Case experience for Convincing Financial Evidence, LLC and its predecessors (hereinafter referred to as “CFE”) is extensive and overlaps from one category of service to another. The cases discussed below often involve several categories of different service (e.g., securities litigation, forensic accounting fraud and litigation services) provided in a single matter. Cases are classified below based upon CFE’s perception of the most significant service offered in each case.
The following is far from an exhaustive list. It is presented for purposes of demonstrating the kinds of work CFE has performed. Please do not hesitate to phone us if you would like further information.
- In several Enron-related investigations and litigation (Enron as a whole and Enron’s Broadband division separately), CFE advised various counsel on the propriety of accounting and audit procedures involving several complex accounting and disclosure matters. These included, but were not limited to:
- corporate governance and control;
- accounting for variable interest entities (SPE accounting, SFAS 125, 140 and related authority);
- derivative accounting under SFAS 133;
- related party transactions;
- segment reporting;
- accounting for reserves and changes to reserves;
- asset impairment issues;
- side agreements;
- mark to market accounting for oil and gas contracts; and
- SAB 101 revenue recognition issues.
Michael Mulligan testified on two occasions in federal district court in Texas with regard to his findings in the Enron-Broadband trials for a senior level accountant defendant who was ultimately acquitted.
- In a Gateway-related SEC investigation and trial, CFE was a lead advisor to defendants’ counsel on accounting, financial disclosure and auditing issues (GAAP, GAAS and disclosure regulations) including, but not limited to:
- changes in accounting principles;
- loan loss reserves;
- rules regarding management’s discussion and analysis (i.e., Regulations S-X and S-K);
- materiality; and
- SAB 101 sales recognition.
Michael Mulligan testified for defendants in the trial in federal district court in California. Defendants won on directed verdict.
- In a securities fraud claim emerging out of a savings and loan failure, CFE conducted the portion of the investigation involving the responsibilities and activities of in-house and independent accountants (i.e., GAAP, GAAS and SEC regulations). Substantive aspects of the case involved disclosure and auditor responsibility with respect to revenue recognition in financed land sales and like-kind exchanges. CFE also advised on adequacy of disclosure and the appropriateness of tax-sharing arrangements and other transactions between the regulated banking entity and the non-regulated non-bank affiliate.
- In several separate market manipulation cases, CFE was engaged to assess claims that clients had manipulated the trading in certain securities. In one case, CFE was hired to determine whether market data supported government claims that a broker dealer had engaged in a “no-net sales” policy and “marking the close” practices in certain transactions. Analytical review of NASD market data revealed that the government’s claims were unsupported by the actual trading data. Criminal charges in that case were ultimately dropped.
- CFE was engaged to assist the defense team in assessing the US Government’s claim that a broker dealer and its principal had manipulated two stocks during their initial public offering. Specifically, CFE was asked to assess whether the market data supported the government’s claims that 1) certain insiders had received guaranteed returns, and 2) that the firm engaged in pre-IPO contracts had effectively manipulated the secondary market in the IPO securities. CFE was able to provide substantial trading evidence that refuted the government’s claims in the indictment.
- In a number of other broker dealer sales practice cases, CFE investigated trading data, brokerage account statements and transactions, and prepared summary analyses of complex trading patterns to assess insider trading and market manipulation allegations.
- CFE investigated suitability issues, sales techniques, and fund composition issues in a fraud-in-the-offering case in which a bank sold units of funds (funds that in large part were composed of complex derivative securities) to clients who had previously owned only certificates of deposit.
- CFE was engaged in a number of cases to analyze and opine upon whether or not broker dealers and/or registered representatives engaged in improper sales practices (churning, unauthorized trades or recommending unsuitable investments) or weather broker dealers had unsound supervisory practices.
CIVIL AND CRIMINAL FRAUD
- In an investigative matter arising out of the HealthSouth accounting scandal, CFE investigated and then advised counsel on accounting, disclosure and auditing issues arising out of the FBI investigation, the SEC investigation and the US Congressional inquiry. CFE provided counsel with advice involving:
- merger accounting;
- top-down and inter-company adjustments;
- the processes for preparation of budgets, forecasts and street guidance;
- designation of recurring and non-recurring income items;
- health care eccentricities for billing, collection, Medicare and Medicaid and related accounting issues;
- auditor responsibilities in the various areas of accounting and disclosure;
- restatement issues;
- accounting for asset impairments and restructuring; and
- tax-related internal control matters.
