitz of television appearances and interviews. He claims he trusted the wrong people and valiantly tried to save the energy giant.

For Lay, former CEO Jeffrey Skilling and former top Enron accountant Richard Causey, the consequences of conviction are dire. Consider the fates met by convicted corporate executives in 2005 alone:

Ebbers' sentence, which followed a trial in which he took the witness stand and flatly denied any knowledge of the massive book-cooking at WorldCom, was the toughest to date in the business scandals.

John Rigas, the white-haired founder of cable giant Adelphia, got 15 years in prison for looting his company. His son Timothy, the former chief financial officer, got 20.

Dennis Kozlowski, the former Tyco chief whose $6,000 shower curtain and lavish parties made him almost a caricature of the boomtime CEO, finishes the year in a maximum-security prison that will allow him three showers a week.

He and his own former finance chief, Mark Swartz, will serve at least 8 1/3 years - and perhaps as many as 25 - after they were convicted of stealing $600 million from Tyco.

And former Cendant Corp. vice-chairman Kirk Shelton was slapped with 10 years in prison for his role in an accounting scandal that cost investors and the company more than $3 billion.

For judges considering the staggering harm done to investors and employees of these scandal-scarred companies, the sentences were not close calls, said Eric Chaffin, a securities lawyer at Seeger Weiss LLP and a former white-collar prosecutor in New York.

"The judges, when they really see the real victims and see that there's really strong fraud in these companies, they're going to make somebody pay the price," he said.

Some paid literally. A New York judge signed off on settlement deals that forced investment banks, auditor Arthur Andersen and former WorldCom officials to cough up $6.1 billion, much of it to be divvied among 830,000 investors and institutions who lost money in the accounting fraud.

That settlement included $25 million paid by former WorldCom board members out of their own pockets, and forfeiture of homes owned by Ebbers and former WorldCom finance chief Scott Sullivan.

And investment banks and former directors agreed to pay more than $7 billion in a similar settlement over the Enron collapse, including $13 million paid personally by 10 former board members.

But the year was not without at least one high-profile setback for government prosecutors, who had run up a winning streak worthy of the Harlem Globetrotters in securing guilty pleas and convictions in their crackdown on corporate crime.

In June, HealthSouth Corp. founder Richard Scrushy was cleared of charges, despite the testimony of five former CFOs who implicated him in a $2.7-billion fraud to inflate earnings.

"I'm going to go to a church and pray," announced Scrushy. "I'm going to be with my family. Thank God for this."

It was also a better year for Stewart, the celebrity face of the era of corporate scandal, who donned a poncho and walked out of a West Virginia prison in March after serving five months for lying about a 2001 stock sale.

After about half a year of house arrest, she roamed free again - and turned up in a daytime talk show and a spinoff of Donald Trump's The Apprentice.

Lest anyone think the Enron trial marks a close to allegations of corporate wrongdoing, there were new cases to consider in 2005:

Phillip Bennett, the former chief of commodities brokerage Refco Inc., was accused of taking part is a conspiracy to sell $583 million in stock to the public based on falsified financial statements. He has pleaded not guilty.

And New York Attorney General Eliot Spitzer sued insurer American International Group, former CEO Maurice Greenberg and an ex-CFO, accusing them of misleading investors and regulators about that company's finances. Greenberg retired from AIG in March, pressured by the board of directors amid regulatory investigations.

"In my perception there is not a cooling off" by prosecutors and regulators, said Melinda Haag, who this year helped successfully defend former McKesson Corp. CFO Richard Hawkins against conspiracy charges in a 1999 alleged accounting scheme.

"It's obvious that law enforcement authorities still have a great deal of interest in corporate America and in policing corporate America," she added.

But the year will be remembered as a time of harsh reckoning for executives whose very names - WorldCom, Tyco, Adelphia - became synonymous with corporate greed, excess and fraud.

The moment was captured by Gino Cavallo, who worked for years at WorldCom and lost tens of thousands of dollars in retirement money in the fraud. He attended Ebbers' sentencing in July.

"The man's 63," Cavallo told reporters in a hallway outside the courtroom. "He's going to die in jail. How much sterner could you get?"

Here's my impression:

Lots of crazy predictions...but, it's the stuff about the DTCC and it's connections with the Fed. that I found interesting.

Lots of it's way out there and some of the stuff's already been proven wrong (Y2K)...but, some if it appears to be true.

Very few people understand the US Federal Reserve. Same goes for the DTCC. Some of the connections made, seem to make the naked shorting problem more clear. I had a feeling (based on my knowledge and intuition) that they were connected.


It about control and accountability. The DTCC and the Fed. have enormous control over this country's capital. They have governmental powers (supra-governmental powers), are private organizations, and still appear to be accountable to no one.

Ming the Mechanic: The unknown 20 trillion dollar company
The NewsLog of Flemming Funch

The unknown 20 trillion dollar company 2003-10-30 17:37
19 comments

by Flemming Funch.................................................................................................................


There is a busy little private company you probably never have heard about, but which you should. Its name is the Depository Trust & Clearing Corporation. See their website. Looks pretty boring. Some kind of financial service thing, with a positive slogan and out there to make a little business. You can even get a job there. Now, go and take a look at their annual report. Starts with a nice litte Flash presentation and has a nice message from the CEO. And take a look at the numbers. It turns out that this company holds 23 trillion dollars in assets, and had 917 trillion dollars worth of transactions in 2002. That's trillions, as in thousands of thousands of millions. 23,000,000,000,000 dollars in assets.

As it so turns out, it is not because DTCC has a nice website and says good things about saving their customers money that they are trusted with that kind of resources. Rather it is because they seem to have a monopoly on what they do. In brief, they process the vast majority of all stock transactions in the United States as well as for many other countries. And - and that's the real interesting part - 99% of all stocks in the U.S. appear to be legally owned by them.

In the old days, when you owned stocks you would have the stock certificates lying in your safe. And if you needed to trade them, you needed to get them shipped off to a broker. Nowadays that would be considered very cumbersome, and it would be impractical to invest via computer or over the phone. So the shortcut was invented that the broker would hold your stocks instead of you. And in order for him to legally be able to trade them for you, the stocks were placed under their "street name". I.e. they're in the name of the brokerage, but they're just holding them in trust and trading them for you. And you're in reality the beneficiary rather than the owner. Which is all fine and dandy if everything goes right. Now, it appears the rules were then changed so the brokers are not allowed any longer to put the stocks in their own name. Instead, what they typically do is to put the stocks into the name of "Cede and Company" or "Cede & Co" or some such variation. And the broker might tell you that it is just a fictitious name, and will explain why it is really more practical to do that than to put it in your name.

The problem with that is that it appears that Cede isn't just some dummy name, but an actual corporation that DTCC controls. And, well, if you ask anybody about this, who actually knows about it, they will naturally tell you that it is all a formality. To serve you better, of course. And, well, maybe it is. DTCC seems like a nice and friendly company. It is a private company, owned by the same people (major U.S. banks) who own the Federal Reserve Bank. And if they all stick to their job, and just keep the money and your stocks flowing smoothly, I'm sure that is all well and good. But if somebody at some point should decide otherwise, and there's a national U.S. emergency and/or the U.S. government becomes unable to pay its debts, well, they might just not give you your stocks back. Because legally they own them. Something to think about.

An fascinating article about this whole thing is here. I will include it at the bottom too, in case it should disappear. Not that I can vouch for or agree with everything the guy is saying, and some of it is a little whacko, but obviously he's been researching this quite a bit. You'll find very little about it on the net otherwise.


--------------------------------------------------------------------------------

The Unknown $19 Trillion Depository Trust Company
by Anthony Wayne

Part I of II

This exclusive report is a compilation of interviews and background research from October 1995 through April 1999.

The Depository Trust Company (DTC) is the best kept secret in America. Headquartered at 55 Water Street in New York City, the average American has no clue that this financial institution is the most powerful banking corporation in the world. The general public has no knowledge of what the DTC is or what they do. How can a private banking trust company hold assets of over $19 trillion and be unknown? In a recent press release dated April 19, 1999, the Depository Trust Company stated:

The Depository Trust Company (DTC) is the world's largest securities depository, holding nearly $19 trillion in assets for its Participants and their customers.... Last year, DTC processed over 164 million book-entry deliveries valued at more than $77 trillion.

In dealing with the trust department of Midlantic Bank, N.A. in New Jersey [now PNC Bank, N.A.], this writer was authorized, as trustee and power of attorney, to transfer original trust assets comprising of common stocks and bonds to a new trust set up in another jurisdiction. An Assistant Vice President from the Trust & Financial Management Office of Midlantic Bank said to me "it will take at least 6 weeks to do this as the majority of the stocks and bonds are not held in the name of the trust". This same Midlantic Bank Assistant V.P. also stated in a letter dated November 17, 1995, "Of the 11 municipal bonds, 8 are held in book entry only. This means they cannot be physically re-registered with a certificate sent to the new trustees." (* these are not the actual figures quoted in the letter in order to protect the privacy of the account holder, at their request. Also, we were asked not to name the Midlantic Assistant V.P. in order to protect her privacy Rights. We respect these requests with full moral compliance). In disbelief, I brought this matter to the attention of our research assistants at the Christian Common Law Institute [formerly the North Bridge News] and we began our lengthy investigation into the matter. After 3 years, the can of worms we've opened up should frighten every American. With the advent of reported Y2K computer glitches and the possible collapse of our 'paper asset' economy, every person who has a stock or bond in their portfolio had better read this report and act on the information we are disclosing here.

In November 1995, after encountering numerous "no comments" and a myriad of "that's not my department" excuses via telephone, I eventually spoke with Mr. Jim McNeff who told me his position was Director of Training for the DTC. He said he'd been employed there for 19 years and was "very proud" of his employer. During my initial telephone interview, either Jim's employer or some other unknown person or persons were illegally listening or taping our telephone conversation according to the electronic eavesdropping equipment we have installed on our end. Why did anyone feel it was necessary to illegally record our conversation without advising us? Was some federal alphabet agency monitoring DTC calls to safeguard National Security? That in itself is suspicious enough to warrant a big red warning flag.

Jim informed me back then (1995) that "the DTC is the largest limited trust company in the world with assets of $ 9.1 trillion". In July 1998, I spoke with Ms. Rose Barnabic of the DTC Finance Department who said that "DTC assets are currently estimated at around $11 trillion". As of April 19, 1999, the DTC itself has stated that their assets total "nearly $19 trillion" (see above). Mr. McNeff had also stated "the DTC is a brokerage clearing firm and transfer center. We're a private bank for securities. We handle the book entry transactions for all banks and brokers. Every bank and brokerage firm must secure their membership with us in case they become insolvent, so your assets are secure with DTC". Yes, you read that correctly. The DTC is a private bank that processes every stock and bond (paper securities) for all U.S. banks and brokerage houses. The big question is this; Just who gave this private bank and trust company such a broad range of financial power and clout?

The reason the public doesn't know about DTC is that they're a privately owned depository bank for institutional and brokerage firms only. They process all of their book entry settlement transactions. Jim McNeff said "There's no need for the public to know about us... it's required by the Federal Reserve that DTC handle all transactions". The Federal Reserve Corporation, a/k/a The Federal Reserve System, is also a private company and is not an agency or department of our federal government, according to the 1998 Federal Registry. The Federal Reserve Board of Governors is listed, but they are not the owners. The Federal Reserve Board, headed by Mr. Alan Greenspan, is nothing more than a liaison advisory panel between the owners and the Federal Government. The FED, as they are more commonly called, mandates that the DTC process every securities transaction in the US. It's no wonder that the DTC (including the Participants Trust Company, now the Mortgage-Backed Securities Division of the DTC) is owned by the same stockholders as the Federal Reserve System. In other words, the Depository Trust Company is really just a 'front' or a division of the Federal Reserve System.

"DTC is 35.1% owned by the New York Stock Exchange on behalf of the Exchange's members. It is operated by a separate management and has an independent board of directors. It is a limited purpose trust company and is a unit of the Federal Reserve." -New York Stock Exchange, Inc.

Now, let's see how this effects the average working American family. If you're not aware how the system works, you should visit or call a stock broker or bank and instruct them you want to purchase some shares of common stock or a small municipal bond, for example. They will set up a brokerage account for you and act as your agent with full durable power of attorney (which you must legally sign over to them) to conduct business on your behalf, upon your buy or sell instructions. The broker will place your stock or bond purchase into their safekeeping under a "street name". According to Mr. McNeff of the DTC, no bank or broker can place any stock or bond into their firm's own name due to Federal Trade Commission (FTC) and Security and Exchange Commission (SEC) regulations.

The broker or bank must then send the transaction to the DTC for ledger posting or book entry settlement under mandate by the Federal Reserve System. Remember, since your bank or broker can't use their name on the certificate, they use a fictitious street name. "Since the DTC is a banking trust company, we can't hold the certificates in our name, so the DTC transfers the certificates to our own private holding company or nominee name." states Mr. McNeff. The DTC's private holding company or street name, as shown on certificates we have personally examined from numerous certificate holders, is shown as either "CEDE and Company", "Cede Company" or "Cede & Co". We have searched every source known to learn who CEDE really is, but have been unable to get any background information on them. Is Cede Company fictitious or is their identity perhaps a larger secret than DTC? We must presume that the information Mr. McNeff gave us was correct when he confirmed that Cede Company was a controlled private holding company of the DTC. We have now found the following proof that CEDE is real from the Bear Stearns internet site:

NEW YORK, New York - March 16, 1999 - Bear Stearns Finance LLC today announced that it will redeem all of the 6,000,000 outstanding 8.00% Exchangeable Preferred Income Cumulative Shares, Series A ("EPICS") of Bear Stearns Finance LLC, liquidation preference of $25.00 per Series A Share, CUSIP number G09198105. All of the Series A Shares are held by Cede & Co., as nominee of The Depository Trust Company, and the payment of the redemption price will be made to Cede & Co. by ChaseMellon Shareholder Services, LLC, as paying agent, whose address is: 85 Challenger Road, Ridgefield Park, New Jersey 07660.

The banks and brokers are merely custodians for their clients. By federal law (SEC), they cannot hold any assets in the customer's name. The assets must be held in the name of DTC's holding company, CEDE & Co. That's how DTC has more than $19 trillion dollars of assets in trust... or is it really in "trust" if the private Federal Reserve System is technically holding it in their "unknown" entity's name? Obviously, if stock and bond certificates you've purchased aren't in your name, then the "holder" (the Federal Reserve System) could theoretically refuse to surrender them back to you under a "national emergency" according to the Trading with the Enemy Act (as amended). Is this the collateral being held by the private Federal Reserve System to pay off the national debt owed to them by our federal government, first initiated by Lincoln's debt bonds of 1864?

According to Mr. McNeff, the DTC was a former member of the New York Stock Exchange (NYSE), and "Our sister company is the National Securities Clearing Corporation... the NSCC" (they have since merged). He was correct since we now know that the NYSE holds 35.1% of the "ownership" of the DTC on behalf of their NYSE members. Simply put, the Depository Trust Company absolutely controls every paper asset transaction in the United States as well as the majority of overseas transactions, and they now physically hold (as of April 1999) 99% of all stock and bond book-entrys in their street name, not the actual owner's names. If you have stock or bond certificates in your name buried in your back yard or under your mattress, we suggest you keep them there. If not, it might be very wise to cancel your brokerage account and power of attorney status, re-register the stocks and bonds in your name (if you still can), and keep them hidden where only you know their location. Otherwise, you have absolutely no control over them (see Part II of our exclusive research report on the DTC for more information on beneficial ownership status). However, getting a stock or bond certificate these days is not so easy if possible at all:

"For the most part, issuers know little about the role of the Depository Trust Company (DTC). The DTC was created in 1973 as a user-owned cooperative for post-trade settlement. Our members are banks and broker/dealers, whom we refer to as participants. We handle listed and unlisted equities, including 51,000 equity issues and 170,000 corporate debt issues, equating to more than 78% of shares outstanding on the New York Stock Exchange (NYSE). We also have more than 95% of all municipals on deposit.

In the 1980s, the "Group of 30" [business leaders] recommended that stock certificates be eliminated, because physical certificates create risk. The Securities Exchange Commission (SEC) issued a concept release in 1994 to gradually decrease certificates, providing optional direct registration on the books of the issuer instead of a certificate.... this enhances the portability of shares between transfer agents and brokerage accounts. With the direct registration system, brokers transmit instructions to purchase through DTC, which the issuer or transfer agent then registers, so shares can be delivered electronically." -John D. Faith, Manager, Corporate Trust Services, The Depository Trust Company (1996)

Now we're about to reveal to you the most shocking discovery we came across during our research into this matter. Most of us remember a few years back the purported computerized selling of stocks that resulted in Wall Street's "Black Monday":

Dow Dives 508.32 Points in Panic on Wall Street

"The largest stock-market drop in Wall Street history occurred on "Black Monday" -- October 19, 1987 -- when the Dow Jones Industrial Average plunged 508.32 points, losing 22.6% of its total value. That fall far surpassed the one-day loss of 12.9% that began the great stock market crash of 1929 and foreshadowed the Great Depression. The Dow's 1987 fall also triggered panic selling and similar drops in stock markets worldwide" -Source: Facts on File World News CD ROM

The stock exchanges had dramatic record losses, and a record volume of shares were traded on that infamous Monday in October 1987. We all asked ourselves how computers could have done this by themselves without someone knowing about it. After all, someone has to program a computer to tell it what to do, what not to do, or even when to do or not do it.

During my telephone conversation, Mr. McNeff was trying to assure me that they [the DTC] have "never lost a certificate or made a mistake in a book ledger transaction". In attempting to give me an example of how trustworthy the DTC is when I asked him how he could back up such a statement, he replied "DTC's first controlled test was 4 or 5 years ago. Do you remember Black Monday? There were 535 million transactions on Monday, and 400 million transactions on Tuesday". He was very proud to inform me that "DTC cleared every transaction without a single glitch!". Read these quotes again: He stated that Black Monday was a controlled test. Black Monday was a deliberately manipulated disaster for many Americans at the whim of a controlled test by the DTC.

What was the purpose of this test? Common sense tells you that you test something before you intend to use it. It's quite obvious that the stock markets are going to 'crash and burn' at some future date and for some 'unknown' reason since the controlled test was so successful. Was this just one of the planned tests for a Y2K internationally planned worldwide economic meltdown? The Great Depression is about to be repeated, and it will be as deliberate and manipulated as the first one that began with the stock market crash of 1929. We are, without a doubt, on the brink of the Mother of all economic Depressions. As of May 3, 1999, the Dow Jones Industrial Average (DJIA) went above a record 11,000 points. Just prior to the 1929 stock market crash, Wall Street was posting record prices, record earnings, and record profits.... just like the scenario we are experiencing today. Will Y2K be a manipulated and deliberate a financial meltdown? Too many facts already support this probability.

On June 7, 1995, the federal government issued a new regulation requiring stock and bond certificate transfers to be cleared in three days instead of the previous five day time period. It coincided with the infamous Regulation CC that purportedly gave us faster three day availability of funds from deposited checks. This means that brokers and banks must get your stock or bond transaction into the street name (Cede & Co.) of the DTC within 3 working days. That's hard to do considering banks claim it takes 3 or more days to clear a check that you've submitted to pay for a stock purchase. But, there's a reason for this new regulation and it coincides with the introduction of the new FRS "dollars".

On February 22, 1996, "the DTC will flip the switch" according to Mr. McNeff. "What switch?", I asked. "This is the day that clearing house funds will no longer be accepted for stock or bond transactions" was my reply from Jim. "Instead, only Fed Funds will be accepted". Fed Funds, or a Fedwire, are electronic computer ledger debit transfers between Federal Reserve System member banks. No checks or drafts have been allowed from that day, just as Mr. McNeff accurately stated. This is more commonly called a 'cashless transaction'. I call it the reality of the mark of the beast. This is the manifestation of the new international god, the New World Order [I prefer the term 'New World DISorder' as a more accurate description].

Consider this my fellow Christian Americans: All pension funds and other institutional 'managed funds' are comprised of paper asset investments such as stocks, bonds, and mutual funds. These certificates are technically in the name of DTC's private holding company, CEDE and Company. The DTC is owned by the private Federal Reserve System owners (Click for a complete list of names). Congress has attempted, on no less than two occasions since 1995, to pass legislation allowing pension funds to be used by the government as purported 'loans'. All the Federal Reserve System has to do is hand it over. But, what happens to the people counting on those pension fund investments in order to feed themselves in their retirement? Too bad for them.... they're out of luck because for the 'good of the nation', they may be forced to share or relinquish their lifetime of hard-earned wealth. This can be done without the consent of Congress under an Executive Order based on the War and Emergency Powers Act and a state of National Emergency, just like we are already under (See further Executive Orders). Since the Federal Reserve System already holds our stocks and bonds in their fictitious DTC "street name", CEDE, then perhaps they'll cash them in for the federal government's failure to repay the loans that have become way overdue. Heck, some of Lincoln's gold backed bonds from 1864 have not been repaid yet.... and for a reason.

On March 6, 1933, all bullion gold and gold coins were forcibly taken from the hands of private citizens (see New York Times). Under the War Powers Act, President Roosevelt declared a national emergency touted as a "Banking Holiday". It was declared due to the deliberately calculated stock market crash that preceded the Great Depression. Where did this gold end up? Into the hands of the Federal Reserve System owners. The majority is stored in the impervious rock vaults they own beneath New York City. Is it any surprise that the DTC physically holds all the remaining non-book entry issued stock and bond certificates in the same place?

Technically, our entire nation is still under the Executive Order declaration of the War Powers Act and in a continual state of national emergency (See Clinton's 1994 Executive Order 12919). The President can enforce any new emergency at any time under Executive Order or Presidential Directive. In 1995, we [the former North Bridge News] published that we expected a new national "dollar" emergency to be declared within a year or two. Just like we thought at the time, they have now blamed it on the purported drug dealers who are allegedly destroying our currency by money laundering schemes.

Since late 1996, old U.S. $100 FRB notes issued by the Federal Reserve Bank are being exchanged for new $100 FRS issued by the Federal Reserve System. These new notes have scanable magnetic platinum encryption on the plastic strips embedded inside the bills. The U.S. Treasury claims this is for "the blind". Now, new $20 and $50 FRS's are replacing the older notes as well. What people don't realize is that very soon, the older FRB notes will no longer be 'legal' and there will be a penalty for hoarding them. This is what happened to those Americans holding gold and gold coins after 1933.

"We are most gratified with the successful introduction of the new $100 and $50 notes and look forward to the same success with the new $20s," Chairman Greenspan said. For the first time, a machine-readable capability has been incorporated for the blind. A new feature in the $20 will facilitate the development of convenient scanning devices that could identify the note as a $20. -U.S. Treasury, Office of Public Affairs, RR-2449 released May 20, 1998.

Why new paper 'money' and for what purpose? Because the new FRS notes in your pocket can be scanned and whoever scans them can know exactly how much money you have on you. The older FRB notes are not encoded to do this. This writer knows firsthand of at least one machine, manufactured by Diebold, Inc. (a/k/a InterBold) that scans the money in your pockets, wallet or purse no different in theory than a credit card scanner, but much more sophisticated. I participated in a 'test' of this machine at a U.S. international airport in 1998. To me, it looks much like the standard metal detector scanners you walk through at all airports. I was asked (by who I believe was a U.S. Treasury Agent, as he introduced himself and flashed his ID quickly in my face so I couldn't read it) if I had any of the new $100 or $50 bills in my pockets. I looked in my wallet and saw I had one new $100 FRS note. I told him "yes", then he said "Good, but don't tell me how much". After saying he would "really appreciate it" if I would help them with a test, he asked me to walk through what looked like a typical airport scanner. No beeps. No noise. No sound at all. He looked at a computer screen and said "Do you have a new $100 bill?". When I confirmed that was true, he thanked me and told me to please move on. I tried to ask him how the machine knew that, but he ignored my question. I took a good look at the scanning system and believe I have now spotted them at Kennedy, Atlanta, Miami and Los Angeles airports.

The odd part about this is that these machines seem to all be located in the customs areas where you enter the U.S. from a foreign country. Obviously, they want to know if someone is carrying more than $10,000 into the U.S. Common sense dictates that they should be more concerned about people leaving with more than $10,000 if they're really trying to thwart the drug dealers.... until you begin to realize that there must be some other hidden agenda: They are apparently going to stop money from entering the U.S. for a reason.

Will the President call for the confiscation of all gold bullion and bullion coins as Roosevelt did? Who will end up with it? The Federal Reserve System owners, just like before. Since June 1998, international gold supplies have been so low that some private Swiss Banks have been paying a premium above the market wholesale value for gold bullion. This was confirmed to us by a gold and diamond mining Chief Executive from Rex Mining in Guinea, West Africa, who supplies raw gold to a major Swiss Banking company smelter and processor The spot gold market has been manipulated to keep the price low so that the Federal Reserve System owners can purchase all that is available through their various trusts and corporations. World gold availability on the open market is now at a record low and mining production of gold is also at a record low output.

What happened to 'supply and demand' with gold and silver? Normally, when supply is high the price decreases. When supply is low, precious metal prices increase. Perhaps the private FED will peg the new dollar to gold prices, as many experts have already speculated. What will stocks and bonds purchased with old dollars be worth then? Pennies to the dollar, so to speak. Who ends up being the only winner? The Federal Reserve System stockholders. They control the circulation amounts of paper money in the U.S. Combine that with the new scanner to stop large amounts from entering into the U.S., and the scenario amounts to a planned shortage of paper FRS notes, the banning of the older FRB notes, and the soon to be astronomical price of gold which most Americans will be forbidden to have or hoard, once again. The facts we've presented in this report all point to this.

People will be at the mercy of the federal government for daily food and for jobs. Checks are soon to be totally phased out. Banks issue ATM debit cards and tell you they must charge more for your account if you use a real live human teller instead of the machine. The switch is being turned on. This is not speculation. This is the truth of reality. It's already been tested, and their new system works. Just ask Jim McNeff of the DTC.

The day has come when you must decide to accept or reject the beast and the New World Disorder.



Part II of II-

You don't own your Stocks....or any of your Bonds...The Depository Trust Company does.
by Anthony Wayne

In Part I of this series, excerpts of which were first published in November 1995 by the former North Bridge News, we exposed The Depository Trust Company (DTC) as the Unknown $ 9.1 Trillion Company. It appears that our startling discoveries of the inner-workings of the DTC had only scratched the surface. We'd like to add more fuel to this blazing fire by further exposing the DTC and those behind it.

