Executive Fraud Blog

Borrowers, investors and other plaintiffs filed 278 civil lawsuits in federal courts related to subprime lending in 2007, and the trend is expected to continue this year, according to the report released on Thursday.

Last year's subprime tally was equal to about half of the 559 legal actions brought over a multiple-year period following the savings and loan crisis, according to the report by Navigant Consulting Inc. The subprime fallout has frequently been compared with that of the S&L crisis, which cost the government more than $100 billion.

"The S&L crisis has been a high-water mark in terms of the litigation fallout of a major financial crisis," said Jeff Nielsen, managing director of Navigant, which provides business, regulatory and financial advisory services. "The subprime-related cases appear on their way to eclipsing that benchmark."

Student loan fraud has been investigated in the relationships between universities and large financial banks. The cause for concern is that certain universities have been accused of exclusively directing their students to lenders in exchange for revenue sharing opportunities or extravagent gifts related to their role in giving students higher rate loans. From a review of college arrangements with banks done by the St. Petersburg Times explains the following relationships:

- At Florida State University, the financial aid director sits on the advisory board of preferred lender Student Loan Xpress, which has seen nearly half of its board members suspended by their schools recently for allegedly accepting hefty consulting fees or owning stock.

- With thousands of competing lenders to choose from, Florida A&M University students were, until recently, directed to use one of two lenders based on the spelling of their last name.

- The Stetson University Law School financial aid director sits on the advisory board of a preferred lender that last year controlled 70 percent of the school's $31-million loan business. Now, officials say they will no longer accept free travel and lodging if the director attends further meetings.

The lenders and campus officials that are recently under the most criticism include:

FSU financial aid director Darryl Marshall has served for five years on that company's advisory board, and said he has accepted reimbursement for travel and lodging to attend three meetings.

Six other members of that board - including financial aid directors at the University of Texas, Columbia University and Johns Hopkins University - have been suspended by their schools for allegedly holding up to $100, 000 in stock or accepting fees of up to $80, 000 from the company.

Marshall said he was also reimbursed for two trips as an advisory board member for USA Funds, the nation's largest loan guarantor, and one trip for Elm Resources, a nonprofit run by lenders.

Student Loan Xpress is one of 11 preferred lenders at FSU. Last year, it did more business there - $27-million worth, in the form of more than 9, 000 federally backed loans - than any campus in the nation but one, according to federal reports compiled by the Student Marketmeasure data service.

These student loan fraud schemes seem to be very easy to conceal for these universities because they can claim to be only providing a convenience for their students but they should be held accountable for vouching for the their preferred lender. As the investigations continue it is likely that other fraud schemes will be uncovered.

Many of you may have been exposed to the original online stock scheme where spammers will send out stock picks on penny stocks creating buzz that artificially drives up the price of these worthless stocks. As the price hits the daily high the spammers liquidate their own holdings and walk away with the profits leaving those buyers with the worthless stock. This old fraud scheme has been manipulated and redirected at users of public computers specifically hotel users.

Online criminals have developed software that will track the key strokes of these computers especially when these guests are checking out their online portfolio accounts. By stealing their accounting identity the fraudsters are able to buy large holdings in these penny stocks to drive up the price then they are able to liquidate their position while leaving the stolen account stuck in the those stocks. Companies such as E*Trade and TD Ameritrade have been left with the liability to reimburse investors nearly $20 billion in one quarter. This type of securities fraud is becoming more common with the amount of users of online trading companies tips 30 million. The best way to prevent this from happening to you is to make sure that you have a secure connection to the internet and ensure that you do not have malware on your computer by running virus scans and anti-adware software.

The National Association of Securities Dealers (NASD) has recently released a new more user friendly version of their online service BrokerCheck that houses information about individual brokers and securities firms. BrokerCheck provides a free disclosure of information that tracks the professional background of these securities firms. By conducting the appropriate background checks on these brokers firms are able to limit the potential for fraud.

Information in the BrokerCheck system includes over 5,100 securities firms and 660,000 individual brokers. This update is the first major renovation since its orginal creation back in 1998.

"Information that NASD BrokerCheck will now provide on individual brokers includes: current employers; a 10-year employment history; other businesses the individual engages in; all approved licenses and registrations; qualification exams passed; criminal felony charges and convictions; investment-related misdemeanor charges and convictions; disciplinary actions and investigations by regulators; investment-related civil judicial actions and proceedings; most consumer-initiated complaints, arbitration proceedings and civil litigations; unsatisfied judgments and liens, bankruptcy proceedings; and, employment terminations that follow allegations of misconduct or failure to supervise."

If you intend to register with a new broker it would be recommended to check out the NASD's website for further fraud prevention information.

Last year a 15 member commission was created by the US Chamber of Commerce to evaluate the effects of litigation & regulation on the US capital market. Tom Donohue, the CEO of the Chamber, is a powerful business lobbyist that has become critical of the implementation of Sarbanes Oxley (SarBox) especially section 404 which covers the assessment of internal controls.

The question remains: Is the litigious US business environment driving away foreign investment in US public companies? Has SarBox section 404 caused these declines and how could it be changed to build confidence but retain assurance of the efficiency of internal controls?

Despite the criticisms in the report, the Securities and Exchange Commission's (SEC) Christopher Cox has responded with an acknowledgement of the difficulties of SarBox but an emphasis on the new changes. The Complete Act of 2007 recommends a limitation of section 404 that only requires the internal control audit on a three year basis. Another change proposed attempts to reduce the costs of these 404 audits for smaller companies by making them voluntary. There is also a movement to rely more heavily on the internal audit function for an assessment of lower risk internal controls.

By changing the rules for implementation the SEC feels that it would appropriately mitigate the costs to firms for their audit AND reduce their exposure to unwarranted securities fraud lawsuits.