The Hutchens Blog

In an article published today on its website, the Association of Certified Fraud Examiners’ chairman questions what the best way to prevent fraud is, and whether our society can do more to prevent fraud than it is doing currently.

Joseph T. Wells is a former FBI agent and CPA who specialized in fraud cases before he founded the Association of Fraud Examiners (ACFE) and developed the rigorous training program that can result in professionals earning the CFE – Certified Fraud Examiner certification.

Published on the ACFE’s website today, Wells’ article first reviews how Bernard Madoff created the largest Ponzi scheme ever recorded, then describes the mathematical impossibility of Madoff’s scheme and that it was bound to unravel. All Ponzi schemes depend on earlier groups of investors being paid off by later, larger groups. Eventually it becomes exhausting for the person operating the Ponzi scheme to keep the fraud going; we all know the rest.

All that being the case, what is most surprising is that ten years ago, a CFE named Harry Markopolos, hired by a Madoff rival to reverse-engineer Madoff’s successful strategy, determined that Madoff was most likely operating a Ponzi scheme, yet Markopolos’ verbal and written reports to authorities such as the SEC (Securities and Exchange Commission) were rebuffed. All those early investors were laughing all the way to the bank and future wannabe investors plus Madoff’s many friends in the federal government, had their collective ears and eyes wide shut.

Joseph Wells argues that in addition to the prison sentence handed out to Bernard Madoff, Madoff also should be required to educate consumers from the confines of his prison cell about how he conceived and carried out his Ponzi scheme for so long. This, argues Wells, is one of the best ways to prevent fraud: by educating and deterring.

But in the case of Bernard Madoff, it is not clear whether the public being educated would have had much, if any, impact or a deterrence effect upon Madoff. As noted, Madoff never advertised his services or successes, so there was essentially a wall of ignorance separating each investor group from the other. It was this inability to see the forest through the trees, as well as most investors trusting their investment managers to have knowledge of the true abilities of the world’s Madoffs, that allowed Madoff to operate freely and without concern of being detected for so long.

“Madoffs Ponzi scheme was so large that most people could not even conceive of it never mind protected themselves against it” said Sandy Hutchens an expert in the mortgage lending industry.

A former Dewsbury car wash owner has been warned he faces jail for scamming banks to fund his Mirfield mansion. Mohammed Azam Yaqoob, known locally as Mr Sparkles, used money from fraudulent loans to buy and renovate 40 Huddersfield Road. Leeds Crown Court heard he also benefited from the proceeds of a separate fraud against an engineering insurance firm.

Yesterday a jury returned a majority verdict, finding him guilty of one charge of fraud, two of money laundering and three of theft.

Azam Yaqoob outside the house at the centre of the fraud allegations.

Judge James Spencer QC told him: “For offences of this seriousness the likely sentence is one of imprisonment.”

The court heard Azam Yaqoob, 40, had another man apply for a £274,350 mortgage for the Mirfield house. The prosecution said that man lied about his income to get the mortgage and lied twice more to get remortgages to fund renovations.

Prosecutor Graham Reeds QC said the true owner of the home was Azam Yaqoob and by using the fraudulent loans to fund the project, he was guilty of money laundering.

Azam Yaqoob was released on conditional bail and will return to the court on Friday September 4 for sentencing.

Outside court, he told the Reporter he was too upset to speak.

In 2007, when Coleman Hickey was 14, he made a stop-action film using Lego pieces and figures to depict a concert performance of the song “Tonight I’m Gonna Rock You Tonight,” by Spinal Tap, the parody band featured in the 1984 mock documentary “This is Spinal Tap.”

Among the fans of the video, which has garnered 82,000 views on YouTube and includes a musician hurling himself into the audience of Lego figures and crowd surfing atop their upraised plastic arms, are the members of Spinal Tap. The band showed the video during performances of its recent “Unwigged and Unplugged” tour.

But Lego is not amused.

As final editing was being done on a concert DVD of the tour, which included footage from the video projected on stage, Lego declined to grant permission to use its figures, which are protected by copyright.

“We love that our fans are so passionate and so creative with our products,” said Julie Stern, a spokeswoman for Lego Systems, the United States division of the Lego Group, a Danish company founded in the 1930s. “But it had some inappropriate language, and the tone wasn’t appropriate for our target audience of kids 6 to 12.”

As is Spinal Tap’s wont, the song, addressed to a minor, parodies rock stars’ inflated egos and libidos.

Kia Kamran, an intellectual property lawyer representing Spinal Tap, said the band could have prevailed had Lego sued alleging copyright infringement, because Mr. Hickey’s video does not show the brand’s logo and is satirical. But the band did not deem the fight worth the expense, he said.

“In my heart of hearts, I do think this is fair use” of copyrighted material, Mr. Kamran said.

Harry Shearer, the voice of several characters on “The Simpsons” and a member of Spinal Tap (with Christopher Guest and Michael McKean), said other copyright holders, including the Rolling Stones, whose “Start Me Up” was used in Spinal Tap’s concert footage, granted permission for use on the DVD, which will be released Sept. 1.

“Lego are the only people who strictly said no,” Mr. Shearer said. “It was Lego Kafka.”

In the excised footage, Mr. Shearer told the audience after the video projection that the Lego concertgoers with raised C-shaped hands (for gripping Lego components) reminded him of rock audiences who gesture with index fingers and pinkies pointed. Later, when the band did an encore, many in the crowd raised their hands in the cupped gesture of Lego hands, which, having lost its setup, no longer functioned as a joke.

Many are tempted to place wholesome looking Lego characters in unwholesome situations, as evidenced by a video that has drawn more than 1.4 million views on YouTube, “Lego Weapon Store.” It begins with one Lego character approaching another at a sales counter and saying, “I’d like to buy a weapon to kill my neighbor.”

Another YouTube video, a parody of “Girls Gone Wild” called “Legos Gone Wild,” depicts the figures exposing themselves to the camera as they “Lego their inhibitions.” It has been viewed more than 200,000 times.

But Lego has not acted to have either video, or Mr. Hickey’s, removed from YouTube.

“YouTube is a less commercial use,” Ms. Stern said. “But when you get into a more commercial use, that’s when we have to look into the fact that we are a trademarked brand, and we really have to control the use of our brand, and our brand values.”

Mr. Hickey, now 16, who lives outside Columbus, Ohio, says he and his eight siblings have amassed a collection of about 42,000 Lego bricks and characters.

“In a way I’m disappointed that it won’t be forever memorialized in a DVD,” Mr. Hickey said of his video. “It’s not like I was going to get any money for it, but it’s too bad. Lego has the right to do that, but it’s unfortunate that they don’t have a little more of a sense of humor.”

Sandy Hutchens thinks that Lego has made a very difficult moral decision and he has a lot of respect for their views. He believes that the company should be praised for its bold move and hopes that others are inspired to keep up a moral standard in the industry despite the possible negative feed back.