The Depository Trust Company has grown since October 1995. On July 1998, this amount was estimated by a DTC employee at more than $11 Trillion. As of April 19, 1999, the DTC itself has stated in a press release that their asset value is nearly $19 trillion. In 3 1/2 years, their assets increased nearly $ 10 Trillion. That's a lot of stocks and bonds supposedly held in trust. The latest trend over the past ten years is for stock and bond brokers to offer "book-entry ownership" only. Every book-entry stock or bond is literally owned by the DTC. Since 1985, most bond and many stock issuers have converted from the issuance of certificates to book-entry systems administered and controlled by the DTC. As of March 1999, the National Securities Clearing Corporation (NSCC) and the Participants Trust Company (PTC) are now merged into the DTC. Practically, there isn't one stock or bond issued that is not controlled by the DTC.

If you purchase any stock or bond through a broker, it is being held for you under a "street name" by the DTC unless you have specifically requested to hold the certificate yourself. If you have a book entry stock or bond, you won't be issued a certificate. It's important to note that you have purchased that particular stock or bond without becoming a registered holder of the actual stock or bond certificate. Instead, you have become a beneficial owner. The difference between the two is like night and day. Take the time to absorb and understand the following definitions:

REGISTERED HOLDER- A Registered Holder literally possesses, owns, and holds, his stock or bond with his name appearing on the face of the certificate. The company that issued the certificate has registered the owner's (holder's) name on their official books. This is the safest way to own a paper asset. You literally possess the fully registered certificate and only you can transfer or sell it. By all Rights and definition of law, you are the owner. You have it, you hold it, you possess it, and you keep it. You have the complete control over it.

BENEFICIAL OWNER- A Beneficial Owner is nothing more than a beneficiary, "One who is entitled to the benefit of a contract"- A Dictionary of Law, 1893. All book-entry stocks and bonds you purchase make you the beneficial owner, not the registered holder. The owner of a book-entry stock or bond is the entity or name that it is registered under.

The DTC owns that bond or stock, not you. Rather than in your name, it's registered (as the legal Registered Owner or agent) in their "street name", Cede & Company. (In the past, it may have been registered in your broker's street name, but this is no longer allowed). The DTC is the Registered Owner - holder - of your stock or bond. The DTC is the legal property-holder, share-holder, stock-holder, owner and purchaser. Your name appears nowhere on the book entry or certificate as the actual owner. Instead, you have been designated by the legal registered owner, the DTC, as the Beneficial Owner. This means that your lawful Rights in that stock or bond are confined to that of a successor or heir.

At the University of Utah College of Law, we found the following examination question about Cede & Co.:

The common stock of LargeCo, Inc. is publicly traded on the New York Stock Exchange. Over 2/3rds of the shares are registered on LargeCo's books in the name of Cede & Co. Cede is a depository company which holds the shares as nominee on behalf of brokerage firms, mutual funds and other active traders. The brokerage firms in turn are also nominees with respect to some of the shares, which they hold on behalf of their customers. Nominees, such as Cede and brokerage firms holding for customers, view the customer as the beneficial owner of the shares and consider the customer to be the one with the right to vote the shares; mutual funds, however, view the fund as the owner of the shares it holds and vote the shares themselves.

Most of the remainder of LargeCo's stock (26% of the total) is held by the Large family, which is still actively involved in management. LargeCo is aware that the beneficial owner of about half the stock registered in Cede's name is the Small family, who live next door to the Larges in downtown Rome, and that the remainder of the Cede stock is beneficially owned by several well known mutual funds.

According to the DTC, under the US Security and Exchange Commission (SEC) rules, you only have the right to "receive proceeds or other advantages as the beneficiary". You are not the owner... you are the consignee, "One who has deposited with a third person an article of property for the benefit of a creditor"- A Dictionary of Law, 1893. In legal terms, you are considered the heir presumptive or heir at law to the stock or bond you paid for. The DTC controls, possesses as creditor, holds and owns your book-entry stock or bond. This is a difficult pill to swallow for those who have placed their assets in stocks and bonds over the past decade. Your broker sends you a fancy accounting every month of your purported holdings, along with dividend and interest payments paid. The fact is, you only receive the benefit of ownership (interest and dividends) without holding title to your property. You are at the mercy of the registered owner, the DTC. If you don't believe this is true, then call your broker right now and ask them who's name is listed as the Registered Holder of your book-entry stocks and bonds. If you're lucky, the broker will tell you "why of course you're the Beneficial Owner", then you'll know the truth. He may emphasize to you that the stocks and bonds are being held in "safe keeping" for your own protection. This is broker language for "your stocks and bonds are held by the DTC in their street name as the creditor".

From J.P. Morgan's internet site:

Registered and beneficial shareholders

There are two types of shareholders: registered, who hold an ADR in physical form, and beneficial, whose ADRs are held by third-parties and are listed under a "nominee" or "street" name.

Registered shareholders are listed directly with the issuer or its U.S. transfer agent. The transfer agent handles the record-keeping associated with changes in share ownership, distribution of dividend payments, and investor inquiries; it also facilitates annual meetings. An issuer's depositary bank can provide the identities of registered shareholders on a regular basis. However, this may not provide the level of shareholder identification required for a successful investor relations effort. Registered shareholders are typically individual investors who have physical possession of their share certificates, generally in lots of 100 shares or fewer. The registered list also includes nominee names such as Cede & Co., which represent the aggregate position of the Depository Trust Company (DTC), the primary safekeeping, clearing, and settlement organization for securities traded in the United States. DTC uses electronic book-entry to facilitate settlement and custody rather than the physical delivery of certificates.

Beneficial shareholders, which can include individual as well as institutional investors, do not have physical possession of their certificates; third-party broker-dealers or custodian banks hold their securities on their behalf. These shares are said to be held in street name because they are kept with the DTC in the name of the broker-dealer or the custodian bank - not the underlying shareholder. Lists of beneficial shareholders who do not object to disclosing their holdings are available from banks and broker-dealers. These lists, called NOBO for Non-Objecting Beneficial Owner, typically provide the names of individual investors.

To help identify institutional investors, who do not usually disclose their holdings, issuers use publicly available filings. Large holders, including investment managers, are required to make periodic filings - such as 13-F, 13-G, and 13-D - with the Securities and Exchange Commission (SEC) disclosing the name and value of the positions in their portfolios.

Which brings us to the street name used, registered, and designated by the DTC as the registered owner of over $19 Trillion (USD) of our stocks and bonds... CEDE & Co. Everyone in the brokerage business keeps pronouncing this name as "See Dee" and Company, but it's spelled C-E-D-E and pronounced "Seed". This is where the real irony comes.

According to Black's Law Dictionary, Sixth Edition, 1990, the word Cede is defined as "To yield up; to assign; to grant; to surrender; to withdraw. Generally used to designate the transfer of territory from one government to another". In the Black's 1951 Fourth Edition, it lists the following as supportive case law; Goetze v. United States, C.C.N.Y., 103 Fed. 72.

Have you made the connection yet? Your book-entry stocks and bonds and all stock and bond certificates purchased through your broker and held by them under your brokerage account are owned by CEDE & COMPANY (the DTC) as the registered owner. You have surrendered, assigned and granted ownership to someone else other than yourself. Their name says it all.

How ironic and sarcastic can they be?

"CEDE- To surrender possession of, especially by treaty. See Synonyms at 'relinquish'." -American Heritage Dictionary of the English Language, 3rd Edition of 1992

If Americans had any idea that they have relinquished the lawful ownership of their stocks and bonds to someone or something else, there would be a revolution. In a sense, that's why we are exposing this paper asset scam to you. The point is, now that you know the truth, do something about it and get your assets back into your name.

Our suggestion to you is this: If you don't literally have every stock and bond registered certificate in your possession, then promptly call your broker and tell him you want all your securities transferred and re-registered into your name as the Registered Holder and Owner. If he says he can't do that because your stock or bond is a book-entry transaction only, we strongly suggest, for your own security, that you sell your book-entry assets immediately. Don't let the broker tell you that it's "safer" for you if they keep your certificates. Remember, you know the truth. Even if all your stock and bond certificates were burned in a fire, the process to have them replaced is simple. If someone were to steal your certificates, you simply report them stolen to the company that issued them and they're automatically cancelled, just like a stolen credit card. Replacement certificates are then issued to replace the lost or stolen originals.

Most people don't realize that when they open a brokerage account, they have entered into an contractural agreement allowing the broker to assign the stocks and bonds to an undisclosed creditor, the DTC. (We suggest you read the small print on your brokerage agreement). This gives the broker your express written permission to place all your securities into the ownership of the DTC. Your broker is an agent for the DTC through mandatory Securities and Exchange Commission regulations and mandates by the Federal Reserve System private bank. Your broker represents them, not you. Your brokerage account is nothing more than a ledger of accounting. It reflects no assets held in your name. The assets are registered in a "street name" that is not you or your name. Sure.... you receive the interest and dividends, but you do so as a beneficiary to the real owner. Your brokerage account in no way, shape, or manner reflects who literally owns your securities. What you own is a brokerage account and nothing more.

A greater consideration is just exactly who does the DTC hold these securities for? As the owner, who has the DTC pledged these securities to? Our research points to the Federal Reserve System, an international private banking cartel with major offices found in Moscow, London, Tokyo, and Peking. By treaty with the United Nations and in compliance with the Bretton Woods Agreement, the DTC under regulation of the Federal Reserve System has pledged all those stocks and bonds to the International Monetary Fund (IMF). These are the same paper securities found in your IRA and pension fund accounts, as well as in your brokerage account. Remember, you don't own them.... you're just a beneficiary.

The truth is, the securities you purchased and paid for with your hard earned money is collateral for the United Nations which is backed by the Federal Reserve System and it's associated agencies, such as the International Monetary Fund. Is it any wonder that the UN can operate year after year with increasing budgets, but without sufficient funds? The UN has nearly $19 Trillion of backing and reserves, thanks to millions of duped Americans. We are financing the New World Dis-Order with our stocks and bonds.

( link to site and article here: http://ming.tv/flemming2.php/__show_article/_a000010-000923.htm )
______________________________________________________

ps. Opinions people? Thanks.

“COOKING THE BOOKS”


ENRON CORPORATION

Accounting and Securities Fraud

MBA 8423

Law and Ethics and Business Employment Environments

July 24, 2003

“I am incredibly nervous that we will implode in a wave of accounting scandals. My eight years of Enron work history will be worth nothing on my resume, the business world will consider the past successes as nothing more than an elaborate accounting hoax.”

- Sherron Watkins, “Whistle Blower memo to CEO Kenneth Lay”


“I affirm that I have not received any impermissible assistance from others nor any unfair advantage in connection with this assignment”


Team 3

Mark Higgins ______________________________

Sean Lindsay ______________________________

Jill Miller ______________________________

Elstan Sippola ______________________________


INTRODUCTION

In January of 2000, Enron Corporation was one of the top company’s in the United States, ranked the seventh largest in terms of revenue at roughly 100 billion dollars.[1] Investors that held 1,000 shares of Enron stock at that time would roughly a $70,000 investment. What happened next was one of the biggest examples of corporate corruption, accounting fraud and securities fraud in the history of American Business. The same investors that had a comfortable investment of $70,000 in early 2000, now have an investment valued at only $40 (Based on closing price of $.07 on July 22. 2003.) The final tally of losses to Enron investors was $63 billion dollars, roughly equal to the 2002 Gross Domestic Product of Chili.[2]

Today, the energy giant is bankrupt, thousands lost their savings and are unemployed, and the world is still trying to figure out how they were duped by this once powerful and respected company. The complexity of the Enron fraud case is staggering. Congressional Committees are holding hearings to determine what went wrong and what changes in laws or regulations can prevent another Enron in the future. Shareholders are filing class action lawsuits. The Securities and Exchange Commission (SEC) is investigating insider trading and changing rules on auditing and disclosure to protect investors. The IRS is investigating Tax Code abuse by both Enron and its executives. The Justice Department is conducting criminal investigations against individuals for securities fraud, wire fraud, mail fraud, money laundering, concealing evidence, defrauding the pension fund, shredding of documents, obstruction of justice and conspiracy. Focusing on allegations of accounting and securities fraud, it is easiest to understand how Enron’s aggressive corporate policies and practices misled and confused the public and will ultimately lead to improvements in SEC and GAAP rules, while continuing the trend of a heightened sense of ethics and corporate responsibility to shareholders.


CORPORATE HISTORY

Based in Houston, Texas, the company was formed in 1985 when Houston Natural Gas merged with Omaha, Nebraska-based InterNorth. The primary scope of business originally pertained to energy trade on an international and domestic basis. The initial merger created the first nationwide natural gas pipeline system. In 1986 Kenneth Lay, formally chief executive officer of Houston Natural Gas, was named chairman and chief executive officer of Enron. In 1987, taking advantage of England’s privatization of its power industry, Enron opened an overseas office, making their first step towards global expansion while pursuing both regulated and unregulated markets.

In 1991, Jeffrey Skilling joined the company and Enron launched its Gas Bank, a program under which buyers of natural gas were able to lock in long-term supplies at fixed prices. The company also began to offer financing for oil and gas producers. In 1994, expanding on their successful international growth and growth in unregulated markets, Enron began trading electricity. The energy trading market would turn out to be one of the company's biggest profit centers over the next few years. In December of 1996, Jeffrey Skilling was elected president and chief operating officer while continuing his role as chairman and CEO of Enron Capital & Trade Resources. In 1997, Enron Energy Services was formed to provide energy management services to commercial and industrial customers. In 1999, Enron Online, the company's commodity trading Internet site was formed. It quickly becomes the largest e-business site in the world.

In 2000, Annual revenues reach $100 billion, more than double the year before, reflecting the growing importance of energy trading. Enron Field was opened in downtown Houston. In addition to buying the naming rights, Enron Chairman Ken Lay helped raise financial support for the construction project. The Energy Financial Group ranked Enron as the sixth-largest energy company in the world, based on market capitalization. Enron and strategic investors, IBM and America Online, launch The New Power Company to provide electric service in deregulated markets.

In 2001, Jeff Skilling took over as chief executive officer. Ken Lay remains as chairman. In August, Skilling unexpectedly resigns for personal reasons. Lay takes back the CEO job and investors start to question the motivation behind Skilling’s shocking resignation. Meanwhile, seven officers of Enron dumped $175 million worth of stock in 2001. In total, 18 top officers and directors executed 64 stock sales.[3]


SITUATIONAL ANANLYSIS: THE BEGINNING OF THE END

Suspicions rose and Wall Street started cranking up its requests for Enron to provide clearer and more detailed financial information about its performance. In October of 2001, Enron released its third-quarter earnings, with Non-recurring charges totaling $1.01 billion including $35 million related to investment partnerships formerly headed by Andrew Fastow, Enron's chief financial officer. “After a thorough review of our businesses, we have decided to take these charges to clear away issues that have clouded the performance and earnings potential of our core energy businesses,” according to Ken Lay.[4] Fastow was replaced as CFO. The Securities and Exchange Commission launches a formal investigation into the partnerships. In November, Enron restated its earnings for 1997 through 2000 and the first three quarters of 2001.[5] In December, Dynegy announced it wanted to merge with Enron. Enron's stock closed at $8.63 per share, an 89% drop since the beginning of 2000.

In January of 2001, roughly 60% of Enron employee’s 401K accounts were comprised of Enron stock. Kenneth Lay, CEO and Chairman of the Board, encouraged employees to maintain their holdings of Enron stock. On September 26, 2001 Lay wrote on Enron’s internal “ethink” intranet chat site, "My personal belief is that Enron stock is an incredible bargain at current prices and we will look back a couple of years from now and see the great opportunity that we currently have.” [6] Meanwhile Lay was liquidating much of his holdings to the tune of a $100 million profit from 1998 through 2001.[7]

Enron was able to camouflage a mountain of debt under a complicated matrix of partnerships. They had thousands of them, many offshore accounts, mostly throughout the late 90s and 2000-2001. The fraud was not revealed to the public until October of 2001 when Enron announced that the company was actually worth $1.2 billion less than previously reported. There was mounting evidence that the Enron board knew in 1997 that “aggressive” accounting helped bury the facts. The Securities and Exchange Commission began an investigation which has revealed many levels of deception and illegal practices committed by high-ranking Enron executives, investment banking partners, and the company’s accounting firm, Arthur Anderson. Many of the executives have been charged with wire fraud, money laundering, securities fraud, mail fraud, and conspiracy.


ENRON’S ACCOUNTS: THE TRUE PICTURE


Reported Revised True debt True Equity
Income Income

1997 $105m $77m up $771m down $258m

1998 $733m $600m up $561m down $391m

1999 $893m $645m up $685m down $710m

2000 $979m $880m up $628m down $754m

Reported and revised income, debt and shareholder equity.

Source: Enron/Power Special Report

The strongest evidence against the executives was a “smoking gun” memo sent to Kenneth Lay by Ms. Sherron Watkins shortly after the departure of Jeffery Skilling. This document raised many questions about Enron’s historical accounting practices, the motivations of internal executives and the outlook for the future due to the gross misuse of a myriad of special purpose entities. This document named multiple key executives and requested Mr. Lay’s assistance in correcting the improper dealings that had occurred. While disregarding this memo professionally, Lay personally sold 1.77 million shares of stock from February thru October of 2001 at prices from $78.79 down to $15.40. The proceeds from these sales totaled $70.1 million. He is regarded by many to have been an ineffective CEO that did not have a firm understanding of the operations of his organization. It seems that his main role was to maintain high level political relationships including a close personal relationship with George W Bush.[8]

CFO, Andrew Fastow and his web of 6 known tipees, or people that Fastow shared his inside trading information with, made roughly $42 million in profit on total investments of $161,000. Fastow was named managing director of Enron Energy Services in 1996 and failed miserably. He was then relegated to a finance position where he was the mastermind of the tangled web of “special purpose entities”, or SPEs, that were used to hide debt for Enron and create personal wealth for himself. For these transgressions, Fastow has been indicted on 78 counts of securities fraud, money laundering, wire and mail fraud, as well as conspiracy to inflate Enron’s profit.

CEO, Jeffrey Skilling has maintained complete innocence throughout Senate hearings in February, 2002. He claims that when he left the company in August of 2001 he had no idea of the company’s coming collapse. The Watkins “Smoking Gun” document tells a different story of an informed CEO that did not take action. Skilling was regarded as an extremely intelligent individual who could solve complex problems in minutes, yet he claims that he had no idea that his company was at risk of demise. Skilling, sold 160,000 shares of Enron stock in June of 2001 prior to leaving in August.

J. Clifford Baxter, the Vice Chairman of Enron, worked his way up through the Enron organization. He began as the chairman and Chief Executive of Enron North America before he became Chief Strategy Officer and then he moved up to Vice Chairman. Baxter was referenced in the Watkins memo as someone who complained mightily to Jeff Skilling and all who would listen about [the] inappropriate accounting actions”. Baxter died in an apparent suicide in January 2002.

So what was the root cause of the problems at Enron? What follows is an in depth analysis of the aspects of accounting fraud and securities fraud that led to the demise of Enron.


AUTHUR ANDERSEN’S INVOLVEMENT

Enron was looking a whole lot better on paper than it had any right to, but a savvy outsider would have had to do an amazing amount of tedious research to realize it. The public is required to trust and rely on the financial inspection performed by auditors. Auditors perform the inspection of it's clients financial statements and other important documents in order to put their stamp of approval on the operation, which in turn allows investors to act with confidence. The questions about the rapid demise of Enron also turned to the auditors, in this case Arthur Andersen, one of the biggest accountancy companies in the world.

Arthur Andersen's relationship with Enron began in the mid 1980's when Enron's predecessor, Internorth, hired Andersen as it's auditor. Andersen's reputation and prestige gave the fledgling company legitimacy, as Andersen was the oil industry's largest accounting firm. When Internorth became Enron, CEO Kenneth Lay found no reason to change accountants. As Enron grew in size and prestige, the balance of power shifted. Enron outsourced much of their consulting work to Andersen, who even had an office in Enron's Houston headquarters which rivaled the size of other Andersen regional offices. By the mid 1990's, Andersen had become extremely dependent on Enron, both for prestige and for billings, which almost eclipsed $1 Million on a weekly basis.

Enron's fast paced, win at all costs corporate culture also rubbed off on Arthur Andersen. Any Andersen auditors that questioned Enron's accounting techniques were either demoted or told that they "just didn't get it." At this time Andersen was also giving more power to their local managers and the pressure on these managers to make their numbers mounted. By 2001, Andersen had settled lawsuits and paid fines to the SEC for its dealings with Sunbeam and Waste Management. Another scandal, especially one involving one of its largest clients, proved to be disastrous to Andersen.


ISSUES: QUESTIONABLE ACCOUNTING TECHNIQUES

In the 1990's, the stock market soared, as did Enron's stock price. Enron began manipulating its earnings, just as many other companies did at the time and some still do. Enron would hold back net profits from good years and apply them to bad years in order to make Wall Street analysts’ earnings predictions. This practice while technically legal, is thought of as unethical in the business world. This caused a big problem for Enron in 1996 when they found out they were going to fall $190 Million short of their target earnings and they had no "left over earnings" to cover it with. Consequently, they decided to implement a new accounting practice for revaluing assets. They would claim that many of the assets that it held in its equity investment fund (JEDI) were being held for resale, rather than as part of the company's core investment plan. Therefore, Enron could include the unrealized gains, or the money they think they could make by selling these assets at a higher price, as profits. They entitled this method as "fair value" accounting. The problem with this method was that Enron had no intention of selling these assets and Enron could use any estimate it wanted for the future value of these assets. Therefore, Enron was able to make its earning target in 1996 once again and the stock continued to rise.

In 1991, Enron adapted a similar accounting technique involving the valuation of its energy contracts. This aggressive technique called “mark to market” accounting enabled Enron to show the projected profits from long-term energy contracts for the entire life of the project as earnings for the current quarter. This accounting method also allowed Enron to determine the total value of such deals by manipulating the factors of the long-term price of the commodity being sold. Mark-to-market helped earnings meet expectations, pump up the stock price and increase the value of the thousands of executive stock options. Many employees' bonuses were tied to the value of these deals, not the actual profit from these deals. The deal makers (or the salesmen), not the risk managers were allowed to determine the final valuation of these contracts. Therefore, these employees had a personal interest, via bonuses and incentives, to inflate the profits of these deals. Since all profits on long-term deals were realized immediately, Enron needed to continue to make more deals in order to remain profitable. As more companies entered the energy market in the late 1990's, these deals became harder to make. Therefore, future value estimates of new deals were grossly inflated to make up for the drop in the number of contracts that were sold. This translated to Enron having much more money on paper from these deals than it really had coming in the door.


SPECIAL PURPOSE ENTITIES

Enron's most complicated and controversial accounting technique was the use of special purpose entities. SPEs were created to help isolate companies from large financial risks for projects that require a large amount of funding. Many large corporations have only two or three SPEs at the most. Enron had over 900 of these partnerships that were not shown on its Balance Sheets.[9] Enron would borrow massive amounts of capital and they were able to push off large amounts of this debt into these SPEs. The accounting rules provided that if at least 3 percent of the equity in an SPE partnership was provided by outside investors, then the debt does not have to be disclosed on the company’s balance sheet. Enron would find a "friendly" partner that was willing to invest in the SPE in order to meet these requirements and it would also issue more of it’s own stock to the SPE as equity. Although, the use of SPEs is legal, at times Enron would not meet their 3% funding requirement and many times they would not report the SPEs existence in the footnotes of the company's annual report. Enron never mentioned the existence of these entities and the massive amounts of its debt in their letters to the stockholders in their annual and quarterly reports. It is in these letters that a company has the duty to disclose relevant and important information that will most likely impact the company in the future, so that stockholders may better understand their financial risk. Enron's silence on the massive debt stored away in these SPEs along with the inaccurate footnotes constitutes a breach in their fiduciary duty to their shareholders.

Neal Batson, an Atlanta lawyer who was appointed by the federal bankruptcy court in New York to investigate Enron's financial transactions, concludes in his report that the company relied on six complex accounting maneuvers to enhance it's financial standings such as noneconomic hedges, tax transactions and other devices discussed above. All of these techniques accounted for 96% of Enron's reported $979 million in net income for 2000, the report concludes. Enron also reported debt of only $10.2 billion rather than the $22.1 billion that should have been reported.[10] The Senate's July 8, 2002 report The Role of the Board of Directors in Enron's Collapse stated that, "Andersen regularly informed [Enron's] Audit Committee that Enron was using accounting practices that, due to their novel design, application in areas without established precedent, or significant reliance on subjective judgments by management personnel, invited scrutiny and presented a high degree of risk on non-compliance with generally accepted accounting principles." Enron started by taking advantage of accounting loopholes and managed to push them morally and ethically to the brink of fraud through their deceit and greed. Corporate America's current backup is the audit system, which is in place to catch such accounting discrepancies as Enron's. The audit procedure failed miserably due to massive conflicts of interest, self-dealing and the persistence of Enron’s corrupt corporate culture at the Executive level.


Source: Swartz & Watkins, Power Failure: The Inside Story of the Collapse of Enron


THE LAW FIRMS

The University of California, the lead plaintiff in the Enron shareholders lawsuit, initially filed a complaint against 29 current and former account executives. The complaint was later amended to include nine financial firms, two law firms, and additional individual defendants. The law firms accused included Vinson and Elkins, Enron’s Houston based corporate counsel, and Kirkland and Ellis, which represented Enron in a number of special purpose entities. Vinson and Elkins were closely involved in creating the special purpose entities and drawing up true sale opinions, which Enron needed in order to enter into many of the transactions leading to their demise. The law firms were also involved in reviewing SEC filings, press releases and shareholder reports. The allegations against Kirkland and Ellis were dismissed on the grounds that no material misrepresentations were ever made by the law firm.


THE FINANCIAL INSTITUTIONS

The amended University of California complaint added nine financial institutions to the list of defendants. The list included JP Morgan, Citigroup, CS First Boston, Canadian Imperial Bank of Commerce, Merrill Lynch, Bank of America, Barclays, Deutsche Bank and Lehman Brothers. The plaintiffs alleged that the financial institutions used derivatives and secret guarantees to assist Enron in hiding debt and create false profits in exchange for outrageous fees and interest rates almost double the normal rate in return. Many bank executives are also accused of personally investing millions of dollars in these transactions. JP Morgan disguised loans as forward commodities trades. Several institutions engaged in total return swaps to disguise loans. Charges against Lehman Brothers, Bank of America, and Deutsche Bank were dismissed by Judge Harmon in the Southern District of Texas.[11]


CONGRESSIONAL RESPONSES

The collapse at Enron caused congress to pass one of the most influential pieces of securities legislation since 1934. The Sarbanes-Oxley Act requires public company's top executives to certify annual and quarterly reports and make new disclosures on internal controls, ethics codes and the makeup of their audit committees. It also prohibits auditors from providing certain non-auditing functions. These controls are to assure investors that companies have the proper processes in place to prevent gross misuse of accounting techniques that executives are held responsible for company's financial statements and that conflicts of interest are prevented within each company and their accounting firm.