- In a private $40 million securities fraud case involving a debt issuance in connection with acquisition of a software company, CFE investigated evidence of improper revenue recognition by the defendants. CFE also advised lead counsel regarding causes of action to include in the complaint against both in-house management and accountants, as well as the outside accountants/independent auditors.
- In a private common law fraud investigation that involved misappropriation of investment proceeds by an international import business, CFE advised legal counsel on methods to trace and recover physical and financial assets that were siphoned from the US business unit. CFE advised counsel regarding impropriety of GAAP-based financial statements, manipulation of asset accounts used as collateral for bank borrowings, and debt covenant defaults. CFE also advised counsel on theories for recovery of loss based upon theories based upon accountants’ state law duties.
- In a fraud case involving approximately 7 brokerage firms on three continents and the sale of approximately $3 billion in securities to Japanese investors, CFE investigated issues and advised counsel on matters involving:
- commingling of accounts;
- pledge arrangements;
- trading supervisory issues;
- commodity and futures trading segregation issues;
- international accounting and disclosure issues;
- the audit function;
- responsibilities of auditors; and
- internal accounting control issues.
- In a fraud-in-the-offering securities case, CFE investigated and advised attorneys on use of proceeds issues (i.e., how investment proceeds were used, as compared to representations regarding use of proceeds in the prospectus). CFE also investigated and advised on improper methods for maintaining and using escrowed funds; and whether funds were improperly commingled in joint accounts.
- CFE conducted an internal investigation of a fortune 100 US firm in Santiago, Chile in which an employee of the firm had allegedly embezzled substantial funds from the Santiago office’s bank account. The work involved attempts to trace and recoup the funds under Chilean law and banking norms.
- In a case involving a whistle-blower allegation that a publicly held high tech company manipulated fourth quarter earnings to meet analyst expectations, CFE’s team of forensic accountants performed an investigation and concluded in a report to the Special Committee of the Board of Directors that there were no misstatements of earnings. The report and its support were ultimately shared with the SEC. The SEC concurred with the findings and no further investigation was conducted.
- In an independent counsel’s investigation for the Special Committee of the Board of Directors of a non-profit organization and its related political action committee; CFE investigated and reported to counsel and an independent Special Committee that, aside from minor deposit-related anomalies, there was no evidence to support the broad allegations of impropriety. The report was ultimately disclosed to an investigative department of the Federal Election Commission that took the findings as final. No further inquiry of the organization was deemed necessary.
- CFE was engaged by a small investor who had lost over $2 million in a wine import business. The client wanted to know how the seemingly “profitable business” with $3 million in sales had lost so much in the course of one year. Through review of the accounting records, CFE discovered a pattern of overstatement of sales through booking sales and then receiving the wine back into inventory. CFE found that “Prepaid wine” inventory, which made up nearly 60% of assets, was false and should have been more appropriately accounted for as an equity draw. CFE found a series of highly irregular international cash transactions that should have raised the suspicions of the external accountants. CFE also discovered evidence of knowledge of improprieties by the external accountants who failed to report the issues to management. By developing a case against the external accountants, CFE was able to develop a plan for loss recovery.
- In several unrelated cases, CFE was engaged to investigate and conclude upon the propriety of accounting and legitimacy of transactions involving senior-level management (i.e., related parties). Most of the cases involve a preliminary assessment of the relationships and inherent risks, investigation of the actual transactions, and ultimately a report with findings as to misappropriation issues as well as recommendations regarding improvements in internal controls.
- In a seminal case involving improper acquisition accounting (one that ultimately was used by the SEC in its release of new accounting guidance on reserve accounting), CFE investigated and advised counsel on acquisition accounting, reserve accounting, propriety of advice and professional conduct by external accountants, lawyers and underwriters. The case required a deep dive into thousands of transactions, but was concluded quickly at a very low cost.
