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The Fraud Story

The Fraud Story

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Published by chandra
Fraud is an evil. Some say, it is an art. I see those just consequences of situation and certain acts. “Situations” most commonly known as fraud triangle, are found evidently present in known, uncovered frauds.

This Book is more like fraud story rather re-investigation.
Fraud is an evil. Some say, it is an art. I see those just consequences of situation and certain acts. “Situations” most commonly known as fraud triangle, are found evidently present in known, uncovered frauds.

This Book is more like fraud story rather re-investigation.

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Published by: chandra on Feb 28, 2010
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09/11/2013

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The Fraud Story

By Chandra Prakash CISA, CPA

F

raud is an evil. Some say, it is an art. I see those just consequences of

situation and certain acts. “Situations” most commonly known as fraud triangle, are found evidently present in known, uncovered frauds. This Book is more like fraud story rather reinvestigation. Fraud, as a generic term could be anything from criminal fraud to political fraud. However, I being an Auditor, all the stories here will be limited around financial frauds.

On May 31, 2000, the U.S. District Court for the Southern District of New York entered a final judgment against Ronald
Moskowitz, the former Chairman and CEO of Ferrofluidics Corporation, in a pending case. The judgment enjoins Moskowitz from future violations of the antifraud provisions and certain reporting, internal controls, and record-keeping provisions of the federal securities laws. Without admitting or denying the Commission's allegations, Moskowitz consented to the entry of the judgment, which also bars him from acting as an officer or director of a public company. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 16584 / June 6, 2000 Accounting and Auditing Enforcement Release No. 1268 In its complaint, the Commission alleged that from early 1991 through June 1993, Moskowitz devised and, with the assistance of members of the company's senior management and others, implemented a broad-ranging scheme to defraud the investing public and enrich himself by materially inflating the company's revenues and earnings and by making numerous other materially false and misleading disclosures about the company's business. As part of the scheme, Moskowitz and other defendants prepared and disseminated a series of materially false and misleading public statements concerning, among other things, a sham private placement of stock by the company, sales of the company's products, and equity investments made by the company. Moskowitz and other defendants also disseminated favorable projections concerning Ferrofluidics' future business prospects and profitability, without having any reasonable basis for such projections. As a result of these activities, potential and actual investors were led to believe that Ferrofluidics was a profitable company with tremendous opportunities for rapid growth and earnings. In fact, Ferrofluidics was then experiencing problems in developing and manufacturing its products. During the relevant period, Moskowitz sold (through seven family trusts that he controlled), and directed to be sold, Ferrofluidics stock worth millions of dollars, in a series of

private

placements

and

open

market

transactions, while in the possession of material, nonpublic information about the company. Moskowitz was sentenced to eight years in prison on two counts, conspiracy and securities fraud. In related criminal proceedings, former Ferrofluidics CFO Jan R. Kirk was sentenced to five years in prison, and former Ferrofluidics consultant Jerome Allen was sentenced to six months in prison.
Source: http://www.sec.gov/litigation/litreleases/lr16584.htm

Company Profile: Magnetic fluids, or ferrofluids, were developed in the 1960’s through the sponsorship of
NASA, to address the unique requirements of moving liquid fuel in a gravity-free outer space environment. Recognizing the potential for commercial applications using ferrofluids, Ferrofluidics Corporation was founded in 1968. After several years of research and development, and applications engineering, the company introduced the first commercial application of ferrofluids, a 100% leak-free, no-wear vacuum rotary seal for use in the manufacture of semiconductor wafers and other vacuum processing applications. Today, Ferrofluidic® sealing technology is used in the manufacture of the majority of semiconductor wafers, the heart of all high-tech products. Ferrofluidics’ early 1970’s efforts to identify new applications for ferrofluids also led to the successful synthesis of ferrofluids that enabled loudspeaker manufacturers to improve audio speaker performance. In this application, which takes advantage of a ferrofluid’s heat transfer property, the fluid is magnetically positioned in the air gap of the driver assembly. This protects the speaker voice coil from thermal failure. Today, Ferrofluidic technology is used in ~100 million loudspeakers per year, of which approximately two thirds are automotive speakers. New applications for this unique sealing technology continued to be found, and in the late 1970’s the company pioneered a leak-free sealing system for computer disk drives that prevented contamination, increased memory capacity and improved processing throughput. Today, many sealed computer disk drives have a Ferrofluidic technology-based exclusion seal. In the late 1970’s the company also developed a ferrofluid based viscous damper that improved the performance of stepper motors. These applications require a high degree of precision, quiet operation, and minimum transit time between the various work functions. When attached to the motor, a Ferrofluidic damper reduces settling time and significantly increases accuracy. By the late 1980s, Ferrofluidic sealing technology was expanding from its semiconductor roots into other sealing applications. In 1981, in response to its wide acceptance in the global marketplace, Ferrofluidics became a public company (NASDAQ: FERO). In the same year it acquired the product line of a major semiconductor crystal growing manufacturer. In 1989 the company produced a large diameter, low power-consumption, hermetic seal that permits smooth operation of airborne targeting cameras despite the harsh environments of military aircraft. The product has since been integrated into major helicopter lines and fixed wing aircraft. This continued in the early 1990s with the company’s expansion into industrial sealing applications where the inherent hermetic qualities of a Ferrofluidic seal make it ideal for hydrocarbon processing, nuclear and other hazardous environments. For the next 15 years, Ferrofluidics was at the forefront of crystal growing technology and was responsible for many developments and innovations in this business. This division was divested in 1998. In 1997, Ferrofluidics developed a “value added” program with its extensive customer base, offering fully integrated Ferrofluidic sealing sub-assemblies. Today, The Company is providing outsourcing services to a growing number of top-tier semiconductor equipment manufacturers.