Both President Bush and Congress are proposing legislation to stiffen penalties on those involved in securities fraud including increasing jail time from 5 years to 10 years. Harsher penalties are also being sought for those convicted of obstruction of justice, increasing jail time from 18 months to 3 years. Bush has also asked Congress to increase the SEC budget by $100 million in 2003 to allow them to hire new enforcement officers and upgrade their technology. President Bush has also requested a Corporate Fraud Task Force to coordinate civil and criminal investigations. The Public Company Accounting Reform and Investor Protection Act of 2002, S. 2673, bans accounting firms from providing consulting services to clients they audit. This requirement is to ensure independence of the auditors and audit reports regarding the client’s financial status. S. 2673 also provides additional funding to the SEC and creates the Public Company Accounting Oversight Board. President Bush has also requested a Corporate Fraud Task Force to coordinate civil and criminal investigations.[12]

Congress created the five member Public Company Accounting Oversight Board in July of 2002 to combat a wave of corporate accounting scandals. The SEC Board agreed to seek members for a new advisory group that will consist of about two dozen individuals that mixes investors, corporate finance experts and accounting industry professionals. The advisory group must hold public meetings semiannually and annually. All recommendations by the advisory group must be made in public. Any action made by the Board itself must be approved by the SEC prior to implementation and must proceed through standard rule making process which includes notice of proposed rule to the public, evaluation of comments and adoption of rule.


FASB RESPONSES

Responding to the turmoil surrounding Enron's use of the SPEs, the Financial Accounting Standards Board (FASB) voted to change the rules governing when partnerships can be kept off a company's books. Now, publicly traded companies that use SPEs will have to add debt to their books or raise funds from outside investors. The new rules will require newly formed partnerships to have independent, outside investors provide cash totaling at least 10% of such partnership funding; rather than the 3% that Enron was required prior to its collapse.


SEC RESPONSES: VIOLATIONS OF RULE 10b-5

The class action lawsuit filed on behalf of Enron employees and shareholders by Milberg Weiss Bershad Hynes and Lerach, LLP allege that Enron officers and directors were involved in securities fraud and insider trading and that these acts were successfully executed with the cooperation and assistance from Arthur Andersen, Vinson and Elkins, and nine different banks. In order to win the lawsuit and recover damages, Milberg Weiss, et al must demonstrate the elements of SEC Rule 10b-5 were committed by the defendants. The elements of 10b-5 are as follows: (1) defendant used a facility of a national securities exchange; (2) defendant made a misrepresented statement or omitted a fact; (3) the fact was material; (4) the misrepresentation or omission was made with scienter; (5) the statement was made in connection with the purchase or sale of securities; (6) plaintiff acted in reliance of the misrepresentation or that the market price of the security accurately reflected its value; (7) the misrepresentation or omission caused the plaintiff to suffer losses.

1) The use of a facility of a national securities exchange is the first element of Rule 10b-5, which provides Congress with the power to regulate the acts of the defendant under the constitution. In the case against Enron, this requirement is easy to establish because Enron was a publicly traded company on the New York Stock Exchange with trades in all 50 states.

2) When a defendant makes a misrepresentative statement or omits a fact, they have just satisfied the second element of Rule 10b-5. Statements made by third parties can also be attributed to the company when the company is entangled with the third party. Enron misrepresented their earnings by understating its debt by billions of dollars while overstating earnings by hundreds of millions of dollars. Enron defends itself by stating that in the 10-K filing for the year 2000, a consolidated balance sheet was provided for the unconsolidated affiliates that had debt secured by Enron. However, analysts have stated that not all Enron’s partnerships were listed in this balance sheet and in the notes of the 10-K it states, “Management does not consider it likely that Enron would be required to perform or otherwise incur any losses associated with the above guarantees.” SPE’s were created to keep Enron from having to take out loans, thus increasing their debt. The funds from outside lenders were guaranteed with Enron stock. Enron then would sell assets to the SPE’s and record the sales as revenue. Therefore, Enron received the money from the lenders and investors of the SPE’s, but recorded the monies as revenue instead of as debt which construes a misstatement

3) Next, the plaintiff has to prove that the misstatement was of material importance. In order for a fact to be material, a reasonable investor would have to deem it important in deciding how to act. Materiality is determined at the time the statement was made and is not affected by the intent of the party making the statement. Generally any statement about earnings, distributions, or assets of a company will be considered material by the courts. Significant facts about a parent-subsidiary relationship are normally material.[13] In October 2001, Enron announced that the company was worth $1.2 billion less than previously reported. Financial statements for years 1997 through 2000 and the first two quarters of 2001 would be restated to correct the misstatement. This announcement ultimately resulted in Enron’s stock being downgraded to junk bond status and the company filed for Chapter 11 bankruptcy in December 2001.[14] Clearly, these misstatements had a material impact.

4) Probably the most important element of Rule 10b-5 is the element of scienter. A misstatement or omission must be made with scienter. Scienter is a mental state of mind with intent to deceive, manipulate, or defraud. However, scienter is more than negligence of lack of care. When a defendant makes a statement that they know is untrue in hopes that others will rely on the statement, the defendant is acting with scienter. The plaintiff is claiming all dependants acted with scienter because they were all aware of the dealings going on and all stood to receive significant financial gains as the stock price increased.

5) The next element of Rule 10b-5 narrows the parties who can file suit under this rule. Conduct must involve the purchase or sale or securities. This means that only those who actually purchase or sale securities can file suit under 10b-5. Those that can be sued under Rule 10b-5 include the parties that make or are responsible for misstatements or omissions that influence investors.

6) Plaintiffs filing suit under 10b-5 must prove they relied on the misrepresentative statements or that the market price of the stock accurately reflected its value. Enron’s schemes inflated earnings reported in their 10-k filings, which in turn over-inflated their stock price. Investors relied on the financial statements Enron submitted to the SEC, which were audited and approved by Arthur Andersen.

7) Finally, the plaintiffs must prove the misrepresentation caused them to suffer losses. When Enron did finally announce that earnings would be restated, their stock price dropped 91%. Enron stock had peaked at $90 and dropped to $0.26 a share after the company was downgraded to junk bond status.[15] Shareholders suffered enormous losses and employees’ 401k accounts were rendered worthless. However, inside traders sold 20.8 billion shares worth $1.2 billion in proceeds. In addition to the proceeds from the stock, Enron executives received over a billion dollars in cash bonuses based on the false revenue numbers and stock price. The accountants, law firm and banks involved in the Enron scandal also received billions in fees and commissions.

The SEC is proposing many new amendments to enhance the current financial reporting and disclosure rules as well as shorten the time it takes to get such information into the hands of the public. There has also been discussion on expanding the types of information companies must report in their 8-K filings such as officer and director securities transactions, material changes in customers, contracts, accounting policies, and equity security offerings not included in a prospectus filing. The SEC held roundtable discussions including experts from corporate America, securities regulation, financial services, academia and other fields to further determine what actions need to be taken to ensure fraud of this magnitude does not happen again.


RECOMMENDATIONS FOR FURTHER CORRECTIONS

Major changes have occurred in the accounting industry due to the Enron debacle and many more are coming. One major change that is needed is the change from a rules based accounting system to a principle based accounting system. FASB's current accounting rules are extremely complex and offer various loopholes exposed by companies on a regular basis. A principle based system would focus on broad principles and professionals exercising judgment. Accountants and auditors may be subjected to greater liability, although that liability could be decreased with the proper controls and balances. Many countries, such as Japan, already use the principal based accounting system and many more plan on switching, such as the European Union in 2005. To date, there have not been any major catastrophes in their system such as Enron's fall in the rule based system.

Corporations should also have to change accounting firms every 3 or 4 years. This allows for the auditor to work without the threat of being fired for its honest actions. Finally, accounting firms should not be allowed to police themselves. Just as corporations need auditors to report to, accounting firms need to be culpable to someone other than themselves. Businesses and the government need to help FASB institute the proper accounting principles and rules while also helping institute and enforce them. Otherwise, the accounting world can make the rules as they see fit and enforce them too.

Corporations should have to simplify the reports given to the public. It is far too easy for them to confuse the average investor with lengthy reports and complicated financial terms. The Internet and other changes have made it easy for everyone to buy and sell stocks on their own. Therefore, corporations should aim their reports at the average investor and the footnotes to financial statements should be limited in length and simplified. Investors rarely have the time or acumen to dig through 200 pages of footnotes from one company's statements, as was typical of Enron's financial statements.

The accounting and securities fraud scandal, resulting from Enron’s aggressive corporate policies and practices, has already caused major improvements in rules and regulations that govern how public companies conduct their business. The scary reality of the Enron scandal is that no matter what rules and regulations the government puts into place, it will still be up to the individuals with the resources and abilities to defraud the public to act with a heightened sense of ethics and integrity. Officers and directors have a duty to manage the company in the best interest of the shareholders. Unfortunately, many incentive programs reward for positive performance, which often results in management taking measures to enhance performance in the short run instead of considering the future repercussions of the acts.

Endnotes:
--------------------------------------------------------------------------------

[1] Enron Annual Report, 2000

[2] World Bank, July 2003

[3] Tallahassee Democrat, January 25, 2002

[4] Enron 3rd Quarter Press Release, October 16, 2001

[5] Enron Press Release, November 8, 2001

[6] Gaurdian Unlimited, Special Report – Enron, January 24, 2002

[7] Annex Bulletin, Volume XVII, No. 2002-09, April 1, 2002

[8] Truthout.org, March 6, 2002

[9] Fortune Magazine, February 18, 2002, http://accounting-net

[10] The NY Times, March 6, 2003, http://accounting-net

[11] www.ucop.edu/news/enron/art408.htm

[12] www.llrx.com/features.enron.htm

[13] Constance E. Bagley, Managers and the Legal Environment

[14] The Enron Fraud, www.enronfraud.com

[15] The Enron Fraud, www.enronfraud.com

Additional Sources:

Bush Demands Corporate Responsibility
//usgovinfo.about.com/library/weekly/aa070902a.htm

The Business Journal, March 3, 2003
http://sanfrancisco.bizjournals.com/triad/stories/2003/03/03/focus2.html

The Collapse of Enron: A Bibliography of Online Legal, Government and Legislative Resouces
www.llrx.com/features/enron.htm

Enron.com, July 8, 2002
http://www.enron.com/corp/por/pdfs/senpsi70802rpt.pdf

Enron Fraud Info Center
www.enronfraudinfocenter.com

The Houston Chronicle, October 20, 2002
http://www.chron.com/cs/CDA/story.hts/special/enron/1624822

Political Cartoons
//politicalhumor.about.com/cs/enron/index.htm

Resources Supply Management, Inc, March 2002
http://www.rsmenergy.com/newsletters/newsletter.pdf


Stiffer penalties ahead for Corporate Criminals
//usgovinfo.about.com/library/weekly/aa011603a.htm


Smart Pros, July 1, 2003
http://finance.pro2net.com/x38861.xml

Swartz, Mimi with Sherron Watkins, Power Failure: The Inside Story of the Collapse of Enron, March 2003 pp. 86-100

Testa, Hurwitz & Thibeault, LLP, September 16, 2002
http://www.tht.com/pubs/SearchMatchPub.asp?ArticleID=841

Update on US’s Enron Investment and Lawsuit
www.ucop.edu/news/enron/art408/htm
____________________________________________________

ps. The original article is here: http://www.seanhlindsay.com/EnronProject.htm

Posted by: Alex Chory
In reply to: stock_seeker who wrote msg# 709 Date:11/5/2005 11:39:31 AM
Post #of 712

$$$$$


U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19457A / November 4, 2005
Securities and Exhange Commission v. One or More Unknown Purchasers of Call Options for the Common Stock of Placer Dome Inc., Civil Action No. 05 CV 9300 (S.D.N.Y.)
SECURITIES AND EXCHANGE COMMISSION OBTAINS EMERGENCY ASSET FREEZE AGAINST UNKNOWN PURCHASERS OF CALL OPTIONS FOR PLACER DOME STOCK PRIOR TO ACQUISITION ANNOUNCEMENT
Orders Placed From Foreign Accounts Just Prior to $9.2 Billion Acquisition Announcement; $3 Million Now Frozen
On November 2, 2005, the Honorable George B. Daniels, U.S. District Judge for the Southern District of New York, entered a Temporary Restraining Order freezing assets of certain Unknown Purchasers of Call Options for the common stock of Placer Dome, Inc. ("Unknown Purchasers"). The Commission's complaint alleges that the Unknown Purchasers engaged in illegal insider trading, in violation of the antifraud provisions of the federal securities laws. In addition to freezing approximately $3 million in assets, the Court's order (i) requires that the Unknown Purchasers identify themselves, (ii) provides for expedited discovery, and (iii) prohibits the defendants from destroying evidence.

The Commission's complaint alleges that on Monday, October 31, 2005, prior to the opening of the market, Barrick Gold Corporation ("Barrick"), a Canadian-based gold mining company, announced that it was making an offer to purchase Placer Dome Inc. ("Placer"), also a Canadian-based gold mining company ("Announcement"). Under the proposed offer, the complaint alleges, Placer shareholders would receive $20.50 per share. The Complaint further alleges that as a result of this Announcement, the price of Placer stock jumped to open at $19.82 per share - a 20% increase over its prior closing price on Friday, October 28, 2005.

The Commission further alleges that on October 25 and 26, while in possession of material, nonpublic information regarding this acquisition offer, the Unknown Purchasers, using overseas accounts, purchased over 10,000 call option contracts for Placer stock in an account at a broker-dealer in the United States. As the complaint alleges, over 5,000 call option contracts were "out of the money" and set to expire in November, within weeks of the purchase date. The complaint further alleges that, as a result of the increase in price of Placer stock following the Announcement, the unrealized illicit profits on these option contracts total over $1.9 million.

The Commission alleges that the Unknown Purchasers in this case engaged in insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest thereon, and civil monetary penalties.

The Commission wishes to thank the Securities Commission of the Commonwealth of the Bahamas, the Bundesanstalt fur Finanzdienstleistungsaufsicht in Germany, the Swiss Federal Banking Commission and the Chicago Board Options Exchange for their assistance in this matter.



http://www.sec.gov/litigation/litreleases/lr19457a.htm

Franklin D. Ponzi’s Scheme
by Gary North


On Sunday morning, March 21, I saw what I never expected to see. The lead story on the "Sunday Morning" news show was on the future of Social Security/Medicare: "Cloudy Future For Retirees."

Charles Osgood, the show’s host, introduced the segment by saying that Social Security is the third rail of American politics: "Touch it, and you die." This is a familiar slogan, based on an analogy with the New York City subway system’s electrical power supply. The slogan goes back to the Goldwater campaign, but it’s nonetheless true. Yet the show basically called for Congress to touch the rail.

Not one politician appeared on-screen to comment on the segment’s details. This came as no surprise.

The on-line version’s text of the segment does not match what was shown on-screen. First, the segment began with a verbal comparison: Social Security as a Ponzi scheme. There was no explanation of what a Ponzi scheme is: a fraud by which early investors are paid above-market returns out of funds provided by later investors. The system goes bankrupt when new investors are too few to pay off previous investors. The system always dies.

Second, the screen displayed the estimated shortfall, or net unfunded liability, of both programs: $50 trillion.

I could hardly believe my eyes and my ears. Here was a mainstream news show, broadcast on a network, that admitted the truth. Never before had I seen this with respect to Social Security/Medicare. The show was saying what I was saying publicly back in 1976. That’s a time delay of a mere 28 years. But I was hardly the first to say it. My high school civics teacher told us back in 1959. Here was CBS News letting the public know the truth after a mere 45 years delay. It’s a new world!

The show even had a photo of Ida Fuller. I had written about her in 1976. As I recall the statistics, she paid in $22, retired, and lived to be a hundred. She collected $22,000. Here is what the on-line script says: $22.54 to $22,000. On-screen, there was an update: $24.75 to $22,888. I’ll go by the revision.

About 77 million children were born between 1946 and 1964. At Woodstock years later, some danced and others skinny-dipped.

But in four short years, those kids, who are now adults, will start collecting Social Security.

If some of them take the early retirement option, they can start collecting in 2004. Most of them will choose to wait until 2012. I’m eligible for full benefits in 2008. Those who were born in 1946 will have to wait another four years . . . if the law isn’t changed again.

The show’s director added some great footage of Woodstock attendees – long hair, peace signs, and Salvation Army clothes that had been donated by the Amish. At least they were wearing clothes.

Given what is going to happen to Social Security/Medicare, I hope they saved some of those clothes.


A PERFECT STORM

The director must have seen George Clooney’s movie.

It may seem like it’s hyperbolic to say there is a huge storm coming. But, CBS News Correspondent Joie Chen explains, the facts are really irrefutable.

Economist Lawrence Kotlikoff says "Baby Boomers" will hit the Social Security system the way a giant wave hit the boat Andrea Gale in the movie "The Perfect Storm."

At this point, there was a great screen shot of the movie, when the wave capsizes the little boat.

"The entire country is getting older," says Kotlikoff. "In 30 years, we’re going to have 100 percent more old people, and only 18 percent more young people to pay their benefits."

The script immediately got worse.

"In 30 years, the entire country is going to be older than Florida is today," explains Kotlikoff. "In 50 years, we’re going to have enough people over 100 to fill up Washington, D.C. We’ll have enough people over 85 to fill up New York City, Los Angeles, Chicago, Houston and a couple of major other cities. We’re talking about very, very old."

Then we were treated to screen shots of geezers who looked really old, even to me.

All I could think of was this: "I hope I’ll be in one of those cities. Maybe I’ll even make it to Washington, D.C."

Then we got the Ida May Fuller photo and the story of the earliest big winner on the Ponzi scheme. Those days are long gone. The early birds got the really fat worms.

But in 1940, there were 42 workers paying into the system for every Ida May Fuller – every retiree – taking money out. Not any more!

By 1950, there were only 16. Today, there are barely three. And in 2030, when most "Boomers" are retired, it will be down to two.

All I can say is that the two I get had better be willing to hustle, because I’m not going to tolerate any K-Mart retirement program.


LIVE LONG AND PROSPER

Moses wrote this, 3,500 years ago:

The days of our years are threescore years and ten; and if by reason of strength they be fourscore years, yet is their strength labour and sorrow; for it is soon cut off, and we fly away (Psalms 90:10).

As we approach Moses’ limit, the system’s finances will get into deep trouble.

Also, retirees are living longer. In 1940, life expectancy was in the 60s. Today, it’s in the 70s and soon will be approaching 80.

Eighty? Only 80? Not this would-be retiree. I expect science to get its act together. The gerontology brigade owes me for all the tax money I shelled out to keep them in government grants.

Add it all up and the United States has a problem. In 14 years, Social Security will begin running at a deficit. By 2042, the shortage will cause an automatic 27 percent cut in benefits. In about 70 years, Social Security could be short $24 trillion.

In 2042, I’ll be a hundred, and living in Washington, D.C. Don’t talk to me about any 27 percent cut! If you do, I’ll vote your upper-middle-class tail out of office, and so will my peers, who will have more votes than any equally well-fed, well-organized special interest group that you ever heard of. Keep your finger off that third rail, sonny, or you’ll pay dearly for it. I know my rights! You’re just going to have to find a way to make up that shortfall, or else your career will have a long fall. Get my drift?

Looking to the future, Federal Reserve Board’s Alan Greenspan said in a report, "Our problem essentially is we have been making commitments without focusing on our capability of meeting them."

Look, Greenspan, I don’t want to hear about our problem and our capability. I want to hear about THEIR problem and THEIR capability. My ship is about to come in. I’m about to get out of "our" group. I’ve been in it too long.


BELLYACHERS

Hart McIntyre says, "It’s something you put money into, and you look at your check every week and you go: ‘Hey, I’m putting money into this. It’s mine. When do I ever get it back? Am I going to get it back?’"

Look, Hart, quit bellyaching. So, maybe you got into Franklin D. Ponzi’s scheme a little late. That’s the luck of the genetic draw. Win some, lose some. You’ll just have to get your two workers to fork over a little more than they presently plan.

Hart and Phyllis McIntyre are both in their late 40s – the heart of the "Baby Boom." They live in Parkland, Fla. He owns a small company. She’s a schoolteacher. They have three children. And, they’re saving on their own for retirement.

"We look at Social Security as something that will be sort of icing on the cake," says Hart McIntyre. "To depend on Social Security, we don’t think that will meet the lifestyle we want to live as we move into retirement."

That’s the right attitude, Hart! You, too, Phyllis. Stay in the game. Earn more money. I want you folks to be my two workers. Do you think you can you find the third one, who thinks just like you do?

To pay for those Social Security checks, Chairman Greenspan has two ideas: raise the retirement age or cut the annual cost-of-living adjustment.

"We’re in the midst of raising the age [of retirement] from 65 to 67," says David Certner, director of Federal Affairs for the AARP.

Not yet! Not yet! Wait six years. Then it’s OK. But don’t rush into this. Take your time. Appoint another committee to study this.

Certner says the decision to raise the retirement age to 67 for everyone born after 1959 was made in 1983 by a commission chaired by Alan Greenspan. The director says America shouldn’t go back to the same well for more money.

You tell ’em, Certner. Find another well.

"A lot of people just don’t have the physical or health ability to continue to work," says Certner. "It’s a lot different if you’re working in a nice office behind a computer or you’re really out doing – real hard labor."

What do you mean? Computer work is really hard work. You can’t begin to know. I just hope I can make it for another four years. You hear that, Hart? You hear that, Phyllis? I’m old. I’m tired. I need help. You’ve got to stay in the game.

Back in 1940, workers paid 1 percent of their salaries into Social Security, up to $3,000.

Over the years, the tax has gone up. Each worker now pays 6.2 percent, up to about $89,000. Employers pay an additional 6.2 percent for each worker. AARP favors raising that – arguing the hit would be felt mostly by the most well-off.

You hear that, Hart? You got that, Phyllis? AARP knows what’s good for the system. You’ve got to get your income up. Both of you.

That idea does not sit well with Phyllis McInytyre: "I think, probably in general, people would say, ‘Why should I put more in if I’m not even guaranteed I’m going to get what I have now.’"

Phyllis, you’re beginning to sound like a slacker. Stop that. If you start funnelling money out of your fair share of Social Security into your own private retirement fund, the system will go into the red earlier than 14 years from now. Don’t even think about trying to weasel out at this late date.

"The more and more you change Social Security to increase taxes on one class of people, and provide greater benefits to another class of people when those payments and benefits are not linked, it does, at its core, change to a welfare program and not a public pension program."

Phyllis, Phyllis, Phyllis: it was never a public pension program. It was always a welfare program. It was packaged as a pension program by President Ponzi, but he knew better. This is all about politics. It’s about votes. How many votes do you have, Phyllis? Sure, you youngsters could gang up on us, but we can guilt-manipulate most of your peers. We always have. Also, if pressed, we’ll use this argument: "Cut Social Security, and your in-laws will have to move in with you." Try to match that, Phyllis!

"I’d rather have the option of taking money and putting it into other types of investments rather than putting it into Social Security," says McIntyre. "We’re taxed enough as it is. We’re taxed too much."

Hart, you’re beginning to sound like Phyllis. That’s not the right attitude. You see, we owe it to each other. Does that sound right? No? Well, how about this one? "If old folks don’t have money to spend, the economy will go into recession." You don’t believe in all that supply-side nonsense, do you? That someone’s demand should be related to his prior production? We know better. Demand is what drives this economy. I plan to do a whole lot of demanding. People my age are really skilled in the demand side of economics. In the domestic division of labor, we have specialized in demand. Don’t mess with us. And that includes your friend, Eugene Stuerle.

"We’ve largely succeeded in giving fairly good health and many years of retirement to an elderly population," Stuerle says. "It now turns out that we have other needs of society, such as children who are generally poorer than the elderly population."

He’s right. More than 16 percent of those under 18 currently live in poverty, compared to about 10 percent of the elderly.

If they are poor, then it’s because they aren’t working. Let’s get the supply-side equation correct: young people work, old people demand. These grade-school slackers need to get jobs and pay taxes. They need to make contributions into the program. I love that word: "contributions." It makes working people feel really good about themselves. I feel good about them, too, just so long as they quit bellyaching.

If you retired in 1970, you could expect about $300,000 in lifetime retirement benefits, including Medicare. In the year 2000, it was $650,000. By 2030, it will be more than a million dollars.

So, my advice is for people who expect to retire in 2070 to aim high. You can do it! Don’t quit now!

Currently, children are the poor parts of our population. And so the question arises, shouldn’t Americans be putting more money to children and perhaps a little less to the elderly?

A story about older Americans takes on a different perspective when it’s looked at from the eyes of those who will have to pay for the Boomers – today’s kids.

Kids should be seen and not heard. Remember this: kids don’t vote. Old people vote. Got that, Congress?

There are fewer of them because the Boomers had fewer children. Time spent climbing the corporate ladder, along with high rates of divorce, cut down the time to have that second or third baby.

There, you see? Old people are the wave of the political future, not a bunch of kids. When you’re talking "constituency of the future," you’re talking old people.

"If we current adults don’t accept a higher tax liability or accept lower expenditures on our behalf, we’re going to try to dump the entire problem into the laps of our kids," says Kotlikoff. "That’s not really possible for the kids to handle, because it would require doubling their lifetime taxes, compared to what we’re facing."

You know what I say? I say, "When the going gets tough, the tough get going." That slogan was on the wall of my high school dressing room. It moved me deeply. It made a great impression. Anyone who balks at this late date is going to get swats.

No one suggests the checks of current or soon-to-be retirees are in jeopardy. So, David Certner of AARP says he doesn’t expect it to be a burning issue in the presidential election.

"It’s a political year. People don’t want to deliver bad news to people," says Certner. "There is no consensus right now about what is to be done for Social Security."

He’s got that right! John Kerry is not going to hold George Bush’s feet to this particular fire, let me tell you. So, this problem can be delayed again. For at least four more years. Maybe eight. Maybe fourteen.

But there is the knowledge, the longer we wait, the worse it will be. To paraphrase an old television commercial: "You can pay me now, or you can pay me later."

OK, pay me later. Keep paying me later. I plan to be here for a long time.

March 24, 2004

Gary North [send him mail] is the author of Mises on Money. Visit http://www.freebooks.com. For a free subscription to Gary North's newsletter on gold, click here.

Copyright © 2004 LewRockwell.com
_______________________

Link: http://www.lewrockwell.com/north/north258.html

Why Corporate Images Die a Slow Death
by Naseem Javed

When sleek world class corporate images go up in flames like ENRON, WorldCom, GlobalCrossing, and start looking badly charred like ENWRONG, WorldCon, DoubleCrossing or when names become obvious liabilities like, Consignia,Thus,Thales, Xansa, or Uniq ... then it’s time to call the gate-keepers of Corporate Identity on a red carpet.