- In a bankruptcy-related investigation involving pre-acquisition accounting fraud by an automotive parts manufacturer, CFE was responsible for investigating and uncovering approximately $50 million in overstated income in the year preceding the acquisition. Analysis was focused on intercompany and “push down” accounting issues (e.g., corporate allocations, reserve manipulations, obsolescence write-downs and asset impairments). Analysis also covered improprieties and/or poor conduct in connection with due diligence work. Because the purchase price was based on a multiple of earnings, the fraud resulted in claims in excess of $400 million.
- In several cases involving high tech firms, CFE investigated and advised various counsel on myriad accounting, disclosure and auditing issues unique to the computer industry including:
- the propriety of capitalization of in-house software development costs;
- recognition of sales involving rights of return, seller guarantees on performance;
- installation requirements (including integration and customization); obligations regarding upgrades; and
- bundled software with other products or services.
CFE also investigated cases involving “constructive shipment” and “rotation rights,” and other complex revenue recognition situations. Investigative cases have focused on all aspects of the accounting for the transactions at issue, the disclosure related to the transactions and the auditors’ responsibilities with respect to the accounting and disclosure.
- In a case involving investments into accounts frozen by the SEC, CFE assisted counsel for investors in Germany, Switzerland, and Belgium in performing international asset tracing of their investments – investments that wound through offshore and South American accounts – to the frozen funds being held by the US government. The work was done for purposes of establishing the investors’ rights to recovery. By demonstrating the source, CFE was able to help obtain a release of funds for the investors.
- In a Department of Labor (DOL), Sarbanes and Oxley claim, CFE investigated and provided a report on its findings with regard to retaliatory employment actions by a publicly-held US-based pharmaceutical company when it fired an employee in its in-house counsel department. The report was ultimately relied upon by the Administrative Law Judge at the DOL and was used for purposes of reaching a settlement for the terminated employee.
- CFE performed a Criminal Asset Forfeiture Reform Act (CAFRA) tracing examination of brokerage accounts of a former CEO of a US public company to determine if his assets could be traced to (or carved out from) alleged fraudulent conduct. The CAFRA tracing of assets involved approximately $90 million maintained in fifteen brokerage accounts that were actively managed and traded over fifteen years. The findings enabled the client to successfully avoid forfeiture of nearly half of the assets sought for forfeiture by the Department of Justice.
- In a hotly contested securities fraud case in a US Federal District Court, CFE assisted lead SEC counsel in developing case theories – focusing on GAAP, Regulation S-X, and the disclosure obligations of the SEC’s form requirements and Regulation S-K – to defeat respondents in a Section 5 (failure to register) and a Section 17 (fraud) case.
- In the largest defense contractor settlement of its day, CFE assisted in the investigation helped advise counsel on the propriety of cost accounting in absorption of complex overhead accounts into pools of cost that were allocated to fixed price contracts and later billed to the US Government.
- In an acquisition-related common law and securities fraud case, CFE was retained to opine for the defense regarding the reasonable valuation of the small business as of the date of the acquisition. CFE was also asked to testify regarding calculations of accounts receivable collections, working capital calculations and opposing expert’s business valuation.
- In an investigation of a $90 million fraud claim involving falsification of US Government invoices for software, computer hardware and jet engine parts; CFE investigated and advised counsel on internal accounting control issues, auditor malfeasance, and books and records improprieties.
- CFE was appointed by a Judge in the Southern District of NY to provide accounting expertise to a Criminal Justice Act defense team in a case involving charges of fraud in the sale of approximately $3 billion in securities over five years to Japanese investors. The accounting issues involved:
- international funds tracing;
- determining whether commingling of funds had occurred;
- determining if account statements were prepared appropriately;
- determining which accounting principles (GAAP, International, or Japanese) applied, and if they were properly applied; and
- determining if internal accounting controls were appropriate and if they were functioning.
- CFE performed a damage calculation and testified before the Philadelphia Stock Exchange (PHLX) regarding the calculation of damages (ill-gotten gains) from unauthorized transactions that were a part of one of the largest trading frauds in the history of the PHLX. The complex calculation involved clearing fees, brokerage commissions, penalties, pre-judgment interest and other costs.
