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.

Sandy Hutchens takes a look at the mortgage mess.

Who is to blame for the mortgage crisis? America, go look in the mirror! You don’t pay your bills and if you do, you let interest and late fees accumulate until you can’t pay them. This means that your credit score gets lower and lower with each missed payment or increase in debt. Then you whine because no one wants to lend you money anymore and the bank is taking back the house you bought with no money down and the seller paid your closing costs.

As a mortgage professional, I have seen it all! There are so many stories; I had a lady tell me she had good credit and then yell at me because I told her that she had been late every month for the last year. She said she didn’t think that being slow on payments should make a difference on her credit and that it wasn’t fair, at least she paid her bills.

I caused many an argument between husband and wife because they kept bad credit secrets from each other. I once had a man claim that he had excellent credit, only to learn that his credit was in the low 500’s because his wife hadn’t paid the bills on time and they were carrying a balance of $16,000 to Nordstrom’s, not to mention the other $25,000 of debt they were carrying. I believe that was the beginning of divorce proceedings because she was only reachable at the vacation home after that.

During the 1990’s, the sub-prime markets were born. This was creative financing to help those that had fallen on hard times, to re-establish credit and still be able to buy the things that those with “good credit” could buy, just at higher interest rates. Wall Street was selling these loans, in bulk, like hot cakes on the secondary market and investors were singing all the way to the bank.

It got to the point that you could file Chapter 7 bankruptcy on Monday and on Tuesday, with 15% down, could go and buy a new house. The bankruptcy laws being as forgiving as they were, you probably still had your home and could sell it and use the equity as your 15% down payment. If you still managed to keep your credit score at 580 (creditors only report to the credit bureaus every 3 months), this same deal could be done with just “stating” your income instead of actually verifying that you could make the payment.

After 9/11 the economy took a major hit and lenders once again came up with more creative financing to help struggling buyers. These programs combined with low interest rates that the Federal Reserve kept dropping, got to the point that I was able to put families into a new home with zero money down, the seller paying up to 6% of the closing costs and get the buyer 100% financing. I had one buyer walk out of escrow pocketing $800 for buying a condo because the seller had paid all the closing costs and she was credited by her real estate agent.

The most lucrative thing lenders came up with was the Adjustable Rate Mortgage or ARM.

These were a good deal for the lender, the loan officer and the buyer, if they were disciplined and listened to an ethical mortgage professional. There were two types; those that had the possibility of negative amortization and those that didn’t. This was an ethical issue for most loan officers because lenders were paying up to 4 points yield spread premium on the loans that had the negative amortization clause. This is money that most buyers aren’t even aware of because it doesn’t always have to be disclosed, depending on the licensing of the broker and the money doesn’t come out of the buyers pocket at escrow. Mortgage companies were selling these to anyone and everyone, regardless of whether it made sense. This means on a $400,000 loan, $16,000 could be paid to the broker in addition to the other fees charged. Everybody got fat and happy and the borrowers had no idea what they had done, until the payment adjusted and they couldn’t make the new payment.

Regardless of whether this was explained to you or not, America, you didn’t want to listen! You saw a $1500 per month payment for a $400,000 house and went for it because you wanted to impress your wife, family, neighbors and co-workers. Buying a home is the American dream and you wanted your piece of it, now! Not when you could save enough money because America doesn’t save money anymore. You spend it all and live paycheck to paycheck.

Just in my own experience, I explained and explained and disclosed and you didn’t listen. However, my borrowers got the loans that didn’t have the negative amortization clause. It still meant they had to pay their mortgage and bills on time. At the point right before the loan adjusts in rate they were to call to see what rates are doing and either stick with it because rates are down or refinance because they qualify for a lower rate.

However, as much as I hold the American home buyer responsible, I have to say that the mortgage industry is also guilty. It is rampant with criminals and liars. The Department of Real Estate can’t keep up with the complaints and the fraud that just keeps escalating.

The scheme is common in big and well-know retailing companies and it’s quite simple: salesperson writes duplicate bill and sells it to an invoice factory or employer, who wants to optimize taxes. Such scheme can be used only when cash register allows issuing duplicate receipts without note on them on it.

Alo Ivask, the CEO of Rautakesko which operates K-Rauta said that the company is familiar with that.

“Tax and Customs Board (MTA) sent an enquiry on a duplicate receipt. We started to investigate it and it came clear that by now a former employee has done that,” Ivask said.

He noted that that employee said that “a friend asked” and “I didn’t think” as explanations.

These false receipts amount to about EEK 20,000.

Much more risk-free is the case where employee uses receipts a client didn’t want.

“I can’t exclude it hasn’t been done since it’s nearly impossible to check what happens to receipts customers don’t take along or throw away,” Oleg Gross, the owner of Gross store chain said.

He added that you don’t have to be a salesperson to make that scheme – a buyer can grab thrown receipts along as well.

Egon Veermäe, the head of audit department at MTA said that the management usually hears of such schemes from MTA, since people are clever. MTA has caught more than ten such companies in the past months.

“We haven’t done separate action for it. There just have been questions with some receipts when auditing some companies and we’ve found companies and people who have been issuing them,” he said.

Usually the companies are caught when auditing the company which buys the service. Veermäe said that a “service provider” may have more than one customer.

Fee for such a service isn’t big – about EEK 30-50 per EEK 1000 receipt.

Quite common are cases where customer asks to write goods to the receipt, which won’t match the purchases and salesperson does that. Veermäe noted that salesperson often don’t think there’s something illegal in it.

Sandy Hutchens said that because of the difficult times we are experiencing more employees are likely to make money with invoice frauds and useing fictitious duplicate bills.