Andersenization of corporations started when voodoo accounting met voodoo branding and a hundred million dollar corporate image road show became a standard. Start with, a splashy logo, a great color scheme, pick any name along the way and roll out a Corporate Identity show. Steal money from shareholders, but give them a decent Corporate Image, at least, in return. CEO’s forged ahead making their marks, the likes of Zorro! Only this time, it was zero, really Zero. While ENRON, led the way, with the only tilted logo in the industry, clearly pointing the slippery, southbound slope, shareholders gasped and waited.

Within the last few months alone, PWC Consulting, did a self-destructive branding number to become Monday. A dumb name of the period. During this 60 million dollar makeover and while still in a shock gets picked up by IBM for a merely 3.5 billion. The name Monday is dropped immediately. Only a year ago, PWC did reject a 12 Billion dollar offer by Hewlett Packard.

Deloitte, spends 40 million to become Braxton , a name they picked up from the past so that the future can be their judge. KPMG also kicks in 40 million to be re-named to BearingPoint. Their challenge is now to unite 16,000 bright consultants under this difficult term on the global scene before they reach their breaking point. When two complicated ideas like 'bearing' and 'point' are combined they will only become initialized as BP, because it’s only the fickle and lazy public at large which decides what to think of a name and what to call it and no amount of money will ever change their mind … In the meanwhile, the real BP, which is British Petroleum, is trying very hard to shed the ‘British only’ image by re-inventing as BP as in "Beyond Petroleum" one of their short-lived campaigns. We are not amused. BearingPoint’s symbol is not BP rather it’s BE. Pity. Lastly, Anderson, before their demise also spent 160 million on Accenture, a name suggested by their employees. So be nice to your employees who know one day they may end up naming your corporate destiny.

This fancy colorful makeover of the world's top four consulting companies, plus a 300 million budget for four new names, has certainly guaranteed them a chapter in branding history. While the ad agencies collect their design awards the army of consultants get ready to fight for their corporate identity.

The new laws of Corporate Image clearly point to the failure of the traditional Corporate Identity practice, whereby, logo, design and specific color schemes were everything and the name, only one of the components. Today, under the new laws, names are everything while other paraphernalia is certainly lost in the crowd. A name is what a corporation needs, to talk about, remember, type, chat, refer, call, praise or curse. While the logos, designs and colors you forget and do not call for, in these cyber driven economies they have lost their value ... today everyone is forced to TYPE … better remember the name and better remember the spelling … better like it or click on to the next one. Welcome to global e-commerce.

One hour on the net and you go through enough logos, artworks and design equal to the entire work of all the logo shops in the whole world created during the last century … as business gets more complex, search-ability of a name becomes ever so critical. Under the new laws of corporate image, its all in the name, stupid.

Here are 7 steps to measure the life of a Corporate Image


Name is lost in the crowd for being similar or identical to thousands of others. Names borrowed from a dictionary, or part of everyday lingo, never achieve distinction and despite extraordinary expense they will simply die out of exhaustion.


Name is too old fashioned to convey today’s dynamics.


When the spelling of a name requires a higher IQ. Weird spellings are used to avoid trademark problems or to fit the creativity of a spinning logo. This only ensures obscurity. Spell it four different ways, and it will only bring 25% of the hits or profits.


More money is spent in explaining the origin of the name. Why advertise to educate the universe of this name dysfunctionality. Customers only care about their perceptions - they don’t care about your cute story.


Corporation does not own a trademark or an identical domain name. Why bother?


Name is embarrassing in certain countries.


Name is too long, too difficult, too confusing, too complicated or simply, too boring. Using lower cases, dashes or slashes and other dingbat characters in a name, will only ensure its self-destruction.

So, are we are out of names? Hell no. This is only a myth, successfully established by ad agencies and logo shops, leaving clients with often silly names. Naming is a serious black and white exercise and should not be confused with color design, logos, and holistic branding campaigns, because today these components have very limited value. Naming is naming, which is when a name has been selected under the proven and established guidance of a master naming architect.

Voodoo accounting is hurting us all; voodoo branding is hurting agencies. Now is the time to get serious about corporate names.

END.


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Naseem Javed, is a syndicated columnist, author of Naming for Power, Founder of ABC Namebank International, world-renowned lecturer, and an expert on corporate naming issues. Naseem is a committed follower of sobriety in corporate communication strategies and a harsh critic of the "beer commercial" mentality on corporate naming and the influence of voodoo branding on our culture. A hilarious speaker, he has a deadly message on why Corporate Image USA is on fire.

nj@njabc.com
www.naseemjaved.com
www.abcnamebank.com
212-697-7700 New York
905-794-0055 Toronto
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Link: http://www.refresher.com/!njimages.html

Get ready for corporate supertrials
January 20, 2005


(Do you solemnly swear ... taking the oath this year will be, from left, Bernard Ebbers, Dennis Kozlowski, Richard Scrushy and Ken Lay. Photos: AP, Reuters)


US prosecutors have been chasing corporate crooks and piling up big statistics in court for five years. Now get ready for a series of trials featuring many of the biggest executives charged with the most audacious crimes of their era.

A few big figures, such as Martha Stewart and Frank Quattrone, were in the mostly no-name court line-up last year. But 2005 will be remembered as the year of the marquee CEO on trial. Take a look at this line-up:

Bernie Ebbers: The trial of the former WorldCom chief executive charged as the front man for an $US11 billion ($14.5 billion) fraud begins this week in New York.

Ebbers is charged with fraud and conspiracy in the WorldCom collapse, the largest bankruptcy in United States history. Former chief financial officer Scott Sullivan, who cut a plea deal, will be the government's star witness.

This will be an important test of the "idiot CEO" defence (see Richard Scrushy and Ken Lay, below). Ebbers is expected to say he left all the numbers to Sullivan, who told prosecutors what they wanted to hear when he got in trouble. Ebbers was a big-picture guy.


Dennis Kozlowski, the sequel: The former Tyco International chief, who became a symbol of material excess, began his retrial in New York on Tuesday. The first trial of Kozlowski and Tyco CFO Mark Swartz ended in a mistrial after a juror favouring acquittal found herself in the middle of a media frenzy and ultimately received a threatening note.

Kozlowski and Swartz are charged with stealing hundreds of millions of dollars from Tyco by hiding details of their compensation from directors and selling big blocks of company stock after inflating its value.

But it was Kozlowski's outrageous spending on the company tab (including $US15,000 for a poodle-shaped umbrella stand) that grabbed the headlines.

Richard Scrushy: The founder of HealthSouth Corp is charged with masterminding a $US2.7 billion earnings fraud in a trial underway in Alabama. A jury is being selected.

The HealthSouth scam wasn't as big as the WorldCom fraud, and the company continues to operate. But Scrushy takes the cake when it comes to defence stories. He wasn't just the idiot CEO, he may have been in a coma.

Prosecutors will rely on five former chief financial officers who will all implicate him as ringleader; one secretly recorded the former chief executive. Scrushy will blame his lieutenants for inflating HealthSouth's profits. See a pattern?

Ken Lay: The former Enron chairman faces two trials. One, in which he faces fraud, conspiracy, and bank fraud charges alone, will probably be held later this year. The other, in which he is charged along with two other former Enron executives, may not make it to court until next year.

Former chief executive Jeff Skilling and chief accounting officer Richard Causey will join Lay at a second fraud trial.

The Enron team was on the job during the most infamous corporate fraud of its time. More than 5000 employees lost their jobs when Enron filed for bankruptcy in 2001. Lay, as you surely know by now, was just another big-picture guy in the dark.

The idiot CEO strategy may sound risky, but it has been successful elsewhere. A jury in Connecticut was unable to reach a verdict against former Cendant Corp chairman Walter Forbes two weeks ago, despite incriminating testimony from three executives.

The trials ahead culminate the effort to hold people criminally responsible for the worst excesses of a dangerously excessive time. But don't count the idiots out yet.
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Link: http://www.smh.com.au/news/Business/Get-ready-for-corporate-supertrials/2005/01/19/1106110810821.htm...

Banks, law firms were pivotal in executing Enron securities fraud

-Nine banks hid loans, set up false investments and facilitated phantom Enron sales
-Bank executives profited personally from "Ponzi scheme"
-Law firms structured phony deals
-Additional insider trading documented

The Enron fraud perpetrated by the Houston-based energy giant and its auditors succeeded because of the active complicity of several prominent banks and law firms, according to new allegations in federal court today.

The University of California, the lead plaintiff in the Enron shareholders lawsuit, filed a consolidated complaint in the U. S. District Court for the Southern District Court of Texas in Houston, adding nine financial institutions, two law firms and other new individual defendants to a list that already included 29 current and former Enron executives and the accounting firm of Arthur Andersen LLP.

The 485-page amended complaint lays out the scheme in detail, naming J. P. Morgan Chase, Citigroup, Merrill Lynch, Credit Suisse First Boston, Canadian Imperial Bank of Commerce (CIBC), Bank America, Barclays Bank, Deutsche Bank and Lehman Brothers as key players in a series of fraudulent transactions that ultimately cost shareholders more than $25 billion. At the same time, a number of top bank executives profited personally from the schemes, according to the complaint.

Two law firms were also added to the list of Enron defendants because of their significant and essential involvement in the fraud - Enron's Houston-based corporate counsel Vinson & Elkins, as well as Chicago-based Kirkland & Ellis, which Enron used to represent a number of so-called "special purpose entities."

"These prestigious banks and law firms used their skills and their professional reputation to help Enron executives shore up the company's stock price and create a false appearance of financial strength and profitability which fooled the public into investing billions of dollars," said James E. Holst, the university's general counsel. "In return, these firms received multi-million-dollar fees, and some of their top executives exploited the situation to cash in personally."

The amended complaint also documents a total of almost $1.2 billion in insider trading by 28 Enron directors and officers, approximately $171 million more than previously disclosed. Two Enron insiders, Kenneth Lay and Robert Belfer, together sold $144 million more than has been reported.

Bankers tricked investors with dual deception

Many of the financial institutions named in the complaint helped to set up clandestinely controlled Enron partnerships, used offshore companies to disguise loans, and facilitated the phony sale of overvalued Enron assets. As a result, Enron executives were able to deceive investors by moving billions of dollars of debt off its balance sheet and artificially inflating the value of Enron stock.

For their part, the law firms allegedly issued false legal opinions, helped structure non-arm's-length transactions, and helped prepare false submissions to the U. S. Securities and Exchange Commission.

The banks played a dual role in the elaborate scheme, which the amended complaint describes as "a hall of mirrors inside a house of cards." While bank executives were helping conceal the true state of Enron's precarious financial condition, securities analysts at the same banks were making false, rosy assessments of Enron to entice investors.

As underwriters in the sales of Enron securities, the banks also misled the public by approving incomplete or incorrect company statements. J.P. Morgan Chase, for instance, helped Enron raise $2 billion in publicly traded securities that are now almost worthless.

"Instead of protecting the public from the Enron fraud, the bankers knowingly chose to become partners in deceit," said William Lerach, senior partner at Milberg, Weiss, Bershad, Hynes & Lerach, the university's lead counsel. "They were not only willing participants but profiteers. Their executives followed the example of Enron's insiders, getting rich off thousands of unwitting pensioners and other investors who entrusted - and lost - what for many was their life savings."

Bankers made inside deal for themselves

Executives at several of the banks took advantage of their positions to invest more than $150 million in one of the Enron-controlled, off-the-books partnerships called LJM2, which they knew would pay an exorbitantly high return because of "self-dealing" transactions with Enron, according to the complaint.

From the start, the banks provided "extraordinary" assistance to Enron to set up LJM2. In information presented for the first time, the complaint reveals the "prefunding" of LJM2 by J.P. Morgan Chase, CIBC, Deutsche Bank, Credit Suisse First Boston, Lehman Brothers and Merrill Lynch at the end of December 1999 - a critical juncture for Enron. Although under no obligation to do so, the banks advanced nearly 100 percent of the money for LJM2, including a $65 million credit line.

LJM2 used the money in the final days of 1999 to buy four Enron assets that the company had failed to sell to other parties, enabling Enron to report large gains and prevent a sudden decline in stock prices that would have meant large losses for the company and the banks.

The deals, described as "sham" transactions, involved the Nowa Sarzyna power plant in Poland, the MEGS, LLC natural gas system in the Gulf of Mexico, the Yosemite certificates and a set of collateralized loan obligations. Later, LJM2 sold the assets back to Enron.

The four transactions allowed Enron to overstate its profits, conveniently meeting forecasts put out by the company and bank analysts. Simultaneously, bank executives who had invested in LJM2 were enriched when the special-purpose entities paid millions to LJM2.

Banks, law firms helped Enron conceal loans and create fake profits
The banks and law firms are accused of playing an instrumental role in creating a mythical picture of Enron profitability. They helped set up transactions that appeared to be independent, but "which, in fact, Enron controlled through a series of secret understandings and illicit financing arrangements," said Lerach.

Loans, which should have counted as debt, were made to look like profits from sales. The complaint explains how J.P. Morgan Chase helped Enron hide $3.9 billion in debt through a company known as Mahonia Ltd., located in the Channel Islands off England. The bank disguised approximately $5 billion in back-and-forth transactions in which Enron sold gas and oil contracts to Mahonia, but then secretly repurchased the contracts.

The complaint also reveals that Vinson & Elkins gave J.P. Morgan Chase and Enron legal cover for the Mahonia transactions by writing an opinion corroborating them as legitimate.

Citigroup used its Delta subsidiary in the Cayman Islands to carry out $2.4 billion of financial "swaps" with Enron that the lawsuit says "perfectly replicated loans and were, in fact, loans," but were not disclosed on Enron's books. Credit Suisse First Boston gave Enron $150 million in a transaction that the lawsuit says was "made to appear to be a 'swap,'" but was actually a loan, as a bank officer later admitted.

Canadian Imperial Bank of Commerce (CIBC) also formed a partnership with Enron, called EBS Content Systems, and pretended to invest $115 million, enabling the energy company to report $110 million in profits. However, because Enron secretly agreed to guarantee the $115 million, the lawsuit calls the transaction a "contrivance" that inflated the company's profits.

CIBC likewise lent $125 million to the Enron venture New Power IPO, allowing the company to post fictitious profits, while again receiving a secret guarantee that protected the bank. Later, Enron had to reverse the entire $370 million in profits it had created by the New Power deal.
In other cases, Enron and the banks made loans look like investments. Barclays gave $11.4 million to two investors in Chewco, another of Enron's off-the-books partnerships. While the money gave the appearance of outside investment in Chewco, Enron secretly subsidized the loans through a $6.6 million cash deposit with Barclays. The complaint describes the two investors as "strawmen."

Schemes propped up Enron stock but eventually collapsed

The banks' complex maneuvers on Enron's behalf were intended to bolster the value of Enron stock and its apparent creditworthiness. Bank officers were aware that if the price fell, Enron would be required to issue additional stock that would diminish the company's investment rating and limit access to new capital, likely collapsing the scheme from which the banks were profiting. At one point, executives of Credit Suisse First Boston strongly warned their Enron counterparts that the company would be ruined if the stock dropped to $20 a share.

For the first time, the amended complaint reveals that some of the financial institutions were themselves at risk for extensive losses because they had written millions of dollars of "credit default puts" on Enron securities, requiring them to make good on Enron's publicly traded debt if the company defaulted. This gave them strong incentives to keep Enron afloat.

When Enron's financial manipulations finally became public and the stock collapsed in November 2001, executives from J.P. Morgan Chase and Citigroup pressured Moody's to keep Enron's credit rating in place until the banks could arrange a bailout sale of Enron to avoid insolvency and forestall a full-scale investigation into the company's dealings. A proposed sale to Dynegy fell through, however, and Enron filed for bankruptcy on December 2, 2001.

The losses of the plaintiffs in the shareholders class action, who purchased Enron equity and debt securities between October 19, 1998 and November 29, 2001, are estimated at more than $25 billion.

The amended complaint also extends the responsibility of Enron's auditing firm, Arthur Andersen, to cover the role of 24 Andersen executives and several of the firm's international entities, including Andersen Worldwide, SC, and affiliates in Brazil, the Cayman Islands, India, Puerto Rico and the United Kingdom.

"The defendants' sophisticated manipulations allowed them to enrich themselves at the expense of millions of Americans who lost billions of their hard-earned dollars invested in Enron for their retirements," said Holst. "That's not fair. Our lawsuit seeks to return those funds to their rightful owners and to retirees and working families across the country."

Monday, April 8, 2002
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Link: http://www.ucop.edu/news/enron/art408.htm

Structured Finance
The Enron Debacle

This page uses the Enron fraud and collapse to describe the nature and intent of structured finance. It looks at the way the financial institutions used it to aid and abet Enron's fraud. It examines the roles of Citigroup bankers and analysts, accountants, lawyers, and also the political strategies used by these groups.

CONTENTS

Introduction
-Fraud
-The Real Story
-A Sick System
-Citigroup
-The Deceivers Deceived
-Structured Finance and Conscience
The Enron Scandal
-Relevance
-The Enron Story
-The customers
-Enron's wealth
-The fraud
-Comparable situations
-The critical importance of image
-Whistle Blowers
-The collapse starts
-A Life Line is offered
-The Lifeline is Withdrawn
-Bankruptcy
-Many Others Behaved Similarly?
-The investigations
Structured Finance
-Doing it Milton Friedman's way
-History of Structured Finance
-Morality
-The law
-In a Nutshell
Enron's Structured Finance
-Partnership Deals
-Prepay schemes :: Loans hidden in sales
-Other Loans became profits
-Tax Evasion
The Banks and Enron
-How Many Banks?
-Loyal Supporters
-Settling the Allegations
-A Long History Together
-Hedging Loans
Market Analysts and Enron
The Enron Accountants
The Enron Lawyers
Power and Political Influence
-Controlling Democracy
-Lobbying
-Donations Backfire for Enron
-Political Links and donations
-Arthur Andersen and Political Influence
Ideology and the Legislative Process : Oversight Failure


Introduction

Fraud

Enron was the first of the great corporate collapses of the 21st century. Like the others it blew up in a massive scandal of fraud and greed. A close look at what happened gives a very different picture to that revealed in the sound grabs and headlines which penetrate our consciousness in far off Australia.
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- - - - everyone instantly gets an epic fraud in which arrogant high-fliers stacked the deck to fleece thousands of peons to the tune of zillions. The United States of Enron The New York Times January 19, 2002
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The Real Story

The real story is not about Enron. The real story is about structured finance and the giant financial institutions who developed it, embraced it and used it as a vehicle for their own ends without any regard for the social consequences. They set up and arranged the fraud.

The real story is also about the large number of credible financial giants who participated in Enron's fraud. Without their active participation this fraud could not have occurred.

A Sick System

This is not a few bad guys, but a sick and disturbed system and we in Australia are increasingly part of that system and embrace the beliefs which give it legitimacy. Increasingly we think the way it thinks. It is interested in making money from our health care system.

It is not about illegality but about the morality and ethics of all of those involved. Some of them believed that what they were doing was legal and much of it may well have been. That it was totally immoral and quite unacceptable clearly did not worry them at all.

Citigroup

Once again Citigroup was at the helm making arrangements for the largest portion of the scam. Citigroup was less brazen in its denials when it was prosecuted and this is why it earned a lesser fine for its complicity than Morgan Chase and Merrill Lynch. Those defrauded are also pursuing a long list of other banks for compensation. They too played their part in what happened and picked up the scraps from the trough.

The Deceivers Deceived

To some extent the financiers also were victims. Because they were competitors and because Enron used several of them to assist in the fraud none of them realised how imminent the collapse was until too late. They lost money too but much less. Enron kept its own council and played one against the other.

Structured Finance and Conscience

Structured finance was the credible sounding vehicle which the co-conspirators advising Enron used to make what they were doing sound legitimate. Somewhere deep down they obviously knew that what they were doing was wrong. This was never formally objectified and recognised. It was officially seen as legitimate and the investment banks protested angrily when they were accused of complicity in fraud.

This deeper recognition of what they were doing is seen in the emails and private notes made by individuals as they interacted with one another and experienced doubts. It was the undeleted emails that finally gave the lie to public assertions, and led to large fraud settlements by the banks. It prompted shareholder litigation against the banks claiming US $25 billion.

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Here's the link to the rest of this large article: http://www.uow.edu.au/arts/sts/bmartin/dissent/documents/health/citienron.html

Investment/Brokerage Fraud

Investment advisors and stockbrokers are responsible for providing information that is accurate and complete to investors. Investment fraud (also known as brokerage fraud) occurs when an advisor, stockbroker, or brokerage firm offers inaccurate, incomplete, or biased information in an effort to control the market or draw business. The SEC (Securities Exchange Commission) has established guidelines for stockbrokers and advisors to follow to ensure that investment advice is being given fairly and consistently.

Types of investment fraud include:

Biased investment advice - An advisor may have a preference toward or against a specific company for various reasons and advise his or her clients according to that bias instead of research results.

Unfounded advice - An advisor may persuade or discourage an investor toward, or against a company, without the support of appropriate research.

Contradictory investment advice - An advisor may give contradicting advice to different clients.

Continuing a risk - An advisor may advise his or her client to 'stay in' when the risk is apparent and the potential gain is unlikely.

Conflict of interest - An advisor or firm that has outside ties to a business may sell that business's stock, even if the investment opportunity is not the most lucrative for the client.

SEC guidelines for stockbrokers

Because the investor-advisor relationship balances the trust of the investor with the knowledge of the advisor, guidelines are necessary to protect both parties. The investor must receive accurate information, but also must understand the risks involved in investment. In October of 1998, the SEC set standards for how stockbrokers, dealers, and advisors would distribute information (section IV of the "Compliance Guide to the Registration and Regulation of Brokers and Dealers"). The intent of the compliance guide was to create an investment environment where the investor knew his advisor was seeking to find him or her the best possible gains, and the advisor could perform his or her duties reasonably within a risk market with normal fluctuations. These rules are the standard by which fraudulent companies are now being judged:

Fair Dealing – By establishing oneself as a stockbroker, an individual becomes accountable to the standard rules and laws of the profession. Among these standards are requirements to: "execute orders promptly, disclose material [relevant] information…charge prices reasonably related to the prevailing market, and fully disclose any conflict of interest."

Best Execution - The stockbroker must find the best deal for the client. As an advisor, he or she is responsible to the client for the money being invested. An advisor must assess what the appropriate risk level for the investor is, and which market will provide that investor with the greatest gains. The stockbroker is responsible to buy and sell within this market.

Customer Confirmation Rule - The stockbroker must receive the investor's permission before purchasing stocks, bonds, or mutual funds. The investor must be informed as to:

The date and time the investment will be made

Which companies will be invested in

How many shares will be purchased

What the purchase price of each share is

How much stockbroker commission will be charged, and how it will be charged (order flow, or mark up/mark down)

If the stockbroker or dealer is an SIPC (Securities Investor Protection Corporation) member

Expected yield

Disclosure of Credit Terms - If the client desires to purchase securities on credit, the dealer must explain the credit terms upfront. In addition, the status of the client's account must be provided when he or she initially purchases shares, and again on each of the client's quarterly account statements.

Short Sales - In a short sale a stockbroker sells securities that are 'on loan.' If an investor realizes that the value of his or her shares is going down, he or she may lend them to a stockbroker, who will sell them at the market price. When prices go down, the stockbroker will repurchase the shares at their low point, and make a profit between the difference of what they were sold at (high market price), and what they were bought back at (new, low market price). Regardless of whether share prices go up or down, the stockbroker must return the original number of shares to the lender. He or she is, in a sense, borrowing them against a drop in the market. These sales are highly restricted.

Trading During an Offering - A public offering occurs when new securities are made available to the public. When a company first 'goes public,' it will hold an initial public offering (IPO). Individuals participating in an offering may not manipulate the price of the security. For example, a brokerage firm that is underwriting an IPO may not purposefully undervalue its IPO client's shares to make profits when the shares hit a more accurate market price.

Inside Trading - Stockbrokers, dealers, and advisors often have access to private material. Dealers may not make trades based on this information. Preventative measures must be taken to maintain an equal distribution of information among investors (that is to say, certain investor should not be privileged with inside information). Some ways through which information leaks can be prevented are:

Employee training

Trading restrictions for employees of brokerage houses
Information control between departments of brokerage firms


Recent Fraud Accusations

Merrill Lynch

Stock analysts at Merrill Lynch were accused of committing brokerage fraud on April 8, 2002. New York's Attorney General, Eliot Spitzer, brought securities fraud charges against the analysts, claiming they'd given investors biased advice, favorable to companies who used Merrill Lynch as their investment banker. Merrill Lynch's head Internet investment analyst, Henry Blodget, rated InfoSpace stock, for instance, as 'buy' through 2000, though in his own correspondence he called it a "piece of junk." InfoSpace did not do its investment banking through Merrill Lynch, but Go2Net, which InfoSpace was in the process of purchasing at the time (summer 2000), used the firm as its financial advisor.

Spitzer cited the poor advice given in this instance and others as evidence of a conflict of interest. Brokerage firms bring in immense revenues when companies choose them as their investment bankers, and when they act as underwriters during public offerings. Although Blodget and the analysts under him played no official role in the investment banking side of Merrill Lynch’s business, their favorable coverage encouraged businesses to choose and continue to use Merrill Lynch as their investment brokerage. Merrill Lynch settled with the state of New York for $100 million on May 21, 2002, but did not admit to wrongdoing. $100 million was added to the fine on April 28, 2003, after the SEC and other regulators completed an investigation into the acts of Merrill Lynch and nine other brokerage firms.

Salomon Smith Barney

Citigroup’s investment banking unit, Salomon Smith Barney, came under investigation in 2002 by New York’s Attorney General, Eliot Spitzer. According to the findings of the investigation, Smith Barney, as an IPO underwriter, offered shares of new stocks with high gain potential to executives and board members of current and prospective corporate banking clients. In one such deal, Bernie Ebbers, WorldCom’s former CEO, purchased IPO shares that rose 200% in value their first day on the market. Smith Barney was suspected of having acted and advised in a biased manner to obtain and maintain key investment banking relationships. In addition to offering IPO perks, Smith Barney gave its corporate customers high public ratings through heavy declines in the value of their stock.

Stock ratings by Smith Barney’s former telecom analyst, Jack Grubman, were investigated during the inquiry. Grubman, who resigned from Smith Barney August 15, 2002, was suspected of having presented failing telecom stocks as valuable out of a conflict of interest. Grubman was involved with WorldCom, a Smith Barney customer, as a proxy solicitor in 1997, and he sat in on three of the corporation’s board meetings in the years before they declared bankruptcy. Although these actions were disclosed and fully legal, they raised two questions: How close was Grubman, an analyst, to WorldCom, a Smith Barney investing client? And Did Grubman’s interactions with WorldCom influence his stock analysis?