- After appointment by a trustee in bankruptcy, CFE assisted in investigating allegations that related projections were overstated by a Fortune 500 seller just prior to the $700 million acquisition of a manufacturer by the debtor. Shortly after the acquisition, the acquiror/debtor declared bankruptcy. Accounting problems identified were due primarily to:
- earlier acquisitions which had been over-reserved;
- obsolete and excess inventory that should have been written off;
- capitalizations that were carried as assets even though the product would not be developed;
- restructuring reserves that had been improperly allocated to other divisions; and
- profits from other divisions’ one-time sales that were used as offsets for acquiree division losses.
- In a $3 billion bankruptcy-related investigation for an Unsecured Creditors Committee, CFE investigated irregular transactions involving several related parties and companies. Because the debtors were wholly-owned by an individual non-debtor, transactions and book entries could be made without minority shareholder notice. The investigation revealed a pattern of “push down” intercompany accounting entries – along with intercompany billings – that required analysis from a solvency and reasonably equivalent value perspective.
- In an approximate $2.8 billion bankruptcy-related investigation on behalf of secured creditors, CFE undertook an examination of a series of transactions – alleged to be fraudulent conveyances – that involved guarantees issued by consolidated subsidiaries in connection with a parent home-builder refinancing. The complex investigative and litigation issues involved assessing both solvency and reasonably equivalent value in transactions involving multiple related parties and affiliate entities.
- In a UN Oil-for Food Program investigation of a French subsidiary of a US fortune 100 company, CFE investigated allegations that payments were bribes paid to the Hussein regime. The investigation required:
- international funds tracing;
- assessment of compliance with European and US accounting rules;
- import/export rules; US SEC disclosure and Regulation S-X reporting requirements; and
- US and European rules for internal accounting controls and adequacy of books and records (e.g., FCPA).
The case resulted in several findings of employee complicity in a foreign payments and export scheme. CFE provided the company with documentation supporting the investigative conclusions. The findings were reported to the US DOJ, the SEC and appropriate European authorities. Several personnel were dismissed, including members of senior management. Control improvement recommendations were ultimately made and implemented. Regulatory bodies generally concurred with the reported findings, and settlements were reach without litigation.
- In a multi-billion dollar bankruptcy-related case involving Parmalat, CFE advised counsel on intercompany accounting issues, auditing issues, international accounting, and financial disclosure issues. CFE was designated to testify and was deposed on European auditing principles and specifically on responsibilities of principle and secondary auditors pursuant to Italian Auditing Standards.
- Reporting directly to the Deputy Minister of Justice in Mongolia, CFE assisted Mongolia in a criminal investigation into the activities of a Russian Gold Mining operation alleged to have committed a $40 million letter of credit bank fraud and tax evasion scheme. Work involved directing key aspects of a government investigation into transactions with large banks and other entities. It required the delivery and execution of search warrants on the Russian offices of several related companies, the forensic accounting and audit examination of multiple entities over several years; and a report and recommendation to the Government of Mongolia noting irregularities and suggesting appropriate actions.
- In an international arbitration, CFE investigated International Accounting Standard issues and testified on behalf of the Government of Mongolia in a dispute between a Russian gold mining company that claimed Mongolia’s windfall profit tax was confiscatory. CFE testified in the World Bank Arbitration Tribunal for the Government of Mongolia. Mongolia won the dispute.
- CFE supervised the Foreign Corrupt Practices Act (FCPA) investigation of a European company for which American Depository Receipts (ADRs) were traded in the US. The alleged payments issues involved government officials in Indonesia. Ultimately, the investigation concluded with the finding that there was insufficient evidence to support a claim of impropriety under the FCPA.
- CFE worked with regulators in six different Asian and Eastern European countries to develop regimes for international financial reporting and auditing. CFE wrote a book and prepared materials to be used by Ukrainian companies in order to convert Soviet accounting statements to financial statements in accordance with international accounting standards. These materials were used to assist approximately 30 Ukrainian enterprises in their conversion to IFRS-based reporting.
- In several separate matters, CFE has been engaged to assist counsel in searching for missing or understated assets or income in divorce (divorce in both the domestic and business sense). See related article of February of 2002. CFE has also been engaged in several situations (divorce included) to value businesses or interests in businesses.