In 1998, the company entered into another market - supplying ferrofluid for use in DVD optical pickup actuators where the ferrofluid damping greatly improves the actuators settling time and vibrational characteristics. In addition to these products, over the years many additional applications for ferrofluid have been developed by the company and in conjunction from power with other individuals and to and companies. These include technology ranging transformers reclamation materials ferrofluid separation and

Fraud Synthesis: Ronald Moskowitz and Kuldip Raj registered a patent in 1980 for “self-activating ferrofluid seal and
method”, lead to one of the parent product of ferrofluid. The innovation reaped to such an acceptance, ferrofluid went public. In early 1992, the former of two inventors, Ronald Moskowitz, also a former CEO and Chairman, planned for a private placement of 720,000 newly issued unregistered Ferrofluidics shares. Unable to find legitimate buyers for newly issue shares, Moskowitz thought to buy time till shares gets registered by showing a legitimate sell with co-conspirer and ultimately sell off to public during course of time. In due course, he tried to rig up the share prices by disseminating false market information. Moskowitz and Jan R. Kirk, former CFO, parked shares with a company owned in part by Stephen A. Thorpe, and with three other individuals until the shares could be registered and sold to bona fide investors. As per planned intention to resell entire shares before payment obligation were due with no risk of loss, each purchasers signed a subscription agreement, a promissory note, and a pledge agreement. Even Thorpe received compensation from Ferrofluidics for his participation. None of the Purchasers paid for the subscribed Ferrofluidics stock, nor did they have the financial ability to pay. Ferrofluidics publicly announced, in a press release about the added capital as a result of the private placement. The condensed balance sheet issued as part of the press release showed a false increase in working capital and total assets. The Purchasers, including Thorpe, never made any payments on their notes, nor did it ever intended. On other hand Ferrofluidic booked interest on the notes as a receivable and thereby increased net income. During the fiscal years ended June 30, 1991 and 1992, Ferrofluidics recorded $735,000 of expenses in a suspense account, treating them as having been incurred in connection with a proposed private placement of shares by Ferrofluidics. In fact, most of these expenses were incurred in connection with Moskowitz's efforts to sell stock beneficially owned by him (through his family trusts), Moskowitz's payments to investor relations consultants, and Moskowitz's personal travel and expenses. When the sham private placement was completed in April 1992, Ferrofluidics improperly charged these costs against capital. Because the costs were not incurred in connection with a legitimate private placement of shares by Ferrofluidics, they should have been expensed. As a result of this improper accounting treatment, Ferrofluidics' net income was materially overstated during the relevant period. Source: SEC Accounting and Auditing Enforcement Releases – 1260

bearings, quiet solenoids, sensors and switches. New applications are always being examined, and the company is happy to partner with other organizations on a confidential basis to develop new uses for ferrofluid. In early 2000 Ferrofluidics merged with Ferrotec Corporation and on July 16, 2001 Ferrofluidics changed its name to Ferrotec (USA) in order for the company to present a common identity worldwide. Ferrotec Corporation is a Japanese company which was a former subsidiary of Ferrofluidics until a management buyout in 1987. Since then, Ferrofluidics maintained its position as market leader in the US and Europe, and Ferrotec became Asia. one of the leading suppliers of magnetic liquid feedthroughs and audio fluids in

Centennial Technologies, Inc

In Sept 2000, the Securities and Exchange Commission filed civil and administrative actions in connection with the $40
million financial fraud at Centennial Technologies, Inc., a high-technology manufacturer based in Wilmington, Massachusetts. Emanuel Pinez, the founder and former chief executive officer of Centennial, agreed to pay $5.3 million to settle the amended Complaint. In that action, and in a related action the Commission filed against James Murphy, Centennial's former CFO, and two associates of Pinez's, Gilboa Peretz and Robert Lockwood, the Commission alleged that the defendants participated in a fraud designed to artificially inflate the value of Centennial and its stock.

SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 16725 / September 26, 2000 Accounting and Auditing Enforcement 1310 / Sept 26, 2000

The Commission also alleged that Pinez and Murphy illegally sold Centennial stock while in possession of material nonpublic information that Centennial's earnings, assets and revenue had been significantly overstated. In addition to the injunctive actions, the Commission filed and simultaneously settled an administrative cease-and-desist proceeding against Centennial, charging it with violations of the antifraud, record keeping and internal controls provisions of the federal securities laws.

Company

Profile:

Centennial

executive officer and its former chief financial officer directed employees to ship fruit baskets and polo shirts to companies owned by the former chief executive officer's friends. Centennial's former chief financial officer then created fictitious sales documentation to make it appear as if $2 million of PC cards had been sold rather than fruit baskets and polo shirts. In total, $22.6 million of improperly recorded revenue was reversed in the restatement. Centennial overstated its inventory values and levels in a variety of ways. It falsified invoices to support inflated inventory pricing, manipulated inventory counts, understated the cost of sales and included phony inventory. For example, in the spring of 1996, Centennial's former chief executive officer and its former chief financial officer caused 27,000 PC cards to be manufactured. Although these PC cards looked like the typical product that Centennial manufactured, they consisted of outer metal casing only and had no inner circuitry. These dummy PC cards were included in inventory and counted by the independent auditors during Centennial's annual audit. These empty cards constituted a material amount of the finished goods inventory Centennial reported on its balance sheet for the quarters ended June 30, 1996 and September 30, 1996. As of December 31, 1996, Centennial's inventory was overstated by $8.8 million, or 78%. Centennial also overstated the value of its fixed assets in several ways. Non-existent additions to fixed assets were made on the company's books and the cost of bona fide fixed asset additions was padded to inflate their reported value. These additions consisted primarily of small dollar amounts (less than $5,000) which the former chief financial officer believed, based on his prior experience working for the outside auditing firm, the auditors would not check. Moreover, Centennial's books and records were adjusted to falsely increase the reported value of fixed assets and certain inventory items were improperly reclassified as fixed assets. For the quarter ended June 30, 1996, for example, Centennial's former chief financial officer improperly caused $820,000 of inventory to be reclassified as fixed assets on Centennial's book s. To support this reclassification, documentation was altered to falsely reflect fixed asset additions. As of December 31, 1996, Centennial's fixed assets were overstated by $2.7 million, or 95%. Centennial invested in and loaned money to other companies which it improperly valued on its books. For example, in July 1996, Centennial loaned $500,000 to a company owned by close associates of Centennial's former chief executive officer. The borrowing company then lent this money to one of its own affiliates, which in turn used the funds to repay an outstanding debt to Centennial. Centennial also loaned money to small companies (owned by the former chief executive officer's friends and associates) which had no real possibility of repaying the amounts owed. In the restatement, $15.8 million of Centennial's investments and notes were written off.

Technologies, Inc. was a provider of custom and industry standard PC Cards for original equipment manufacturers, and was a global leader in the integration of patented and proprietary technology into application-specific cards for commercial, industrial and military markets. Centennial, with its headquarter and ISO 9001 certified engineering and manufacturing facility was located in Wilmington, Mass., with sales and services offices in California, Florida, New York, North Carolina, Indiana, Pennsylvania and Texas. Centennial's international sales and service operations were headquartered in the United Kingdom Solectron, the world's leading supply-chain facilitator acquired Centennial Technologies, Inc in 2001. Further, Solectron Corporation was acquired by Flextronics International, Ltd. on October 15, 2007.

Fraud Synthesis:
misrepresented and

Centennial Tech. inc. its financial

misstated

condition through multiple fraudulent practices instigated by Centennial's former chief executive officer Emanuel Pinez and its former chief financial officer James Murphy. Centennial improperly recognized revenue from sales in which the customer had no real obligation to pay for product, from sales where phony product was shipped, and from sales where no product was shipped at all. For example, for the fiscal year ended June 30, 1996, Centennial recognized $1.6 million in revenues from sales of "Flash 98," a Centennial product that did not actually exist. In addition, in December 1996, Centennial's former chief

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