During a recent (April 2003) settlement with the SEC, Smith Barney agreed to pay $400 million to end investigations into its banking practices. Grubman was fined $15 million and barred from the securities industry.

Morgan Stanley

Morgan Stanley has faced opposition on two fronts. Moët Hennessy Louis Vuitton (LVMH) is attempting to sue Morgan Stanley for what it claims were biased ratings in favor of its competitor, Morgan Stanley’s investment banking client, Gucci. Morgan Stanley has issued a counter suit against LVMH for what it claims are “vexatious” allegations, “without merit.” If LVMH succeeds in presenting its case, and is awarded a settlement, the gates may be opened for other companies to reclaim money lost because of inaccurate stock analysis. The suit will begin to be heard on March 3, 2003 in France.

In addition, Morgan Stanley’s correspondence records were recently scrutinized by Eliot Spitzer’s office for evidence of a conflict of interest. Mary Meeker, one of Morgan Stanley’s top Internet analysts, published ratings that are now suspected of having been biased toward companies she assisted in bringing public. Meeker was highly involved in Morgan Stanley’s investment banking business. Her approval or disapproval was a deciding factor for Morgan Stanley as it chose whether or not to underwrite Internet clients that wanted to go public. Because she had set a precedent early on that she would only give her approval to companies that had strong fundamentals, her signature meant, ‘buy.’ This exclusiveness, however, was compromised as the telecom boom grew. Meeker became less stringent with her ‘buy’ ratings and continued to support failing companies (usually Morgan Stanley clients) into their proverbial graves. Spitzer’s investigation aimed to discover if Morgan Stanley indeed offered investors inaccurate ratings out of conflicts of interest. Morgan Stanley agreed to pay a $125 million fine in April of 2003 to end investigations into the practices of its research division.

Further Investigations

The following brokerage firms were also investigated by the New York Attorney General, Securities Exchange Commission (SEC), NASD, New York Stock Exchange (NYSE), and North American Securities Administrators Association (NASAA):

Bear Stearns
Credit Suisse Group
Deutsche Bank
Goldman Sachs
J.P. Morgan
Lehman Brothers
Morgan Stanley
Thomas Weisel
UBS Warburg
U.S. Bancorp Piper Jaffray

If you feel that you or a loved one has suffered loss because of biased investment advice, you may want to contact an investment fraud lawyer.
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Link: http://www.securitiesfraudfyi.com/investment_brokerage_fraud.html

Securities Fraud

Securities fraud is an act committed by an entity intending to manipulate the market through deliberate concealment, or distortion of information. The SEC (Securities and Exchange Commission) acts to regulate against securities fraud by enforcing investment acts and laws.

Securities fraud may be committed by:

Brokers-dealers (misleading clients or advising based on inside information)
Financial advisors or analysts (purposefully offering poor advice or inside information)
Corporations (hiding or distorting information)
Private investors (acting on inside information)
The SEC
The SEC was established in 1934 following the advent of extended federal checks on investment markets. Since then the focus of the SEC has been to increase investor confidence by making information on companies and securities publicly accessible. The SEC monitors the securities market and investigates unusual market activity. The SEC was initially designed to enforce the Securities Act of 1933 and the Securities Exchange Act of 1934. Both acts were built on the following principles:

Companies offering investment opportunities must be open and forthcoming about the status of their business and the stocks they are offering. This way the investor has the opportunity to judge the information and assess the potential investment risks versus gains.
Persons who sell or exchange securities must perform their business honestly and with fairness. Because a broker-investor relationship involves trust on the part of the investor, the broker (or dealer, or company, as the case may be) must provide reliable information to his customer.
Forms of securities fraud

The most common forms of securities fraud that the SEC regulates against are:

Insider trading (trading based on information that is not available to the public)

Accounting fraud (keeping inaccurate books or presenting false information purposefully)

Misrepresentation (presenting misleading or untrue information about a company, or its securities, to an investor or the public)

Corporate/shareholder fraud

Corporate fraud or shareholder fraud occurs when a corporation conceals information or misrepresents itself before the public. Because corporations are designed to function as entities of their own, directors have a lower level of personal responsibility for the outcome of business decisions than they would if they were direct owners. In addition, corporation directors operate under limited liability. Under limited liability, the partner or investor takes no loss greater than the amount he has invested in the business. The partners and shareholders are not personally responsible for company debts. The liability for corporation failure or debt, because of the dissemination of responsibility and ownership, is harder to pinpoint than it would be under a sole proprietorship or a limited partnership.

Investment/brokerage fraud

Investment and brokerage houses commit fraud when they offer false or deceptive information to their investors in an effort to manipulate the market. The SEC has set business standards for broker-dealers to follow in order to advise investors well, and handle the flow of inside information fairly.

Course of action

Normally, cases of security and corporate fraud will be addressed in a federal district court. Brokerage fraud disputes are usually handled by the NASD or other dispute resolution organizations. The NASD (National Association of Securities Dealers) regulates its members and may remove them from the association if their actions are found to be fraudulent by NASD or SEC standards. In either situation, a qualified securities fraud attorney can best present the case of the defendant before the court.

Find a Securities Fraud Lawyer in Any State:
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Link: http://www.securitiesfraudfyi.com/index.html

Enron Fraud

It was one of the largest securities fraud scandals in history, and the investigation into the extent of the fraud committed by Enron is still ongoing. As a result, Enron was forced to file for bankruptcy in December 2001.

History of Enron

Enron is an energy company based in Houston, Texas that deals with the energy trade on an international and domestic basis. It was formed in 1985 when Houston Natural Gas merged with InterNorth. After several years of international and domestic expansion involving complicated deals and contracts, Enron was billions of dollars into debt. All of this debt was concealed from shareholders through partnerships with other companies, fraudulent accounting, and illegal loans. Listed below are a few of the partnerships that allowed Enron to hide debt:

RADR – a group of entities secretly funded by Enron that purchased electricity-generating windmills from Enron, then later sold them back with some of the profits going to key Enron officials and their families.

Chewco – a company formed by executives of Enron in order to buy out the shares of California Public Employees’ Retirement System (CalPERS) in a joint venture investment partnership known as JEDI. Chewco bought out CalPERS interest in order to retain JEDI’s off-balance-sheet status. However, Chewco did not meet the requirements for accounting rules and claimed profits that it was not entitled to. In addition, when Enron bought out Chewco’s interest, Chewco’s price was driven up, reaping huge benefits for the original investors (Enron execs).

Southampton – Enron bought the shares of National Westminster Bank (NatWest) in a limited partnership with Credit Suisse First Boston. Enron paid $20 million, but only $1 million went to NatWest. The remainder of the money went to several executives and their families, as well as to three NatWest employees who were in on the deal.


Although top level executives at Enron were likely aware of the debt and the illegal practices, the fraud was not revealed to the public until October 2001 when Enron announced that the company was actually worth $1.2 billion less than previously reported. This prompted an investigation by the Securities and Exchange Commission, which has revealed many levels of deception and illegal practices committed by high-ranking Enron executives, investment banking partners, and the company’s accounting firm, Arthur Anderson.

Investigation of Enron

To date, the SEC has uncovered several instances of financial fraud committed by high-ranking executives at Enron. Many of the executives have been charged with wire fraud, money laundering, securities fraud, mail fraud, and conspiracy. The following is a list of key players who are suspected of fraud related to the Enron scandal:

Kenneth Lay – former CEO and Chairman of Enron.

Andrew Fastow – former CFO of Enron. Fastow was indicted on 78 counts of securities fraud, money laundering, wire and mail fraud, as well as conspiracy to inflate Enron’s profit.

Michael Kopper – former director in the global finance unit.

Kopper pleaded guilty to financial wrongdoing in August 2002.
Jeffrey Skilling – former CEO of Enron.

J. Clifford Baxter – former Vice Chairman of Enron. Accused of securities fraud, Baxter died in an apparent suicide in January 2002.

Arthur Anderson – the accounting firm that was responsible for auditing Enron. Arthur Anderson was found guilty of obstruction of justice for shredding documents related to the Enron scandal.

Timothy Belden – former head of trading at Enron’s Portland, OR office. Belden pleaded guilty to one count of conspiracy to commit wire fraud related to Enron’s activities during the California power crisis.

Gary Steven Emigre, Gilles Robert Hugh Darby, David John Birmingham – three former employees of NatWest (National Westminster Bank). These men have been charged with wire fraud that defrauded their employer but benefited themselves and executives at Enron.
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Link: http://www.securitiesfraudfyi.com/enron_fraud.html

Double Take
WorldCom's Convincing Lies
David Simons, 07.08.02, 6:00 PM ET

NEW YORK - Analysts and fund managers blindsided by WorldCom's (nasdaq: WCOME - news - people ) accounting fraud insist they didn't have a clue. Was there a smoking gun? Even knowing where to look, it's tough to find one among the five quarters of published versions of the financials that were jiggered to the tune of $3.8 billion, allegedly by WorldCom's chief financial officer.

The scam wasn't as complex as that of Enron (otc: ENRNQ - news - people ). At least on the surface it was simple. WorldCom says that operating expenses for using other telecommunications companies' lines--mainly for last-mile access to homes and businesses--were reclassified as capital improvements. Because telco capital costs are charged as depreciation against income over periods ranging from four to 40 years, the reclassification reduced expenses in the past five reported quarters by at least $2.6 billion.

I examined the five quarters of line costs and capital expenses at the company's two main divisions. The WorldCom Group operates the core network and sells voice, data and Internet backbone services to business and government. MCI is the consumer and small-business operation. I also compared the figures' rates of change and ratios to revenue with WorldCom's main competitors, Sprint (nyse: FON - news - people ) and AT&T (nyse: T - news - people ).

I came away with a sense of awe. Far from being ham-handed, the scam was incredibly elegant. All of the numbers behave as would be expected. In fact, the closer the look, the more convincing it becomes.

For example, at the MCI unit, which accounts for 47% of total line costs and 39% of revenue, line costs as a percent of revenue soared from 44% to 51% during the first four quarters of the fraud. That's the opposite of what would be expected if line costs were being transformed to capital costs. The annual report says the increase was due mainly to wholesale price pressure in Internet services.

Indeed, a careful con wouldn't mess with MCI line costs. Access line statistics, while not included in WorldCom's financials, are tracked by the Federal Communications Commission. It's easy to relate numbers of access lines to household subscribers and figure reasonable total line costs.

At the WorldCom division, the ratio is obscured by business and government customers that use many lines. Yet line costs remained flat at 38% of revenue, while total revenue fell 6%--within range of what's reasonable given the division's higher-margin offerings such as Web hosting and private networks. At AT&T's telephone operations, line costs also stayed flat, at 29% of revenue. Sprint doesn't break out line costs, but its 50% gross margins didn't budge.

The capital-expense side of WorldCom's fraud ledger also appears OK. Instead of increasing as the fraud would suggest, capital expense declined at both units by a combined 25%, to $7.9 billion in 2001. That's spot on the $8 billion forecast by WorldCom's year 2000 annual report. At AT&T's phone operations, capital expense decreased 19%, and at Sprint they increased 25%.

The most apparent smoking gun is a $3.5 billion increase in transmission-equipment assets. It's more like a leaky water pistol. The percentage increase is half that notched in the boom year 2000. That's consistent with the overall decline in capital spending.

Now, any junior accountant can tweak a quarter or two. But it takes a real maestro to do it for five full quarters and have the data line up like a business-school case study. In fact, the WorldCom data points look too perfect. Other kinds of costs, such as maintenance-related labor, may have been put in play to fine-tune the tweaks.

Most amazing, though, is that apparently a single person at a company the size and complexity of WorldCom could reclassify $3.8 billion worth of expenses as easily as changing entries on a home-PC personal finance program. Clearly, increased oversight of outside auditors and penalties for perpetrators isn't enough.

The focus should be on foiling fraud before damage is done. That requires real-time bookkeeping controls. The most basic, which would have flagged the WorldCom flimflam, is mandatory review of revision to entries before they are actually made. At the very least, changes that exceed cumulative thresholds should be approved by internal auditors.

Companies should also be required to publicly detail bookkeeping controls and have them independently evaluated by accounting firms other than those who audit the financial statements.
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Link: http://www.forbes.com/columnists/2002/07/08/0708simons.html

Thursday, 27 June, 2002 Disgraced WorldCom faces fraud charge


Bankruptcy could be a day or two away

The US financial watchdog, the Securities and Exchange Commission (SEC), has charged US telecommunications giant WorldCom with fraud.


With executives like WorldCom's, who needs a crumbling industry?

Market analyst Michael Hodel
The company has admitted that its profits had been inflated by $3.8bn (£2.5bn) between January 2001 and March 2002, to keep them in line with Wall Street expectations.

President George W Bush has condemned the fraud as "outrageous" and vowed to address the problems shaking corporate America.

Analysts predicted that WorldCom would file for bankruptcy before the end of week, after it announced 17,000 redundancies and sacked its chief financial officer, Scott Sullivan.

New cash deal 'dead'

"WorldCom's shareholders' long-term hope depends largely on the faith of the firm's creditors, which is now probably nonexistent," said Michael Hodel of Morningstar, a fund rating agency.

"With executives like WorldCom's, who needs a crumbling industry?"

WorldCom now can only avoid bankruptcy by securing $5bn in fresh cash. However, sources close to the creditor banks holding the firm's $30bn debt said this deal was now dead.

Without enough money to cover expenses and interest payments, the firm would be forced to file for Chapter 11 bankruptcy. This would give WorldCom protection from its creditors, but would allow it to continue operating.

Blocking another Enron


SEC chairman Harvey Pitt said the commission was seeking a court order to prevent WorldCom disposing of assets, destroying documents or making payments to senior officers - as happened in the case of failed energy giant, Enron.


Pitt: SEC trying to restore lost credibility

He said the SEC move was "an attempt to restore the understandably lost credibility that people have in what they are hearing and reading".

The WorldCom fraud is far bigger in money terms than Enron's misdeeds, and will further undermine the trust of investors in corporate America.

The US dollar lost strength and share prices around the world plummeted on Wednesday, although the greenback and Wall Street later recovered lost ground.

The SEC said WorldCom's accounting improprieties were of "unprecedented magnitude".

The news is also another damning indictment of auditor Andersen which was responsible for approving the accounts of WorldCom as well as Enron.

Trouble at the top

WorldCom was one of the pioneers of the 1990s telecoms boom.

The scandals that shook Wall Street
Enron's accounts turned out to be an elaborate scam
Andersen approved the WorldCom and Enron accounts
Other firms under fire: Xerox, Adelphia, Tyco, Global Crossing


Click here for more details
An aggressive acquisition spree saw it grow from a small-time regional operator in the early 1980s to a huge international business, but also saddled it with $30bn of debt.

The firm was already shrouded in scandal after the departure of its founder and chief executive, Bernie Ebbers, in April.

Mr Ebbers borrowed hundreds of millions of dollars from the firm to underwrite the inflated prices he had paid for the company's own shares.

WorldCom shares have tumbled from a high of more than $60 in 1999 to 83 cents this week.

Trading on the stock on the Nasdaq market was suspended on Wednesday,

The shares had hit a mere 10 cents in pre-opening trade.

Secret actions

The scandal broke late on Tuesday evening, when the company said it had not actually made the $1.4bn of profits it reported in 2001, nor the $130m stated during the first three months of 2002.


Founder Bernie Ebbers was forced to quit in April

WorldCom said its chief financial officer Scott Sullivan improperly booked expenses as investment in order to make the company look much healthier than it actually was.

John Sidgmore, who took over from Mr Ebbers at the top, said executives were "shocked by the discoveries".

Andersen is protesting its innocence, saying Mr Sullivan did not let on what he was doing.

The SEC added: "We are ordering the company to file, under oath, a detailed report of the circumstances and specifics of these matters."
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Link: http://news.bbc.co.uk/1/hi/business/2068865.stm

14th Jul 2005 Bernard Ebbers gets 25 years for WorldCom Fraud


Former WorldCom founder and CEO Bernard Ebbers was today sentenced to 25 years in federal prison for the famous accounting fraud, which led to the downfall of the WorldCom. He was already declared found guilty in March this year for his involvement in declaration of inflated telecom’s finances to cover massive losses that led to an $11 billion accounting fraud. The judgment was passed by the Judge Barbara S. Jones who said that her decision took into consideration the seriousness of the charges and the effect the massive fraud had on many.

Jones said in the ruling: “I find that a sentence of anything less would not reflect the seriousness of this crime.” the charges against Bernard included conspiracy, securities fraud and seven counts of lying to the Securities and Exchange Commission. He was facing much worse punishment in the form of 85 years in prison. However, he somewhat got a bargain due to his numerous charitable works and poor health.

One of his worst decisions was to instruct the former CFO Scott Sullivan to adjust the company’s accounting numbers over a two-year period to keep the markets happy. This seems to be just the beginning of the decisions pertaining in the case as several other former company employees including Scott Sullivan are scheduled to get their sentences later this year.
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Link: http://news.techwhack.com/1666/bernard-ebbers-gets-25-years-for-worldcom-fraud/

WorldCom's Sullivan gets 5-year term for fraud role

CHICAGO TRIBUNE

August 12, 2005

NEW YORK – Scott Sullivan, credited with helping the government to convict former WorldCom chief executive Bernard Ebbers, was sentenced yesterday to five years in prison for his role in the largest case of corporate fraud in U.S. history.

Sullivan, who had been the telecom company's financial director, received far less than the 25 years given last month to Ebbers, his one-time boss. The lighter sentence was seen as a powerful signal to would-be white-collar criminals to cooperate with government prosecutors rather than take their cases to trial.

At a morning hearing in a packed Manhattan courtroom, Sullivan, 43, repeatedly apologized for his actions, pleading with U.S. District Court Judge Barbara Jones to recognize the importance of his cooperation in convicting Ebbers.

Sullivan also said his wife suffers from a severe case of diabetes and has been hospitalized for emergencies nine times this year, suggesting a prison sentence would be an "extreme burden" on her and their 4-year-old daughter.

"I am sorry for the hurt that has been caused by my cowardly actions. I truly am," Sullivan said. "I ask the court for leniency so that I can get back to my family as soon as possible."

In reducing his sentence, Jones said Sullivan was a "model of cooperation" and added that she recognized Sullivan's "extraordinary family circumstances."

For Sullivan, who pleaded guilty to fraud and other charges in March 2004, the opportunity to testify against Ebbers gave him an avenue for redemption and will allow him to leave prison before he turns 50.

"It was extremely fortunate there was an opportunity for you to cooperate," Jones told Sullivan. "Mr. Sullivan, you would have faced a substantial sentence had you not cooperated with the government."

After the hearing, Sullivan hugged his mother and shook hands with his father, who suffers from Parkinson's disease. Sullivan must surrender to federal officials Nov. 11.

Sullivan's effort to win a light sentence was helped considerably by Assistant U.S. Attorney David Anders, who told Jones that the government would not have been able to convict Ebbers without the help of WorldCom's former No. 2 man.

"Mr. Sullivan was not the cause of the fraud at WorldCom. Mr. Ebbers was," Anders said. "Without his cooperation, Mr. Ebbers would never have been convicted." Under nonbinding federal sentencing guidelines, Sullivan could have received as much as 25 years in prison.

Kirby D. Behre, a former prosecutor and a partner with Paul Hastings LLC in Washington, said, "The interesting thing is the huge disparity between what Ebbers gets for going to trial – 25 years – and what Sullivan gets for cooperating.

"It's a great advertisement for the benefits of cooperating with the government," he said.

Ebbers, 63, was sentenced in July, four months after a jury ruled that he had committed fraud and conspiracy in conjunction with the $11 billion accounting scam that sent WorldCom into bankruptcy, the largest in U.S. history. Ebbers, who suffers from a weak heart, has appealed the conviction.

While praising Sullivan for his cooperation, Jones was quick to add that his "offenses were of the highest magnitude." Thousands of shareholders lost billions of dollars when the extent of WorldCom's fraud became public.

Jones labeled Sullivan the "day-to-day manager of the scheme at WorldCom" – someone who she said was "significantly more culpable" than the other managers who cooperated. "In keeping WorldCom going," she said, "he was also preserving his $700,000 salary, $10 million bonus and stock options."

In addition, she pointed out that in June 2002 when WorldCom first acknowledged fraud at the company, Sullivan initially denied any involvement.

That denial, she said, "remains in sharp contrast" to David Myers, the former WorldCom controller who quickly admitted guilt and agreed to work with the government. Myers received a sentence of one year and one day in prison.

Nonetheless, Jones said she recognized that Sullivan was under intense pressure from Ebbers.

During Ebbers' six-week trial, Sullivan testified for seven days, detailing conversations between the two men that led the company to manipulate its sales and profit numbers to buoy WorldCom's stock price. At its 1999 peak, WorldCom's stock was worth $180 billion, the company served about 15 million customers and employed about 40,000 people.

Sullivan told jurors Ebbers repeatedly urged him to "hit the numbers" – a kind of mantra that Sullivan said he interpreted as a command to commit fraud in order to meet Wall Street expectations.

"I told Bernie, 'This isn't right,' " Sullivan said from the witness stand, describing an October 2000 meeting in which he said he showed Ebbers a plan to improperly create $133 million in revenue. "He just stared at it, and he looked up at me and he said, 'We have to hit our numbers.' "

Sullivan's testimony was the pivotal point in the Ebbers trial. The standoff was an extraordinary confrontation between two men who had once been so closely linked in the minds of investors and the financial media that covered them.

Though Ebbers was unmistakably the public face of WorldCom, Sullivan was widely recognized as the engineer of the company's stunning string of acquisitions. WorldCom, after all, was the most successful stock of the 1990s.

Throughout Ebbers' trial, his defense attorney, Reid Weingarten, charged that it was Sullivan, not his client, who had concocted and engineered the accounting scam meant to cover-up the company's declining revenues. Ultimately, a jury determined that Ebbers was responsible for WorldCom's fraud.

Sullivan made one final reference to his old boss before the sentence came down.

"In the face of intense pressure inside the company, I turned away from the truth," Sullivan said. "I knew it was wrong. My intentions were not to hurt people."

As part of his guilty plea, Sullivan sold his $11 million beachside home in Boca Raton, Fla., handing the proceeds to a fund for WorldCom shareholders.

Sullivan will not be fined and will not have to pay any restitution beyond the assets that he agreed to turn over last month. Sullivan must also serve three years of probation.

Jones also agreed to recommend that Sullivan be sent to a minimum-security prison in Pensacola, Fla., near his home, and that he receive treatment for alcohol abuse.

Sullivan's lawyer also asked for 90 days before his surrender, so that his client could arrange for child care at his home.

But Sullivan's payments and reduced sentence are probably cold comfort to WorldCom's investors and to its former employees, who lost their livelihoods as WorldCom entered bankruptcy protection in 2002.

"It was a mixed blessing, but a well-measured sentence," said Henry J. Bruen Jr., a former WorldCom salesman who submitted a victim-impact statement to the judge. Bruen said he had lost all of his savings, investments, medical benefits and some of his property since being laid off in early 2003.

Sullivan's sentence is roughly in proportion to those given to four of his subordinates, who had also pleaded guilty.

Ebbers, meanwhile, is scheduled to report to a federal prison in Mississippi Oct. 12. Jones must decide whether to allow Ebbers to remain free during his appeal.



--------------------------------------------------------------------------------
The Associated Press and the New York Times News Service contributed to this report.

Link: http://www.signonsandiego.com/uniontrib/20050812/news_1n12worldcom.html

Yeah, I'll really get out there with this board. I've let it sit for a while. Now it's time to have some fun...or rather get down to business and once again put the screws to some real jerks.

Remember the past...and try not to repeat those mistakes...nor let others play them out on you. That's kinda what this boards all about. It's was supposed to be my rant board. But, it may become more valuable and useful than this.

We'll see.

It's a Jungle Out There! -e-

Jungle Fever


The Bre-X saga is the greatest gold scam ever. But to understand the enormity of the fraud, you had to be there. Our man in Borneo tells his story.
Richard Behar

When I stepped off the plane in Jakarta, I was, like the rest of the world's lemmings, swept up in the Bre-X Minerals euphoria. The Canadian company had found the largest gold deposit of the century, buried deep underground in a dense Indonesian jungle on the island of Borneo. As Bre-X vice chairman John Felderhof later explained to me, a volcano had essentially "collapsed back onto itself" three million years ago, causing a massive buildup of heat and pressure, which created the miraculous treasure. He drew a diagram. It made sense. After all, he was on his eighth beer of the evening; I was on my fourth. What's more, everyone believed him--fellow geologists, engineers, financial analysts, business journalists, the world's largest mining companies, government officials, even a former U.S. President. "Geologically, it's the most brilliant thing I've ever seen in my life," Felderhof sputtered. "It's so big, it's scary. It's f--ing scary!"

Horrifying is a better word. Bre-X was a gold-mining hoax--the largest of any century--until it collapsed onto itself last month. Allegedly thousands of rock samples were "salted" with flakes of gold before they were tested. Today Felderhof is rich and sends his regrets from the Cayman Islands, where he professes his innocence and is applying for permanent residency. His deputy geologist, Mike de Guzman, is not so fortunate, having apparently jumped 800 feet into the jungle from a helicopter once the jig was up. Bre-X CEO David Walsh is holed up at the company's Calgary headquarters, scuffling with camera crews. Class-action lawsuits are flying, while criminal investigators are poring over the company's books.

The numbers are heart-stopping. The market value of Bre-X had topped $4 billion--a growth rate of 100,000% in three years. In early May the company melted into bankruptcy. But not before Walsh, his wife, and Felderhof had mined roughly $50 million from stock sales. And the gold? In the weeks before the fraud was exposed, some 71 million ounces of the yellow metal, worth $25 billion at today's prices, had supposedly been "proven" by Bre-X. Then Felderhof said he was "comfortable" with 200 million ounces--far more than the California gold rush. One Bre-X official told me "400 million."

The numbers tell only part of the story. To grasp the enormity of the scam, you had to be there. You had to see the cosmos that Bre-X had created, like an elaborate Hollywood set with hundreds of actors who could be loaded onto trucks and barges once the tickets had been sold. "You have to understand, this thing is like a 20-foot man," gushed Research Capital mining analyst Chad Williams after returning from an early pilgrimage. "For someone in our business, it's like taking the biggest Elvis fan to Graceland."

I spent two weeks in Indonesia in February to chronicle an epic tale of how a bunch of average Joes stumbled onto the holy grail, only to find powerful and greedy forces conspiring to take it away from them. Felderhof told me only one other publication (the Northern Miner) had ever been permitted inside Busang, the exploration camp on the island of Borneo. I felt lucky. I proved even luckier when I returned to New York with an illness that delayed my story for several weeks. ("Saved by a parasite," FORTUNE managing editor John Huey now says.) We held our fire again after Freeport-McMoRan Copper & Gold, Bre-X's new partner, said it was conducting its own drilling tests--the first time in nearly four years anyone independent had checked beneath the surface. Looking back, I don't have the answers. But the trip provided a fascinating look at several characters who may be the century's greatest scam artists.

By the time I got to Indonesia, both Walsh and Felderhof were trapped in a Javanese version of It's a Mad, Mad, Mad, Mad World, the timeless movie farce in which Mickey Rooney, Milton Berle, and a slew of other characters try to outsleaze one another in a manic race to recover buried treasure. The Bre-X version came complete with payola, private eyes, and break-ins. It led from the leech-infested swamps of Borneo to the presidential palace in polluted Jakarta. It featured a dictator's greedy kids and some of the world's biggest mining firms, stabbing one another in the dark.

The story is familiar now. For nearly a year, until Freeport was awarded the contract, the Indonesian government had delayed giving Bre-X control over Busang. Big mining companies jockeyed for position. As the gold estimates grew, Indonesian officials were determined to select an established firm as the operator. Mining giants were lobbying for the post, none harder than Peter Munk, CEO of Toronto's Barrick Gold, the world's second-largest gold producer. Munk hired Kroll Associates, the world's biggest detective agency, to dig up dirt on Bre-X in anticipation of a hostile takeover bid. He enlisted former U.S. President George Bush to lobby Suharto, the Indonesian ruler. He retained the services of a daughter of Suharto to get an edge. (Bre-X offered $40 million to a son.)

When I arrived in early February, Jakarta had become a corporate war zone centered on five-star fortresses. Bre-X was at the Shangri-La (the "Bre-X Shangri-La"). From his window Walsh could see the enemy--the "Barrick Hyatt." Just up the road, at the Regent Hotel, a Houston lawyer was assembling spies to help him figure out whom to sue on behalf of Bre-X shareholders. It was impossible to figure out what was going on. The man holding the cards: Suharto's golfing buddy, a secretive timber tycoon named Mohamad "Bob" Hasan. The dictator had asked him to clean up the Bre-X mess. At one point it wasn't clear whom Suharto's government was favoring as Bre-X's partner. "This place is like Casablanca," complained Doug MacIntosh, Bre-X's investment banker at J.P. Morgan. "The story changes every day."

In Jakarta, I talked with Walsh, Felderhof, and other Bre-X officials dozens of times. We met separately. We met together at lunches and dinners. Not once did a yellow flag go up during those talks. Were they all just playing their parts in an elaborate scheme? If so, they were playing those parts quite well.

Even now, I have trouble believing that Walsh participated in the scam. He was a miserable soul when we were introduced in his Jakarta suite, just hours after he'd had it swept for electronic bugs. He was chain-smoking Dunhills and hacking his brains out. He hadn't exercised in years, he said, which was apparent from a huge deposit hanging over his belt. He was depressed and distracted, and often stared out his window at the litter and sewage that flowed continuously down a muddy canal--a metaphor, we joked, for the corruption that thrived in Indonesia. "We all find it hard to believe that we're responsible for the largest gold discovery probably in the history of the world," he said without much feeling. Indeed, Walsh looked more like some poor schlemiel who had just won the lottery and couldn't locate the ticket.

Walsh told me his story: A former stockbroker, he launched Bre-X in 1989. He hunted for gold in Quebec and joined a diamond rush in the Northwest Territories. His luck was so abysmal that he opened his 1991 annual report with the line "Yes, we are still in business." After filing for personal bankruptcy, he decided he needed "a proven gold finder." Enter Felderhof, whose claim to fame was the co-discovery of one of the world's biggest silver and gold mines in Papua New Guinea in 1968. It took Walsh two weeks to track down Felderhof, whom he hadn't seen in ten years. Using his last $10,000, Walsh flew to Indonesia, where Felderhof talked him into buying the rights to part of the Busang property in 1993.

Looking back, maybe I should have been suspicious when I met the Dutch-born Felderhof. He had a shifty mug, a gruff manner, and a hideous laugh trapped in the back of his throat ("Kkh! Kkh! Kkh!...Kkh! Kkh! Kkh!"). Still, his talent for storytelling made him more enjoyable than Walsh. Here was a pirate without the eye patch--a hard-drinking, swashbuckling explorer who had prowled the world's jungles, dodging flash floods and poisonous snakes. He wore his 14 bouts with malaria like medals on his chest. He said he was so poor that in 1992 he had to steal a Christmas tree for his family. Never again. He pulled out a photo of Ingrid, his second wife. "She just bought me a Lamborghini for Christmas," he said. "It's two seats strapped to a f--ing engine. I think she's trying to kill me. Kkh! Kkh! Kkh!"

Shortly after we met, Felderhof took me to dinner with de Guzman, his longtime pal whom he'd invited to join the Bre-X team. The Filipino geologist beamed like a jewel when Felderhof explained that he couldn't have discovered the gold without his deputy's "pioneering theories." De Guzman boasted that his IQ ranged from 150 to 170, which came in handy when he hiked 32 kilometers through dense jungle "with the camp on my back, eating noodles every meal for a week," and hunting for signs of mineralization. The first two drill holes were failures. "We almost closed the property," recalled de Guzman. "In December 1993 John said, 'Close the property,' and then we made the hit." Never mind that more than a dozen mining companies had dismissed the property as worthless. The previous operator had even drilled 19 holes, but "they were all in the wrong places," snickered Felderhof during the meal. Or they were "too shallow." Or the workers used a wet-drilling method that, ironically, washed away whatever gold they did strike. "Geology wasn't on their minds," added Felderhof. "They were spending all their time in town chasing girls and naming creeks after them." De Guzman, who, as it turns out, had at least four wives simultaneously, laughed as he recalled the various creeks--"Karen, Jenny, Martha, Ann." After consulting with a local tribe of Christian Dayaks, he gave the creeks back their traditional names.

As I continued my work, things got tense. Walsh complained about a break-in at his Calgary office; two weeks earlier his wife had found a spy rifling through the garbage at their Bahamas estate. He claims he sent a memo advising employees to "shred sensitive materials." (If true, that will make it harder for investigators to solve the mystery.) The company's top financial officer, Rolando Francisco, was also caught up in the hysteria. He would talk in his hotel room only after cranking up the volume on the TV. Over at the Hyatt, Barrick spokesman Luc Lavoie was waxing philosophical: "If this was the biggest oil discovery, so what? More oil. But gold is different...It brings up more emotions. It clouds the minds of people." It clearly fogged the mind of his client. I later learned that Barrick, last November, couldn't find gold in many Bre-X samples. "This can't be a scam!" Munk screamed at his deputies. "Do some more tests! Figure it out! I know it's there, okay? You confirm it's there."

I looked forward to seeing the gold. After four days in Jakarta, Felderhof joined me on the flight to Balikpapan, the only place in Borneo with a runway big enough to handle the plane. During the trip he explained that Bre-X had spent more than $1 million on a social-development program for the tribe of Christian Dayaks that comprised the bulk of the 400 workers. "I've always been interested in developing people," he said. From Balikpapan, it was an exhilarating two-hour jaunt in a helicopter to Busang. The dense, swampy jungle stretched as far as the eye could see. Felderhof leaned over and said that a chopper once made an emergency landing in the area. "When the pilot was found, four days later, his body was covered with leeches," yelled Felderhof, over the roar of the engine. "Kkh! Kkh! Kkh!" Little did I know that, six weeks later, Felderhof's sidekick, de Guzman, would apparently throw himself out of the same chopper we were sitting in. It would also take four days to find the body, which had been partly devoured by wild pigs and other creatures.

Once on the ground, you would never know that this wasn't the real deal. What a production! If Busang was a Hollywood set, the 2,000 Dayaks were the extras. Bre-X had electrified their village, built a new church, opened a kindergarten, and organized sewing classes for the local women. A swath of jungle had been cleared for an airport. Bre-X planned to open a fishery and a poultry-farming venture to enable the tribe to sell products to the mine.

I shared a cigar with a young villager who had just received a scholarship from Bre-X to study engineering. I met Pebit, the barefoot Dayak leader, as he was helping construct new homes for the workers--a tribal Levittown, courtesy of Bre-X. Through a translator, Pebit boasted that it was his decision to sacrifice a pig to God that "allowed the gold to be pulled from the ground." Then there was the army of young geologists working the site. At the exploration camp, I drank Bintang (a local beer) deep into the night with ten of these workers, many of whom were fresh out of geology school in Canada, Indonesia, or the Philippines. As we listened to wild monkeys screech like sirens in the darkness, the young men talked about the rigors of life in the bush. They complained about the grueling work schedule (eight weeks on, two weeks off) and the lack of sex. But they believed they were making history. They were the geological equivalent of batboys for the World Champion Yankees. They didn't know that they were pawns in a crooked game that was fixed from the get-go.



After two days, my tour was over. I saw no gold. But then again, I didn't know what real gold was supposed to look like buried in those long, tubular core samples. My return trip included a seven-hour speedboat ride down the narrow Mahakam River with Cesar Puspos, de Guzman's 36-year-old deputy. We spent the day waving to the locals, who lived in shabby huts and washed in the muddy water they used for defecation. Puspos, by contrast, had struck it rich. He drove a BMW. He described how de Guzman, "my mentor," awakened him in the middle of the night in a frenzy to announce that he had solved Busang's geological puzzle. When we arrived at Bre-X's office in the city of Samarinda, I noticed huge piles of core sample bags and persuaded Puspos to climb atop for a picture. Investigators say Bre-X's samples were "probably" salted in Samarinda before being delivered to testing labs in Balikpapan. (Walsh had once said that the bags were transported directly from Busang to the labs.)

After a few more days in Jakarta, I returned to the States on February 17. Bre-X soon unraveled. Even then, many believers chose to stay blind. In March, after de Guzman's death, Barrick's Peter Munk told FORTUNE, "I don't believe that those guys salted the mine...you couldn't have fooled that many analysts for that long." When Freeport said its drilling showed "insignificant" gold, Bre-X's flacks at Hill & Knowlton suggested that Freeport was behind a scheme to lower the stock price (see following box). The last time I heard from Walsh, March 20, he left me a phone message confirming some arcane historical facts in my story--a day after de Guzman's death and a week after Freeport called Walsh with the news that they were coming up dry at Busang. This is a crook? Or the Mr. Magoo of mining?

Looking back, some things seemed suspicious. Like the "accidental" fire at Busang that destroyed a building containing de Guzman's papers and visible gold samples. I was also disappointed to see no gold at the century's biggest gold deposit. A geologist, Steve Hughes, took me through the bush to a creek. We panned. We found nothing. "That's strange," said Hughes. "You'd think we'd find something." The next day I needled Felderhof, telling him I had bad news for Bre-X. "No gold, huh?" he snapped back. "Kkh! Kkh! Kkh!" There was another peculiar moment. In one of my last meetings in Jakarta with Felder-hof, de Guzman walked in. I rose and slapped him on the back, congratulating him on Freeport's emerging as Bre-X's new partner. He should have been thrilled. Instead, he was stone cold. Grim. Icy. He didn't even look at me. It was clear he wanted to talk to Felderhof alone.

No matter who pulled off the crime, Bre-X has left a mother lode of victims--from individual investors to the poor tribal people counting on the mine to earn a meager living. But even the pros got burned in this tale of greed. Recently I caught up with MacIntosh of J.P. Morgan, the Bre-X banker. We'd shared several meals in Jakarta, where he jabbered for hours about how the gold mine would be the most lucrative in the world. Doug is a mining engineer with 30 years of experience. I was curious how it felt to be suckered. "I have been surprised at every turn of this thing," he said, noting how fortunate I was that we had held the presses. "I hope that we're as lucky as you have been." Not a chance, mate.
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Link: http://www.sgrm.com/art45.htm

The Bre-X Gold Scandal
From Andrew Alden,

First there is a gold mountain, then there is no mountain
Start with the biggest gold deposit ever reported, in the headwaters of the Busang River in the steaming jungle of Borneo. The Canadian company Bre-X Minerals Ltd. didn't know that when it bought rights to the site in 1993. But after it hired a high-living geologist to map the ore body, the deposit, along with the fever dreams that always accompany gold, grew to monster size—by March 1997 that geologist was talking about a 200-million-ounce resource. You do the math at, say US$350 per ounce.

Bre-X prepared for big times ahead by building a gold-plated Web site, where you could generate your own Bre-X stock chart to follow its meteoric rise. It also had a chart showing the equally meteoric rise of the estimated gold resource: together, those two pages could infect anyone with gold fever.

Bigger mineral companies took notice. Some made takeover offers, as did the Indonesian government—that is, president Suharto and his powerful family. Bre-X owned more of this lode than seemed prudent for such a small, inexperienced foreign firm. The government suggested that Bre-X share its fortunate surplus with the people of Indonesia and with Barrick, a firm tied to Suharto's ambitious daughter Siti Rukmana. (Barrick's advisors, among them former president George Bush and ex-prime minister of Canada Brian Mulroney, also favored this scheme.) Bre-X in turn enlisted Suharto's son Sigit Hardjojudanto on its side.

To end the contretemps, family friend Mohamad "Bob" Hasan stepped in to offer all sides a deal. The American firm Freeport-McMoRan Copper & Gold (led by another old Suharto friend) would run the mine, Indonesian interests would share the wealth, Bre-X would keep 45 percent of the ownership, and Hasan for his pains would accept a share possibly worth, oh, a billion or so. When asked what he was paying for this stake, Hasan said, "There is no payment, no nothing. It is a very clean deal." (You may hear a voice saying "Forget it, Jake. It's Indonesia-town.")

The deal was announced on February 17, 1997. Freeport went to Borneo to start its own due-diligence drilling. Suharto was ready to sign a contract after this step, locking in Bre-X's land rights for 30 years and starting the flood of gold. But just four weeks later, Bre-X's geologist at Busang, Michael de Guzman, exited his helicopter (250 meters in the air at the time), an evident suicide. On March 26 Freeport reported that its due-diligence cores, drilled only a meter and a half from Bre-X's, showed "insignificant amounts of gold." The next day Bre-X stock lost almost all of its value.

Freeport brought more samples to its headquarters under armed guard. Bre-X commissioned a review of Freeport's drilling; it recommended more drilling. Another review focusing on the chemical assays caused Bre-X to clam up completely on April 1, and Suharto's signature was postponed.

Bre-X blamed the Web. CEO David Walsh told a fawning Calgary Herald reporter that the meltdown began when scurrilous local rumors in Indonesia were "picked up by one of the ghost writers on the Internet on the chat page or whatever." The whole sorry interview is preserved on the Internet Archive.

Further reviews took the rest of April. Meanwhile, disquieting details began to arise. Industry journalists soon found evidence that the Busang ore samples had been "salted" with gold dust.

On Friday April 11, Northern Miner magazine put a "news flash" on its Web site laying out three lines of evidence that Bre-X had been duped.

First, contrary to company statements, Busang core samples had been prepared for assay in the jungle, not in the testing lab. Videotape made by a visitor to the field site showed the humble machines common in assay labs—hammer mills, crushers, and sample splitters. Well-labeled sample bags clearly had finely crushed ore in them. Security was lax enough that samples could easily have been spiked with gold.

Second, the local inhabitants had begun panning for gold in the Busang River, but in two years they never found any. Yet Bre-X claimed that gold was visible, a sign of unusually rich ore. And de Guzman's technical report, confusingly, called the gold submicroscopic, which is typical of hard-rock gold ore.

Third, the assayer that tested the samples said the gold was predominantly in visible-sized grains. Also, the grains showed signs consistent with being typical river-panned gold dust, such as rounded outlines and rims depleted in silver. The assayer dodged the 64-billion-dollar question, saying that there were indeed ways for hard-rock gold grains to acquire rounded edges—but the argument was a fig leaf.

Meanwhile a storm of securities lawsuits arose around Bre-X, which vigorously protested the whole unfortunate series of misunderstandings. But it was too late. The collapse of Bre-X cast a cloud over the gold mining industry that lasted into the next century.
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Link: http://geology.about.com/cs/mineralogy/a/aa042097.htm

Fraud charge filed against former Refco CEO By Adam Shell and Elliot Blair Smith, USA TODAY
Thu Oct 13, 6:34 AM ET


Former Refco (RFX) CEO Phillip Bennett was charged Wednesday with one count of criminal securities fraud in a dramatic reversal of fortune that is proving far more costly than the approximately $545 million in trading losses he is accused of hiding from his firm.

U.S. Attorney Michael Garcia said authorities worked "around the clock" to bring the criminal charge against Bennett, 57, after the futures trading giant Refco disclosed Monday that an internal investigation had uncovered the alleged fraud at its expense.

The disclosure launched a sell-off of firm shares that erased 62% of its value in three days of heavy trading.

According to the criminal complaint, Bennett shifted trading debts for which he personally was responsible off the firm's books each quarter, improving the firm's appearances of profitability. He paid unidentified partners to take custody of the IOUs before moving them back, never disclosing his responsibility for them.

The trading losses date to the emerging markets crisis of 1997. Refco spokesman Rob Solomon said, "We're cooperating with authorities." An attorney for Bennett had no comment. On Monday, the executive repaid $430 million to the firm and took a leave of absence. He was arrested Tuesday evening, arraigned in federal court in New York and then released after posting a $50 million bond and $5 million in cash.

The criminal complaint says Bennett financed one bogus debt swap in February, just before the firm's fiscal year ended, by ordering a subsidiary, Refco Capital Markets, to lend an unidentified customer $335 million that was repaid two weeks later. At the time, that unit's chief was Santo Maggio, already under investigation by the Securities and Exchange Commission in an unrelated short-selling scheme. The firm put Maggio on leave Monday. He has not been charged with wrongdoing.

The SEC and Commodity Futures Trading Commission also are investigating Refco's finances.

John Vita, a spokesman for Refco's auditor, Grant Thornton, said the alleged transfers of Bennett's debts were "specifically hidden from us." Vita said, "If he is responsible for this deception, we believe this would support serious charges."

Last year, Bennett negotiated the sale of Refco to private equity firm Thomas H. Lee Partners, which took it public. The IPO had lifted the value of Bennett's personal stake from $382.5 million to about $1.4 billion.

Plaintiff's attorney Steve Schulman, whose firm filed the first shareholder lawsuit against Refco, said the criminal complaint "provides further corroboration, if any was needed, that there was a serious fraud and theft of shareholders' money."
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Link: http://news.yahoo.com/s/usatoday/20051013/bs_usatoday/fraudchargefiledagainstformerrefcoceo

How Bennett Pulled off his $500 Million Refco Scam (Thursday, October 20, 2005)

The New York Post explains:

Refco Inc.'s former boss Phillip R. Bennett duped some of the world's most sophisticated financial corporations by hiding almost $500 million in a huge line of credit the bankrupt commodities broker gave to hedge fund Liberty Corner Advisors.
New Jersey-based Liberty Corner had a $5 billion line of credit with Refco that it used to trade fairly low-risk government securities through Refco's prime brokerage unit, Refco Capital Markets, according to people close to the company.

Every quarter, Bennett would transfer the debt onto Liberty's books.

Because of its huge credit line and low-risk trading strategy, the $500 million or so didn't raise any red flags with Refco's outside auditors and other big financial institutions responsible for selling Refco's shares to public investors, according to sources close to the bankrupt firm.

"Liberty's debt would go from $3.5 billion to $3.9 billion every quarter but that's not something that would normally cause alarm," said one source familiar with the company.

Here's an interesting question: What did Liberty Corner execs know and when did they know it?
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Link: http://stocknewsdirect.com/2005/10/how-bennett-pulled-off-his-500-million.html

T.H. LEE TAKES A BATH AFTER REFCO SCAM, INVESTIGATION

By ZACHERY KOUWE
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October 12, 2005 -- One of Wall Street's most respected investors has taken a $721 million beating over the last two days as shares of Refco Inc. have plummeted on revelations of an accounting scandal and a Securities and Exchange Commission probe.
Thomas H. Lee Partners, named after its legendary billionaire founder, owns roughly 49 million shares of Refco through its $6.1 billion buyout fund.

Shares of Refco, one of the world's largest commodities brokerage firms, dropped 11 percent yesterday to end the day at $13.85.

They fell 45 percent on Monday after Chief Executive Phillip R...
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Link: http://www.nypost.com/business/55203.htm

Disaster in the Making

As early as 1925, then-Secretary of Commerce Hoover had warned President Coolidge that stock market speculation was getting out of hand. Yet in his final State of the Union Address, Coolidge saw no reason for alarm. "No Congress...ever assembled has met with a more pleasing prospect than that which appears at the present time"...said Coolidge early in 1929. "In the domestic field there is tranquility and contentment...and the highest record of prosperity in years."

Al Smith's campaign manager, General Motors executive John J. Raskob, agreed. In an article entitled "Everybody Ought to be Rich" Raskob declared, "Prosperity is in the nature of an endless chain and we can break it only by refusing to see what it is." President-elect Hoover disagreed. Even before his inauguration he urged the Federal Reserve to halt "crazy and dangerous" gambling on Wall Street by increasing the discount rate the Fed charged banks for speculative loans. He asked magazines and newspapers to run stories warning of the dangers of rampant speculation.

Once in the office, the new president ordered a reluctant Andrew Mellon, his holdover secretary of the treasury, to promote the purchase of bonds instead of stocks. He sent his friend Henry Robinson, a Los Angeles banker, to convey a cautionary message to the financiers of Wall Street--and received in return a long, scoffing memorandum from Thomas W. Lamont of J.P. Morgan and Company. When the Federal Reserve Board that August did take steps to check the flow of speculative credit, New York bankers defied Washington, the National City Bank alone promising $100 million in fresh loans. An angry Hoover let the president of the New York Stock Exchange know that he was thinking of regulatory steps to curb stock manipulation and other excesses. Yet he undercut his own threat by placing ultimate responsibility for such measures on New York State's new governor, Franklin D. Roosevelt.

Presidents in 1929 were not supposed to regulate Wall Street, or even talk about the gyrating market for fear of inadvertently setting off a panic. Hoover had his own reasons for keeping quiet. His conscience was pained after a friend took his advice to buy an issue that later nosedived. "To clear myself," the president told intimates, "I just bought it back and I have never advised anybody since."

By early September, 1929 the market was topping out, some eighty two points above its January plateau. In eighteen months, General Electric had tripled in value, reaching $396 per share. Other blue chips, fueled by more than $8 billion in brokers' loans, enjoyed similar rises. The last week of October, however, brought a terrible reckoning. On October 24 alone, radio stocks lost 40% of their paper value. Montgomery Ward surrendered thirty-three points. Big bankers tried and failed to stem the dizzying decline in U.S. Steel, a bellwether stock.

A Day of Reckoning

On Black Tuesday, the twenty-ninth, the market collapsed. In the words of a gray haired Stock Exchange guard, "They roared like a lot of lions and tigers. They hollered and screamed, they clawed at one another collars. It was like a bunch of crazy men. Every once in a while, when Radio or Steel or Auburn would take another tumble, you'd see some poor devil collapse and fall to the floor."

In a single day, sixteen million shares were traded--a record--and thirty billion dollars vanished into thin air. Westinghouse lost two thirds of its September value. DuPont dropped seventy points. The "Era of Get Rich Quick" was over. Jack Dempsey, America's first millionaire athlete, lost $3 million. Cynical New York hotel clerks asked incoming guests, "You want a room for sleeping or jumping?"

Refusing to accept the "natural" economic cycle in which a market crash was followed by cuts in business investment, production and wages, Hoover summoned industrialists to the White House on November 21, part of a round robin of conferences with business, labor, and farm leaders, and secured a promise to hold the line on wages. Henry Ford even agreed to increase workers' daily pay from six to seven dollars. From the nation's utilities, Hoover won commitments of $1.8 billion in new construction and repairs for 1930. Railroad executives made a similar pledge. Organized labor agreed to withdraw its latest wage demands.

The president ordered federal departments to speed up construction projects. He contacted all forty-eight state governors to make a similar appeal for expanded public works. He went to Congress with a $160 million tax cut, coupled with a doubling of resources for public buildings and dams, highways and harbors. In December of 1929, Hoover's friend Julius Barnes of the U.S. Chamber of Commerce presided over the first meeting of the National Business Survey Conference, a task force of four hundred leading businessmen designated to enforce the voluntary agreements. Looking back at the year, the "New York Times" judged Commander Richard Byrd's expedition to the South Pole-- not the Wall Street crash-- the biggest news story of 1929.

Praise for the President's intervention was widespread. "No one in his place could have done more," concluded the "New York Times" in the spring of 1930, by which time the Little Bull Market had restored a measure of confidence on Wall Street. "Very few of his predecessors could have done as much." On February 18 Hoover announced that the preliminary shock had passed, and that employment was again on the mend. In June, a delegation of bishops and bankers called at the White House to warn of spreading joblessness. Hoover reminded them of his successful conferences with business and labor, and the explosion of government activity and public works designed to alleviate suffering. "Gentlemen," he concluded, "you have come six weeks too late".


Boom and Bust

For most of our history Americans have been resigned to the "boom and bust" school of economics. When the economy got overheated and speculation ran rampant, a crash was unavoidable. Under such circumstances the best government could do was to do nothing that might make a bad thing worse. "Panics" had occurred in the 1830's under President Martin Van Buren, in the 1850s under James Buchanan, during Ulysses Grant's term in the 1870s and, most notably, under Grover Cleveland in the 1890s.

None of these presidents did much to stem the deflation in prices, contraction of investment, and loss of jobs that resulted--for the simple reason that standard economic theory held there was little if anything they could do. Then, in 1921, a post war slump led President Warren Harding to name Hoover as chairman of a special conference to deal with unemployment. "There is no economic failure so terrible in its import," Hoover declared at the time, "as that of a country possessing a surplus of every necessity of life in which numbers...willing and anxious to work are deprived of dire necessities. It simply cannot be if our moral and economic system is to survive.

This view explains President Hoover's vigorous counterattack in the wake of Wall Street's initial tumble. Not all of his advisers were so willing to abandon Boom and Bust theories. As late as 1930, Secretary of the Treasury Andrew Mellon held that a panic might not be such a bad thing. "It will purge the rottenness out of the system," he added. "High costs of living...will come down. People will work harder, live a moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people." Mellon lost out, however, and was packed off to the Court of Saint James.


Why the "Great" Depression?

Economists are still divided about what caused the Great Depression, and what turned a relatively mild downturn into a decade long nightmare. Hoover himself emphasized the dislocations brought on by World War I, the rickety structure of American banking, excessive stock speculation and Congress' refusal to act on many of his proposals. The president's critics argued that in approving the Smoot-Hawley Tariff in the spring of 1930, he unintentionally raised barriers around U.S. products, worsened the plight of debtor nations and set off a round of retaliatory measures that crippled global trade.

Neither claim went far enough. In truth Hoover's celebration of technology failed to anticipate the end of a postwar building boom, or a glut of 26,000,000 new cars and other consumer goods flooding the market. Agriculture, mired in depression for much of the 1920's, was deprived of cash it needed to take part in the consumer revolution. At the same time, the average worker's wages of $1,500 a year failed to keep pace with the spectacular gains in productivity achieved since 1920. By 1929 production was outstripping demand.

The United States had too many banks, and too many of them played the stock market with depositors' funds, or speculated in their own stocks. Only a third or so belonged to the Federal Reserve System on which Hoover placed such reliance. In addition, government had yet to devise insurance for the jobless or income maintenance for the destitute. When unemployment resulted, buying power vanished overnight. Since most people were carrying a heavy debt load even before the crash, the onset of recession in the spring of 1930 meant that they simply stopped spending.

Together government and business actually spent more in the first half of 1930 than the previous year. Yet frightened consumers cut back their expenditures by ten percent. A severe drought ravaged the agricultural heartland beginning in the summer of 1930. Foreign banks went under, draining U.S. wealth and destroying world trade. The combination of these factors caused a downward spiral, as earning fell, domestic banks collapsed, and mortgages were called in. Hoover's hold the line policy in wages lasted little more than a year. Unemployment soared from five million in 1930 to over eleven million in 1931. A sharp recession had become the Great Depression.


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Gallery Index | 1:Years of Adventure | 2:The Humanitarian Years | 3:The Roaring Twenties | 4:The Wonder Boy | 5:The Logical Candidate | 6:The Great Depression | 7:From Hero to Scapegoat | 8:An Uncommon Woman | 9:Counselor to the Republic
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Last updated: August 29, 2001

The Herbert Hoover Presidential Library-Museum is administered by the
National Archives and Records Administration

(Here's the link: http://hoover.archives.gov/exhibits/Hooverstory/gallery06/gallery06.html )

Great Depression
Related: United States History

in U.S. history, the severe economic crisis supposedly precipitated by the U.S. stock-market crash of 1929. Although it shared the basic characteristics of other such crises (see depression ), the Great Depression was unprecedented in its length and in the wholesale poverty and tragedy it inflicted on society. Economists have disagreed over its causes, but certain causative factors are generally accepted. The prosperity of the 1920s was unevenly distributed among the various parts of the American economy—farmers and unskilled workers were notably excluded—with the result that the nation's productive capacity was greater than its capacity to consume. In addition, the tariff and war-debt policies of the Republican administrations of the 1920s had cut down the foreign market for American goods. Finally, easy-money policies led to an inordinate expansion of credit and installment buying and fantastic speculation in the stock market. The American depression produced severe effects abroad, especially in Europe, where many countries had not fully recovered from the aftermath of World War I; in Germany, the economic disaster and resulting social dislocation contributed to the rise of Adolf Hitler. In the United States, at the depth (1932-33) of the depression, there were 16 million unemployed—about one third of the available labor force. The gross national product declined from the 1929 figure of $103,828,000,000 to $55,760,000,000 in 1933. The economic, agricultural, and relief policies of the New Deal administration under President Franklin Delano Roosevelt did a great deal to mitigate the effects of the depression and, most importantly, to restore a sense of confidence to the American people. Yet it is generally agreed that complete business recovery was not achieved and unemployment ended until the government began to spend heavily for defense in the early 1940s.

Bibliography: See D. Wecter, The Age of the Great Depression (1948, repr. 1956); A. M. Schlesinger, Jr., The Crisis of the Old Order (1957); D. A. Shannon, ed., The Great Depression (1960); A. U. Romasco, The Poverty of Abundance (1965); G. Rees, The Great Slump (1970); C. P. Kindleberger, The World in Depression (1973); D. M. Kennedy, Freedom from Fear (1999); T. H. Watkins, The Hungry Years (1999).



Columbia Encyclopedia, Sixth Edition, Copyright (c) 2005.

(Link is here: http://www.encyclopedia.com/html/G/GreatD1ep.asp )

Crashing Hopes: The Great Depression


In 1929, Yale University economist Irving Fisher stated confidently: "The nation is marching along a permanently high plateau of prosperity." Five days later, the bottom dropped out of the stock market and ushered in the Great Depression, the worst economic downturn in American history. Although Americans often believe that the Crash was the starting point of the Great Depression, many historians point out that it wasn't the sole cause. This lecture examines the roots of the Crash and the effect of the Great Depression on the American public.



Some questions to keep in mind:

Why were Americans so confident in the stock market in the years leading up to the Great Depression?
How did the Psychology of Consumption shape the causes and effects of the Crash?
How did stock market investing change during the 1920s? Who were the main investors and how did they pay for their investments?
Explain the statement: "By 1929, much of the money that was invested in the stock market did not actually exist."
Why did Hoover choose the term "depression" for this economic downturn? Why do you think this term has remained part of the American vocabulary ever since?


Optimism and Prosperity
When Americans elected Herbert Hoover President in 1928, the mood of the general public was one of optimism and confidence in the United States economy. Most people believed that national prosperity would continue indefinitely. In his acceptance speech for the Republican party nomination for the presidency, Hoover had said:

"We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from among us."

(The rest of this article and it's photo's are here: http://us.history.wisc.edu/hist102/lectures/lecture18.html )

The Great Depression information ( USA) - Pictures, causes of the Great depression.

(Here's the link to the webpage: http://www.indianchild.com/the_great_depression.htm )


The Great Depression took place from 1930 to 1939. During this time the prices of stock fell 40%. 9,000 banks went out of business and 9 million savings accounts were wiped out. 86,00 businesses failed, and wages were decreased by an average of 60%. The unemployment rate went from 9% all the way to 25%, about 15 million jobless people.



Causes of The Great depression

* Unequal distribution of wealth

* High Tariffs and war debts

* Over production in industry and agriculure

* Stock market crash and finacial panic



Effects of The Great depression

* Widespread hunger, poverty, and unemployment

* Worldwide economic crisis

* Democratic victory in 1232 election

* FDR's New Deal


It was appropriate that the terrible economic slump of the 1930s started in the United States, to which Europe seemed to have surrendered economic leadership during the Great War and on which she had been dependent ever since.


Stock Market Crash
The stock market crash that began on a black Friday in October 1929 and deepened in the ensuing months had immediate repercussion in Europe. Indeed, even before this, the superheated boom in stock prices that marked the bull market of 1928 siphoned money from Europe. The pricking of the bubble sent shock waves throughout the world.

Large exports of American capital had helped sustain Europe, besides providing an outlet for American surpluses of capital, during the 1920s. Investment in European bonds now contracted sharply and swiftly, as banks that were "caught short" with too many of their assets invested in securities desperately tried to raise money. By June 1930, the price of securities on Wall Street was about 20 percent, on average, of what it had been prior to the crash; between 1929 and 1932 the Dow-Jones average of industrial stock prices fell from a high of 381 to a low of 41!

The American market for European imports also dropped sharply as the entire American economy went into shock; and, to compound trouble, congress insisted on passing a high tariff law in 1930, against the advice of almost all economists. Effective operation of the international economy required that the United States import goods to allow foreign governments to pay for American loans. Moreover, the raising of tariffs set off a chain reaction as every government tried to protect itself against an adverse trade balance leading to currency deterioration. The result was a drying up of world trade that further fueled the economic downturn.

These exceptions may seem more numerous than the rule, but the United States and most parts of Europe did enjoy relatively favorable economic conditions between 1924 and 1930. But it turned out that this prosperity rested on American loans and American markets, which now almost vanished. A European economy still recovering from the trauma of the war and its aftermath was too frail to weather this storm.


The Great Depression
Indices of Industrial Production, 1929-1938,
in Major European Countries
(1937 = 100)
Year 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938
___________________________________________________________________________
France 123 123 105 91 94 92 88 95 100 92
Germany 79 69 56 48 54 67 79 90 100 92
Italy 90 85 77 77 82 80 86 86 100 100
Gr. Br. 77 74 69 69 73 80 82 94 100 101
___________________________________________________________________________

Unemployment (in thousands)

1929 1930 1931 1932 1933 1934 1935 1936 1937 1938
___________________________________________________________________________
France neglig. 13 64 301 305 368 464 470 380 402
Germany 1,899 3,070 4,520 5,575 4,804 2,718 2,151 1,593 912 429
Italy 301 425 734 1,006 1,019 964 - - 874 810
Gr. Br. 1,216 1,917 2,630 2,745 2,521 2,159 2,036 1,755 1,484 1,791
___________________________________________________________________________

The business cycle had long had its ups and downs. If this downswing turned out to be words than any previous one, the reason must be sought in the profound structural changes heaped on top of a normal cycle. Fulcrum of the world economy, the United States had not yet learned how to play that part, as its erratic financial policies and high protective tariffs indicated. Deeper changes were going on in the world. Policies of "autarchy" had developed after the war an were to be perpetuated during the Great Depression; that is, countries that were no longer prepared to trust the international order tried to insulate their economies by tariffs, import quotas, or a managed currency. During the 1920s, while sometimes readjusting the rate at which their currencies were exchanged for gold, most nations clung to the gold standard, which facilitated international trade by permitting currencies to be freely exchanged in terms of gold. But beginning in 1931, when Great Britain was driven off the gold standard, country after country left it in order to protect themselves against a flight of gold leading to deflation and unemployment. The flight from gold was followed by all kinds of nationalist economic policies - exchange controls, import quotas, tariffs. International trade was thus further impaired.

Perfect competition was obviously lacking in an era increasingly prone to both corporate business monopolies or allowance for wars, revolutions, dictatorships, the dismemberment of countries, and all kinds of political factors.

Whatever the causes, panic soon spread through Europe. In 1931, after the World Court refused to allow Austria to enter a customs union with Germany, that economically distressed country collapsed. The central bank failed, touching off a panic that threatened Great Britain next. president Herbert Hoover of the United States proposed a moratorium on all war debts and reparations, but French opposition delayed its acceptance.

One of the most punishing features of the depression had been the drastic fall in agricultural prices, together with other primary products. The years from 1925 to 1928 brought good harvests all over the world, the latter a record in wheat. The price of grain tumbled just as the industrial and financial slump hit, compounding the crisis. Loss of urban and international markets afflicted farmers already in trouble from overproduction and, frequently, from a burden of debt incurred in expanding production and buying agricultural machinery. With unemployed workers suffering from hunger, the sight of farmers refusing to harvest crops because the price was too low to make it worthwhile drove home the bitter lesson of poverty in the midst of plenty, the curse of Midas fallen on man. But by 1936 agricultural prices had risen somewhat........

By 1933, 26.6% of people who were wage earners were unemployed. Workers were either fired, laid off, or had extra work to do with less pay if they still had their job. The domestic market was affected and many lost their lands because they couldn't keep up with the payments, and most factory workers had to work twice as had to earn the same amount of money they did before the Depression hit.

The Savings and Loan Scandal: The Untold Story


Article # : 18941

Section : CURRENT ISSUES
Issue Date : 2 / 1991 3,496 Words
Author : Glenn R. Simpson
Glenn R. Simpson covers the Keating case for the Capitol Hill newspaper Roll Call.

The National Mortgage News, the Orange County Register, the Mesa (Arizona) Tribune, Regardie's magazine: These are some of the unlikely press heroes of the Charles Keating-Lincoln Savings and Loan scandal. Along with some bigger newspapers like the Detroit News, the Los Angeles Times, the San Francisco Chronicle, the Dallas Morning News, the Arizona Republic, and the Wall Street Journal, these journalistic bush leaguers made major contributions to uncovering the financial misdeeds and vast subterranean web of political influence spun by accused racketeer Charles H. Keating, Jr.

Without them, the story of one of the most sensational American scandals of the 1980s would in all likelihood have remained untold. For the two most politically influential news organs in America, the Washington Post and the New York Times, have snoozed--albeit fitfully--through most of this complex but sensational tale of venality, greed, and political corruption.

One accomplished investigative reporter for a medium-sized West Coast paper bitterly calls the Post and the Times "the Pravdas." When it comes to the Keating scandal, that is a devastatingly accurate description; both papers virtually dictate what is news--even the television networks take their cues from the two dailies-and little, indeed, has seemed newsworthy to them about Keating.

This reporter has written several ground-breaking stories about the Keating affair, some as recently as last fall, but they have been ignored by the Pravdas and, as far as Washington is concerned, might as well never have been written. It is a familiar plaint among the small community of Keating investigators in the press.

On May 24, 1988, an ironic memorandum was written by a senior aide on the House Banking Committee. He urged his boss, then-Banking Committee Chairman Fernand St. Germain (a Rhode Island Democrat who in November of that year became one of the first electoral casualties of the S&L scandal), to investigate the long-controversial Lincoln.

The thrift, the aide wrote, "is now very much in the eyes of the various national investigative reporters--Jack Anderson, Mike Binstein, Brooks Jackson up front and others like [Kathleen] Day not far behind. My guess, based on conversations with Binstein and Jackson, in particular, is that Lincoln smells and that they will track the smell like sharks after blood."

Note ... Read Full Article


Look for this article in Ask.com


Copyright © 2004 The World & I. All rights reserved.
__________________________________________

ps. The link to this article is here: http://www.worldandihomeschool.com/public_articles/1991/february/wis18941.asp

Savings and Loan crisis

From Wikipedia, the free encyclopedia.
(Redirected from Savings and Loan scandal)

The Savings and Loan crisis of the 1980s was a wave of savings and loan failures in the USA, caused by mismanagement, rising interest rates, failed speculation, fluctuation in real estate values, and, in some cases, fraud. The ultimate cost of the crisis is estimated to have totalled around USD$150 billion, about $125 billion of which was directly borne by the U.S. government, which contributed to the soaring deficits of the early 1990's. The concomitant slowdown in the finance industy and the real estate market may have been a contributing cause of the 1990-1991 economic recession. Cost of Savings & Loan Crisis

Contents
1 Background
2 Nature of the Deregulation
3 External links
4 References


Background

Many banks, but particularly savings and loan institutions, were experiencing an outflow of low rate deposits, as depositors moved their money to the new high interest money market funds. At the same time, the institutions had much of their money tied up in long term mortgages which, with interest rates rising, were worth far less than face value.

In 1980, under the Carter administration, the limits on deposit insurance were raised from $40,000 to $100,000 per account. Early in the Reagan administration, savings and loan institutions ("S&Ls") were deregulated (see the Garn - St Germain Depository Institutions Act of 1982), putting them on an equal footing with commercial banks. S&Ls (thrifts) could now pay higher market rates for deposits, borrow money from the Federal Reserve, make commercial loans, and issue credit cards.


Nature of the Deregulation

The deregulation of S&Ls did not have the effect of causing them to be under the same regulations as banks. Firstly, thrifts could choose to be under either a state or a federal charter. Deregulation at the federal level caused a race to the bottom at the state level (especially in California) because state regulators were paid by the thrifts they regulated, and they didn't want to lose that money.

In an effort to take advantage of the real estate boom and high interest rates of the early 1980s, many S&Ls lent far more money than was prudent, and in risky types of ventures in which many S&Ls were not competent. Whereas insolvent banks in the United States were typically detected and shut down quickly by bank regulators, the S&L regulators were apparently surprised by deregulation, and not sufficiently competent or staffed to perform the due diligence needed to regulate effectively.

The most important contributor to the problem was deposit brokerage. Deposit brokers, somewhat like stockbrokers, are paid a commission by the customer to find the best CD (Certificate of deposit) rates and place their customers' money in those CDs. These CDs, however, are usually short term 100,000.00 CDs. Previously banks and thrifts could only have five percent of their deposits be brokered deposits; the race to the bottom caused this limit to be lifted. A small one-branch thrift could then attract a large number of deposits simply by offering the highest rate. In order to make money off this expensive money, it had to lend at even higher rates, which means that it had to make more risky investments. This system was made even more damaging when certain deposit brokers, instituted a scam known as "linked financing." In "linked financing" a deposit broker would approach a thrift and say that they would steer a large amount of deposits to that thrift if the thrift would loan certain people money (the people however were paid a fee to apply for the loans and told to give the loan proceeds to the deposit broker). This caused the thrifts to be tricked into taking on bad loans.

A large number of S&L customers' defaults and bankruptcies ensued, and the S&Ls that had overextended themselves were forced into bankruptcy themselves. The U.S. government agency FSLIC, which at the time insured consumers' S&L accounts in the same way the FDIC insures consumers' bank accounts, then had to repay all the consumers whose money was lost.

The Federal Home Loan Bank Board reported in 1988 that fraud and insider abuse were the worst aggravating factors in the wave of S&L failures. The most notorious figure in the S&L crisis was probably Charles Keating, who headed Lincoln Savings of Irvine, California. Keating was convicted of fraud, racketeering, and conspiracy in 1993, and spent four and one-half years in prison before his convictions were overturned. In a subsequent plea agreement, Keating admitted committing bankruptcy fraud by extracting $1 million from the parent corporation of Lincoln Savings while he knew the corporation would collapse within weeks.

Keating's attempts to escape regulatory sanctions led to the Keating five political scandal, in which five U.S. senators were implicated in an influence-peddling scheme to assist Keating. Three of those senators — Alan Cranston, Don Riegle, and Dennis DeConcini — found their political careers cut short as a result. Two others — John Glenn and John McCain — escaped relatively unscathed.


External links
FDIC: The S&L Crisis: A Chrono-Bibliography
The Cost of Savings & Loan Crisis: Truth & Consequences

References
Inside Job, by Steven Pizzo, Mary Fricker, and Paul Muolo. ISBN 0-07-050230-7
Retrieved from "http://en.wikipedia.org/wiki/Savings_and_Loan_crisis"

This page was last modified 00:45, 28 May 2005. All text is available under the terms of the GNU Free Documentation License (see Copyrights for details).
______________________________________

ps. Here's the link to this page: http://en.wikipedia.org/wiki/Savings_and_Loan_scandal

The S&L Crisis: A Chrono-Bibliography
--------------------------------------------------------------------------------
(It's easier to read this if, one goes to the actual webpage which is here: http://www.fdic.gov/bank/historical/s&l/ )



[NOTE: This chronology and bibliography is provided solely for informational purposes. The inclusion or exclusion of a source constitutes neither an endorsement nor a rejection by the FDIC of the opinions expressed in that source.]

General Books and Articles A basic bibliography to provide an overview of the S&L Crisis.
Causes of the S&L Crisis Background materials for understanding what led to the S&L Crisis.
Charles Keating and Lincoln Savings and Loan Details on one of the costliest S&L failures that involved 5 U.S. Senators.
Criminal Activity Associated with S&L Failures The goods on specific criminal investigations of S&L owners and directors.
Depository Institutions Deregulation and Monetary Control Act of 1980 Details on the 1980 law (DIDMCA) that eased the distinctions among savings institutions.
Deregulation of the S&Ls Working papers and analysis covering the deregulation of the S&L industry that led to the crisis.
Financial Institutions Reform Recovery and Enforcement Act (FIRREA) The law enacted in August, 1989, to bail out the S&L crisis and create the Resolution Trust Corporation.
Garn - St Germain Depository Institutions Act of 1982 Analyses of the 1982 law that allowed S&L's to diversify their activities with the view of increasing profits.
Interest Rate Vulnerability Bibliography for understanding S&L interest rates, and S&L vulnerability during this time period.
Southwest Plan The plan to consolidate and package insolvent Texas S&Ls and sell them to the highest bidder.
State Deposit Insurance Funds - Ohio and Maryland S&L failures in Ohio and Maryland and the end of the State Deposit Insurance Funds/
Taxation and Accounting bibliography Understanding the tax and accounting rules for S&L's

1966-1979 Market interest rates fluctuate with increasing intensity and S&Ls experience difficulty with each interest rate rise. Interest rate ceilings prevent S&Ls from paying competitive interest rates on deposits. Thus, every time the market interest rates rise, substantial amounts of funds are withdrawn by consumers for placement in instruments with higher rates of return. This process of deposit withdrawal ("disintermediation") and the subsequent deposit influx when rates rise ("reintermediation") leaves S&Ls highly vulnerable. Concurrently, money market funds become a source of competition for S&L deposits. S&Ls are additionally restricted by not being allowed to enter into business other than accepting deposits and granting home mortgage loans.

1967--State of Texas approves major liberalization of S&L powers. Property development loans of up to 50% of net worth are allowed.
1972--Hunt Commission recommendations would have created federal savings banks to replace S&Ls. The banks would have had additional authority to make commercial loans and invest in commercial paper.

1973--FINE Study would have granted same powers for S&Ls as for banks, including checking accounts. Also recommends consolidation of the regulators. Interest rate insurance was recommended if S&Ls are to remain primarily involved in housing finance.

1978--Financial Institutions Regulatory and Interest Rate Control Act of 1978 enacted. Weak version of previous recommendations. Allows S&Ls to invest up 5% of assets in each of land development, construction, and education loans.

1979--Doubling of oil prices. Inflation moves into double digits for second time in five years.

1980-1982 Statutory and regulatory changes give the S&L industry new powers in the hopes of their entering new areas of business and subsequently returning to profitability. For the first time, the government approves measures intended to increase S&L profits as opposed to promoting housing and homeownership.


March, 1980--Depository Institutions Deregulation and Monetary Control Act (DIDMCA) enacted. The law is a Carter Administration initiative aimed at eliminating many of the distinctions among different types of depository institutions and ultimately removing interest rate ceiling on deposit accounts. Authority for federal S&Ls to make ADC (acquisition, development, construction) loans is expanded. Deposit insurance limit raised to $100,000 from $40,000. This last provision is added without debate.
November, 1980--Federal Home Loan Bank Board reduces net worth requirement for insured S&Ls from 5 to 4 percent of total deposits. Bank Board also removes limits on the amounts of brokered deposits an S&L can hold.

August, 1981--Tax Reform Act of 1981 enacted. Provides powerful tax incentives for real-estate investment by individuals. This legislation helps create a "boom" in real estate and contributes to over-building.

September, 1981--Federal Home Loan Bank Board permits troubled S&Ls to issue "income capital certificates" that are purchased by FSLIC and included as capital. Rather than showing that an institution is insolvent, the certificates make it appear solvent.

1982-1985 Reductions in the Bank Board's regulatory and supervisory staff. In 1983, a starting S&L examiner is paid $14,000 a year. The average examiner has only two years on the job. Examiner salaries are paid through OMB, not the Bank Board. During this period of supervisory and examination retraction, industry growth increases. Industry assets increase by 56% between 1982 and 1985. 40 Texas S&Ls triple in size between 1982 and 1986; many of them grow by 100% each year. California S&Ls follow a similar pattern.


January, 1982--Federal Home Loan Bank Board reduces net worth requirement for insured S&Ls from 4 to 3 percent of total deposits. Additionally, S&Ls are allowed to meet the low net worth standard not in terms of generally accepted accounting principles (GAAP), but of even more liberal regulatory accounting principles (RAP).
April, 1982--Bank Board eliminates restrictions on minimum numbers of S&L stock holders. Previously, it required at least 400 stock holders of which at least 125 had to be from "local community", with no individual owning more than 10% of stock and no "controlling group" more than 25%. Bank Board's new ownership regulation would allow a single owner. Purchases of S&Ls were made easier by allowing buyers to put up land and other real estate, as opposed to cash.

December, 1982--Garn - St Germain Depository Institutions Act of 1982 enacted. This Reagan Administration initiative is designed to complete the process of giving expanded powers to federally chartered S&Ls and enables them to diversify their activities with the view of increasing profits. Major provisions include: elimination of deposit interest rate ceilings; elimination of the previous statutory limit on loan to value ratio; and expansion of the asset powers of federal S&Ls by permitting up to 40% of assets in commercial mortgages, up to 30% of assets in consumer loans, up to 10% of assets in commercial loans, and up to 10% of assets in commercial leases.

December, 1982--In response to the massive defections of state chartered S&Ls to the federal system, Nolan Bill passes in California. Allows California-chartered S&Ls to invest 100% of deposits in any kind of venture. Similar plans adopted in Texas and Florida.

1983--Lower market interest rates return many S&Ls to health. 35% of institutions, however, still sustain losses. 9% of all S&Ls (representing 10% of industry assets) are insolvent by GAAP standards.

March, 1983--Edwin Gray becomes Chairman of the Federal Home Loan Bank Board. Beginning in 1984 and continuing throughout his tenure, regulatory and supervisory measures passed by the Bank Board begin the reversing of deregulation.

November, 1983--Bank Board raises net worth requirement for newly chartered S&Ls to 7%.

March, 1984--Failure of Empire Savings of Mesquite, TX. "Land flips" and other criminal activities are a pattern at Empire. This failure would eventually cost the taxpayers approximately $300 million.

April, 1984--Bank Board moves jointly with the FDIC to attempt to eliminate deposit insurance for brokered deposits. Federal court rejects this attempt in mid-1984 as overstepping statutory limits.

July, 1984--Bank Board requires S&L management to adopt policies and procedures for managing interest rate risk.

January, 1985--Bank Board limits the amount of brokered deposits to 5% of deposits at FSLIC insured institutions failing to meet their net worth requirements. Bank Board also limits direct investment (equity securities, real estate, service corporations, and operating subsidiaries) to the greater of 10% of assets or twice the S&L's net worth, provided the institution meets regulatory net worth.

March, 1985--Ohio bank holiday. Anticipated failure of Home State Savings Bank of Cincinnati, OH and possible depletion of Ohio state deposit insurance fund cause Governor Celeste to close Ohio S&Ls. Eventually, those that can qualify for federal deposit insurance are allowed to reopen.

May, 1985--S&L failures in Maryland eventually cause loss to state deposit insurance fund and Maryland taxpayers of $185 million. Ohio and Maryland S&L failures helped kill state deposit insurance funds.

July, 1985--Chairman Gray begins transfer of federal examiners to the twelve regional Federal Home Loan Banks so that they are no longer overseen by OMB and their salaries are paid directly by the Bank Board system.

August, 1985--Only $4.6 billion in FSLIC insurance fund. Chairman Gray tries to gain support for recapitalizing FSLIC on Capitol Hill. In 1986, GAO estimates the loss to the insurance fund to be around $20 billion.

December, 1985--Bank Board allows S&L examiners to "classify" questionable loans and other assets for the purpose of requiring loan loss reserves.

1986-1989 Compounding of losses as insolvent institutions are allowed to remain open and grow, allowing ever increasing losses to accumulate.


August, 1986--Bank Board raises net worth standard gradually to 6% with up to 2% points offset for reduced interest rate-risk.
1987--Losses at Texas S&Ls comprise more than one-half of all S&L losses nationwide, and of the 20 largest losses, 14 are in Texas. Texas economy in major recession: crude oil prices fall by nearly 50%, office vacancy is over 30%, and real estate prices collapse.

January, 1987--GAO declares FSLIC fund insolvent by at least $3.8 billion. Recapitalization has stalled on Capitol Hill until now by claims of powerful S&L lobbyists that Bank Board regulations are too harsh and arbitrary.

February, 1987--Bank Board requires prior supervisory approval for S&Ls making direct investment in excess of 2.5 times their tangible capital.

April, 1987--Edwin Gray ends his term as chairman of Federal Home Loan Bank Board in June. Before his departure, he is summoned to the office of Sen. Dennis DeConcini. DeConcini, with four other Senators (John McCain, Alan Cranston, John Glenn, and Donald Riegle) question Gray about the appropriateness of Bank Board investigations into Charles Keating's Lincoln Savings and Loan. All five senators, who have received campaign contributions from Keating, would become known as the "Keating Five". The subsequent Lincoln failure is estimated to have cost the taxpayers over $2 billion.

May, 1987--Bank Board begins phasing out the remains of the liberal RAP accounting standards. S&Ls must conform to GAAP accounting standards, as banks do. Effective date of this rule postponed by new Chairman of the Federal Home Loan Bank Board, M. Danny Wall, to 1/1/1989.

August, 1987--Competitive Equality Banking Act of 1987 enacted. The Act authorizes $10.8 billion recapitalization of the FSLIC with only $3.75 billion authorized in any 12-month period. Also contains forbearance measures designed to postpone or prevent S&L closures.

February, 1988--Bank Board introduces the "Southwest Plan" to consolidate and package insolvent Texas S&Ls and sell them to the highest bidder. The strategy is to resolve insolvencies quickly while conserving scarce cash for FSLIC. The Bank Board uses a number of strategies to pay for the difference between assets and liabilities of the failed institutions: FSLIC notes, tax incentives, and income, capital value and yield guarantees. The Bank Board disposes of 205 S&Ls through the Southwest Plan with assets of $101 billion.

November, 1988--George Bush elected President. S&L problem not part of election debate.

1989--President Bush unveils S&L bailout plan in February. In August, Financial Institutions Reform Recovery and Enforcement Act (FIRREA). FIRREA abolishes the Federal Home Loan Bank Board and FSLIC, switches S&L regulation to newly created Office of Thrift Supervision. Deposit insurance function shifted to the FDIC. A new entity, the Resolution Trust Corporation is created to resolve the insolvent S&Ls.

Other major provisions of FIRREA include: $50 billion of new borrowing authority, with most financed from general revenues and the industry; meaningful net worth requirements and regulation by the OTS and FDIC; allocation funds to the Justice Department to help finance prosecution of S&L crimes. Additional bank crime legislation the next year (i.e., the Crime Control Act of 1990) mandates a study by the National Commission on Financial Institution Reform, Recovery and Enforcement to uncover the causes of the S&L crisis, and come up with recommendations to prevent future debacles.


Last Updated 12/20/2002 library@fdic.gov

Savings and Loan Scandal

Here are some facts on the infamous S&L scandal of the eighties which we are still paying for.

The Savings and Loan scandal is the largest theft in the history of the world.

Deregulation eased restrictions so much that S&L owners could lend themselves money.

The Garn Institute of Finance, named after Senator Jake Garn, co-authored the deregulation of the industry and received $2.2 million from industry executives.

Neil Bush, George Bush's son, never servered time in jail for his part in running an S&L into the ground.

Represenative Fernard St. Germain, who was head of the House of Representatives banking, co-authored the deregulation and was voted out of office after other questionable dealings and was sent back to D.C. as an S&L lobbiest.

Charles Keating, when asked if massive lobbying efforts had influenced the government officials, he replies "I certainly hope so."

The rip-off began in 1980 when the government raised the federal insurance on S&L's from $40,000 to $100,000 even though the typical savings account was only around $6000.

Some of the seized assets were a buffalo sperm bank, a racehorse with syphilis, and a kitty litter mine.

James Fail invested $1000 of his own money to purchase 15 failing S&L's. The government reimbursed him $1.85 billion in federal subsidies.

It sometimes took over 7 years to close failing S&L's by the government.

When S&L owners who stole millions went to jail, their sentances were typically one-fifth that of the average bank robber.

The goverment bail out will cost the taxpayers around $1.4 trillion dollars when it is over.

If the White House had stepped in and bailed out the S&L's in 1986 instead of delaying until after the 1988 elections, the cost might have been only $20 billion.

With the money lost from the S&L scandals, the government could have provided prenatal care for every American child for the next 2,300 years.

With the money lost from the S&L scandals, the government could have purchased 5 million average homes.

The authors of "Inside Job", a book about the S&L scandal, found criminal activity at every S&L they investigated.

Facts were taken from"Inside Job" and "It's a Conspiracy! by the National Insecurity Council.

Copyright 1995-2005, Charles R. Grosvenor Jr.
http://www.inthe80s.com/sandl.shtml

The Savings and Loan Scandal and Public Accounting


By Wade Frazier



A Brief Economic History

The Biggest Gold Rush of All Time


The Need for Public Accounting

The Savings and Loan Industry and What Doomed it

The Savings and Loan Gold Rush and Public Accounting

An Enron Postscript

Footnotes
___________________________

ps. Go here for these writings: http://www.ahealedplanet.net/savings.htm

FAS Note: This December 1992 document is the penultimate draft of the Senate Foreign Relations Committee report on the BCCI Affair. After it was released by the Committee, Sen. Hank Brown, reportedly acting at the behest of Henry Kissinger, pressed for the deletion of a few passages, particularly in Chapter 20 on "BCCI and Kissinger Associates." As a result, the final hardcopy version of the report, as published by the Government Printing Office, differs slightly from the Committee's softcopy version presented below.--Steven Aftergood
--------------------------------------------------------------------------------

The BCCI Affair
A Report to the Committee on Foreign Relations
United States Senate
by
Senator John Kerry and Senator Hank Brown
December 1992
102d Congress 2d Session Senate Print 102-140

1.) EXECUTIVE SUMMARY
2.) Introduction and Summary of Investigation
3.) The Origin and Early Years of BCCI
4.) BCCI's Criminality
5.) BCCI's Relationship with Foreign Governments, Central Banks, and International Organizations
6.) BCCI in the United States - Initial Entry and FGB and NBG Takeovers
7.) BCCI in the United States - Part Two: Acquisition, Consolidation, and Consequences
8.) BCCI and Law Enforcement - The Justice Deparment and the US Customs Service
9.) BCCI and Law Enforcement - District Attorney of New York
10.) BCCI and Its Accountants
11.) BCCI, The CIA and Foreign Intelligence
12.) The Regulators
13.) Clark Clifford and Robert Altman
14.) Abu Dhabi: BCCI's Founding and Majority Stockholders
15.) Mohammed Hammoud: BCCI's Flexible Frontman
16.) BCCI And Georgia Politicians
17.) BCCI's Lawyers and Lobbyists
18.) Hill and Knowlton and BCCI's PR Campaign
19.) Ed Rogers and Kamal Adham
20.) BCCI and Kissinger Associates
21.) Capcom: A Case Study of Money Laundering
22.) Legislative and Policy Recommendations
23.) Appendix - Matters For Further Investigation, Witnesses and Writs
_______________________________________

ps. the actual link is here (with all the HTML and writing)

http://www.fas.org/irp/congress/1992_rpt/bcci/05foreign.htm

BCCI'S CRIMINALITY

BCCI's unique criminal structure -- an elaborate corporate spider-web with BCCI's founder, Agha Hasan Abedi and his assistant, Swaleh Naqvi, in the middle -- was an essential component of its spectacular growth, and a guarantee of its eventual collapse. The structure was conceived by Abedi and managed by Naqvi for the specific purpose of evading regulation or control by governments. It functioned to frustrate the full understanding of BCCI's operations by anyone.

Unlike any ordinary bank, BCCI was from its earliest days made up of multiplying layers of entities, related to one another through an impenetrable series of holding companies, affiliates, subsidiaries, banks-within-banks, insider dealings and nominee relationships. By fracturing corporate structure, record keeping, regulatory review, and audits, the complex BCCI family of entities created by Abedi was able to evade ordinary legal restrictions on the movement of capital and goods as a matter of daily practice and routine. In creating BCCI as a vehicle fundamentally free of government control, Abedi developed in BCCI an ideal mechanism for facilitating illicit activity by others, including such activity by officials of many of the governments whose laws BCCI was breaking.

As one BCCI officer later recalled, Abedi had a saying that expressed his view about law:

The only laws that are permanent are the laws of nature. Everything else is flexible. We can always work in and around the laws. The laws change.(1)

BCCI would not change to accommodate human laws. On the occasions that such laws actually interfered with BCCI's business, BCCI would, as necessary, change the laws to accommodate BCCI -- or ignore them entirely.

Significantly, at the same time that BCCI created its elaborate corporate structure for the purpose of deceiving and defrauding those outside BCCI, within BCCI, BCCI's various entities were largely disregarded, and treated interchangably. As BCCI's liquidators concluded one year after the bank's closure in a report to the bank's creditors committee, "in a number of respects, the BCCI Group appears to have conducted its affairs as a single entity, witout clearly identifying which company or entity within the BCCI Group was responsible for any particular transaction."(2)

As a result, the records of BCCI's criminal activity constitute an accounting and legal nightmare, and a full record of what actually took place is unlikely to be reconstructed. BCCI's multiplicity of locations, layered corporate structure, front-companies, front-men, its willingness from the top down to falsify information, and its pervasive disregard for the national laws of each country it operated in, combined to create a culture of criminality within the bank so massive as to defy investigation.

BCCI records in the United States are fragmentary and incomplete. To the extent that they are organized at all, that organization is in chronological order document by document, rather than according to any subject matter, customer account, or transaction. Though fragmentary, these records are also voluminous, amounting to at least 9,000 boxes in New York and Miami alone, and several million pages. Foreign BCCI document repositories of BCCI, especially in the United Kingdom, the Grand Caymans, and Abu Dhabi, are even larger, with access for U.S. investigators limited by foreign bank confidentiality, privacy laws, and the willingness of the foreign jurisdictions to cooperate.

One year following the closure of BCCI, federal investigators in the U.S. were still in the process of microfilming BCCI documents from Miami, and liquidators for BCCI in the United Kingdon had indexed 1600 boxes containing approximately 2.4 million separate BCCI documents -- approximately 2.5 percent of the total of BCCI's documents in the United Kingdom.(3)

Adding to the inherent problem of investigating the largest case of organized crime in history, spanning over some 72 nations, has been the destruction of documents at BCCI and its affiliates by shredding and arson; document backdating and falsification; the removal of most key documents from London to Abu Dhabi in 1990; the refusal of authorities in the United Kingdom and in the Grand Caymans to share information with Congress and other U.S. investigators as a consequence of their interpretation of local bank confidentiality and privacy laws; the inability to question Abedi due to his stroke, the inability to question BCCI's other key officials due to their incarceration and segregation in Abu Dhabi by Abu Dhabi officialdom since July 5, 1991, and BCCI's haphazard method of record-keeping.

Regardless of what might be shown in the missing material, the remainder is more than adequate to document BCCI's criminality, including fraud by BCCI and BCCI customers involving billions of dollars; money laundering in Europe, Africa, Asia, and the America; BCCI's bribery of officials in most of those locations; its support of terrorism, arms trafficking, and the sale of nuclear technologies; its management of prostitution; its commission and facilitation of income tax evasion, smuggling, and illegal immigration; its illicit purchases of banks and real estate; and a panoply of financial crimes limited only by the imagination of its officers and customers.

Among BCCI's principal mechanisms for committing crimes were shell corporations, bank confidentiality and secrecy havens, layering of corporate structure, front-men and nominees, back-to-back financial documentation among BCCI controlled entities, kick-backs and bribes, intimidation of witnesses, and retention of well-placed insiders to discourage governmental action.

As Robert Mueller III, the Assistant Attorney General at the Justice Department now in charge of the BCCI investigation, testified in October, 1991:

BCCI was not an ordinary bank. It was set up deliberately to avoid centralized regulatory review, and operated extensively in bank secrecy jurisdictions. Its affairs are extraordinarily complex. Its offers were sophisticated international bankers whose apparent objective was to keep their affairs secret, to commit fraud on a massive scale, and to avoid detection.(4)


In the words of former Senate investigator Jack Blum:

The problem that we are all having in dealing with this bank is that . . . it had 3,000 criminal customers and every one of those 3,000 criminal customers is a page 1 story. So if you pick up an one of [BCCI's] accounts you could find financing from nuclear weapons, gun running, narcotics dealing, and you will find all manner and means of crime around the world in the records of this bank.(5)

However daunting the task of explicating the full extent of BCCI's criminality, it is essential to recognize that at core, BCCI was not a bank which made an adequate return on investment through lending out depositors funds like other banks, but a "Ponzi scheme," which used new depositors funds to pay current expenses and to repay earlier depositors, creating a pyramid of mounting obligations that ultimately and inevitably would bring about BCCI's collapse.

As Blum testified:

"The people I talked to at the bank would say, this was a bank that was very strange, because it needed deposits all the time, and if you're running a Ponzi scheme you need more and more cash in to support the whole system of fraud that you've generated. What it meant was that BCCI people would go out and bribe central bank officials and high government officials to get them to deposit their country's foreign exchange at BCCI, and in exchange for whatever amount of money, suddenly the foreign exchange reserves of a country would be put there and put to use."(6)

From the beginning, BCCI President Abedi conceived of BCCI as a machine with two driving mechanisms -- asset growth and faith. The latter was essential to prevent a day of reckoning when depositors and creditors alike would cause a run on the bank. The former was necessary to sustain the latter through bad times. Together, they worked to sustain the illusion that BCCI was solvent, when in fact, it is unlikely BCCI was ever solvent.

On December 18, 1991, in an agreement with the Justice Department and New York District Attorney, BCCI's liquidators pled guilty to having engaged in a criminal conspiracy through financial fraud, and thereby constituting a Racketeering Influenced and Corrupt Organization (RICO), whose entire assets, legitimate and illegitimate, were subject to confiscation by the government. Specific crimes admitted to by BCCI's liquidators in the agreement included:

** Seeking deposits of drug proceeds and laundering drug money

** Seeking deposits from persons attempt to evade U.S. income taxes

** Using "straws" and nominees to acquire control of U.S. financial institutions


** Lying to regulators and falsifying regulatory documents

** Creating false bank records and engaging in sham transactions to deceive regulators.(7)

Thus, the criminality at BCCI was not, as has sometimes been suggested, a side-effect of the bank's enormous growth during the 1970's, an unintended consequence of overly rapid expansion, but inherent in the bank's philosophy of asset expansion from the beginning, and pervasive to its closure.

While U.S. law enforcement was not able to legally establish BCCI as organized crime until December, 1991, the scope of BCCI's criminality had been clear to both prosecutors and BCCI's defense team at least a year earlier. As BCCI's own private investigators, hired by the bank after its indictment in Tampa for money laundering in October, 1988, told BCCI officials in 1990:

It is [the government's] view that BCC is a full service bank in the worse sense of the phrase. [Prosecutors] believe that it is official bank policy to actively seek out and market high net-worth individuals, and to gain from them large and frequent deposits, preferably in cash. They see such marketing efforts as being done at best without regard for the source of the customer's cash, ant at worst with tacit acceptance or even actual knowledge that in many cases the customer's money is derived from illegal enterprises, most notably narcotics. . . In the eyes of some prosecutors and investigators, the Bank's "services" are not limited merely to accepting the proceeds of illegal activities. They believe that BCC officers and employees, with express upper management approval, also actively assist and even advise their customers on the most effective methods of hiding their money and evading taxes. Money, for example, is seen to be hidden or "laundered" by the constant, carefully controlled transfer of funds from one account to another within BCC and its world-wide branches or between BCC and other banks related to BCC, thus making the money almost impossible for U.S. law enforcement to trace. (8)

As an officer of BCCI Canada wrote to law enforcement just three days after the closure of BCCI worldwide, even those inside BCCI were often appalled by its practices.

We have read with a sense of relief that finally somebody had the guts to investigate into the affairs in the Bank . . . BCCI s.a., BCCI Overseas and BCC Canada have been for years conducting false accounting practices, concealment of losses (more so to avoid displeasing the Arab Owners) and making irregular loans.(9)

The letter went on to describe the knowledge of principal officers of BCCI, including its chief executive officer in the Americas, knowledge of money laundering, drug trafficking, loans created in "bogus" names, and advances of funds to non-existent companies in London, Luxembourg, Cyprus, Malta, the Channel Islands, and other locations. The writer begged investigators prosecute "the big crooks in London and Abu Dhabi."(10)

BCCI Paris branch manager Nazir Chinoy would later admit to investigators that essentially all of BCCI's activity in France was the result of the customer or the bank or both violating somebody's laws.

All the money we got [at BCCI-France] in some way we were breaking the law. If you taking it with a kickback, you are breaking foreign exchange, all Africans who brought their money got commissions which meant kick-backs. Back to back LCs to misrepresent financial deals, taking out less money in a third world country and keeping a share, kickbacks, exchanges, laundering, in some way you are breaking the law in each case. The law breaking was pretty systematic.(11)

(For the rest of this long article go here: http://www.fas.org/irp/congress/1992_rpt/bcci/04crime.htm )

Wow...this board neeeds more posts! I'll have to do something about that.

Bre-X....

Bre-X and Its Lessons

Bre-X was a junior gold exploration company that perpetrated the largest "gold discovery scam" in the history of the world.

The stock went from pennies to $286.50 (pre-split basis), at which time the gold reserves of this company supposedly amounted to 200 million ounces (a value of $70 billion) ... 8% of the entire world's gold in one deposit!

The stock went right back to pennies when the scam was finally discovered. For those who don't know, it turns out that two or three of the Bre-X geologists merely sprinkled gold onto the drill cores! That simple crime created THE most extreme example of the "greed-then-grief" cycle that you will ever see in your lifetime.

Way before this incredible story unfolded, Bre-X looked like just another "PennyGold type of stock." Founded in 1988, here is its high-low trading history:

YEAR 1989 1990 1991 1992 1993 1994 1995
HI__ 0.42 0.75 0.41 0.35 1.55 3.10 59.00
LO__ 0.15 0.20 0.04 0.06 0.12 1.15 1.90

-- and onwards up to $286.50 (NOT a typo!), before the deception was finally discovered.

At its peak, the market put a $6 billion valuation on a company that:

owned a piece of undeveloped jungle in Indonesia
had provided NO independent verification of its drill results
BEFORE it could pour its first ounce of gold, would have to spend $1.5 billion in a country where you are subject to the whim of a corrupt and greedy government
was headed by some rather questionnable characters with generally poor reputations.
There are many lessons to be learned from the "$6 billion" greed side of Bre-X. Suffice it to repeat that Bre-X will stand forever as the ultimate example of the excesses of the "greed" part of the "greed-then-grief" cycle.

But for PennyGold Practitioners, the lessons lie NOT in the years of 1994 and after, but in 1993 and before. Because, while PennyGold does not create these cycles, it DOES recognize and exploit them.

From 1989 to 1993, the Bre-X stock systematically yo-yo'd in price. Several times, Bre-X was an "over-killed" stock that APPEARED dead, but was actually in no danger of delisting. Each year, the Prez worked hard to develop a new promotion. Notice how you could have bought Bre-X for as low as 4 cents in 1991, six cents in 1992 and 12 cents in 1993.

Yes, from 1989 to 1993, Bre-X was just a typical "penny dreadful." But you could have tripled (or better your money) each year by following PennyGold strategies ... and that is BEFORE the really big move even occurred!

The big fraud that occurred post-1992 is merely the most extreme (and illegal) version of what causes these movements ... ruthless promotion ... rumors of rumors ... exaggerated stories .... endless hype ... greed. Then, quiet ... disillusionment ... fear ... panic ... grief ... anger.

And the cycle happens over and over. How can that be? Believe it or not, the 97% of penny stock investors who lose money simply forget ... because "this time it's different." And those who finally give up are replaced by new "players" with a zero knowledge base.

PennyGold puts you into the ranks of the 3%. It will show you how to find those "over-killed" stocks, how to make sure they are not about to delist, how to find the ones with the most upside potential, and how to buy and sell them.

It is infinitely more powerful than what I used to do by hand. For example, while I did not track Alberta actively at the time of Bre-X, today's electronic version of PennyGold would certainly have identified this stock as a PennyGold buying opportunity. Of course, I would likely have sold it at 40-50 cents and then kicked myself for the next decade, so I'm better off

(here's the link): http://www.goodbytes.com/pennygold/bre-x.html
--------------------------------------------

and another Bre-X link: http://pennystocks.org/s5_2.htm

Here's a pertinent post from my other paying member board to get things going here too:

Schemers and Scams: A Brief History of Bad Business

It takes some pretty spectacular behavior to get busted in this country for a white-collar crime. But the business world has had a lot of overachievers willing to give it a shot.

FORTUNE
Monday, March 18, 2002
By Ellen Florian


1920: The Ponzi Scheme
Charles Ponzi planned to arbitrage postal coupons--buying them from Spain and selling them to the U.S. Postal Service at a profit. To raise capital, he outlandishly promised investors a 50% return in 90 days. They naturally swarmed in, and he paid the first with cash collected from those coming later. He was imprisoned for defrauding 40,000 people of $15 million.

1929: Albert Wiggin
In the summer of 1929, Wiggin, head of Chase National Bank, cashed in by shorting 42,000 shares of his company's stock. His trades, though legal, were counter to the interests of his shareholders and led to passage of a law prohibiting executives from shorting their own stock.

1930: Ivar Krueger, the Match King
Heading companies that made two-thirds of the world's matches, Krueger ruled--until the Depression. To keep going, he employed 400 off-the-books vehicles that only he understood, scammed his bankers, and forged signatures. His empire collapsed when he had a stroke.

1938: Richard Whitney
Ex-NYSE president Whitney propped up his liquor business by tapping a fund for widows and orphans of which he was trustee and stealing from the New York Yacht Club and a relative's estate. He did three years' time.

1961: The Electrical Cartel
Executives of GE, Westinghouse, and other big-name companies conspired to serially win bids on federal projects. Seven served time--among the first imprisonments in the 70-year history of the Sherman Antitrust Act.

1962: Billie Sol Estes
A wheeler-dealer out to corner the West Texas fertilizer market, Estes built up capital by mortgaging nonexistent farm gear. Jailed in 1965 and paroled in 1971, he did the mortgage bit again, this time with nonexistent oil equipment. He was re-jailed in 1979 for tax evasion and did five years.

1970: Cornfeld and Vesco
Bernie Cornfeld's Investors Overseas Service, a fund-of-funds outfit, tanked in 1970, and Cornfeld was jailed in Switzerland. Robert Vesco "rescued" IOS with $5 million and then absconded with an estimated $250 million, fleeing the U.S. He's said to be in Cuba serving time for unrelated crimes.

1983: Marc Rich
Fraudulent oil trades in 1980-81 netted Rich and his partner, Pincus Green, $105 million, which they moved to offshore subsidiaries. Expecting to be indicted by U.S. Attorney Rudy Giuliani for evading taxes, they fled to Switzerland, where tax evasion is not an extraditable crime. Clinton pardoned Rich in 2001.

1986: Boesky and Milken and Drexel Burnham Lambert
The Feds got Wall Streeter Ivan Boesky for insider trading, and then Boesky's testimony helped them convict Drexel's Michael Milken for market manipulation. Milken did two years in prison, Boesky 22 months. Drexel died.

1989: Charles Keating and the collapse of Lincoln S&L
Keating was convicted of fraudulently marketing junk bonds and making sham deals to manufacture profits. Sentenced to 12 1/2 years, he served less than five. Cost to taxpayers: $3.4 billion, a sum making this the most expensive S&L failure.

1991: BCCI
The Bank of Credit & Commerce International got tagged the "Bank for Crooks & Criminals International" after it came crashing down in a money-laundering scandal that disgraced, among others, Clark Clifford, advisor to four Presidents.

1991: Salomon Brothers
Trader Paul Mozer violated rules barring one firm from bidding for more than 35% of the securities offered at a Treasury auction. He did four months' time. Salomon came close to bankruptcy. Chairman John Gutfreund resigned.

1995: Nick Leeson and Barings Bank
A 28-year-old derivatives trader based in Singapore, Leeson brought down 233-year-old Barings by betting Japanese stocks would rise. He hid his losses--$1.4 billion--for a while but eventually served more than three years in jail.

1995: Bankers Trust
Derivatives traders misled clients Gibson Greetings and Procter & Gamble about the risks of exotic contracts they entered into. P&G sustained about $200 million in losses but got most of it back from BT. The Federal Reserve sanctioned the bank.

1997: Walter Forbes
Only months after Cendant was formed by the merger of CUC and HFS, cooked books that created more than $500 million in phony profits showed up at CUC. Walter Forbes, head of CUC, has been indicted on fraud charges and faces trial this year.

1997: Columbia/HCA
This Nashville company became the target of the largest-ever federal investigation into health-care scams and agreed in 2000 to an $840 million Medicare-fraud settlement. Included was a criminal fine--rare in corporate America--of $95 million.

1998: Waste Management
Fighting to keep its reputation as a fast grower, the company engaged in aggressive accounting for years and then tried straight-out books cooking. In 1998 it took a massive charge, restating years of earnings.

1998: Al Dunlap
He became famous as "Chainsaw Al" by firing people. But he was then axed at Sunbeam for illicitly manufacturing earnings. He loved overstating revenues--booking sales, for example, on grills neither paid for nor shipped.

1999: Martin Frankel
A financier who siphoned off at least $200 million from a series of insurance companies he controlled, Frankel was arrested in Germany four months after going on the lam. Now jailed in Rhode Island--no bail for this guy--he awaits trial on charges of fraud and conspiracy.

2000: Sotheby's and Al Taubman
The world's elite were ripped off by years of price-fixing on the part of those supposed bitter competitors, auction houses Sotheby's and Christie's. Sotheby's chairman, Taubman, was found guilty of conspiracy last year. He is yet to be sentenced.
__________________________________________

I'm sure I'll be spending lots of time on this board's subject area and subject matter. I find it fascinating...and I may even have an axe or two to grind. We'll see. I know some things about this area already but, I will also continue to learn as I go. Shorting will certainly be addressed here. Human greed, individuality vs. mob or herd mentality, cycles, generational and lifetime cylces for/of depressions (economic in nature and their causes and extensions)...I could go on and on and on...and hopefully, given enough time I will do just that.

Others are welcome to join in the discussion once it gets going...or if, you've got the feel for it already...please post.


To understanding, to better people and to a better society.