Spinning

December 25, 2006: White Collar Fraud Blog - The Art of Spinning: How to Identify Possible White Collar Criminals or at Least Unethical and Deceitful People Who You Should Avoid

White collar crime is a crime of persuasion and deceit. Since the white collar criminal uses persuasion and deceit to commit their crimes, it follows that such felons are artful liars.

People often ask me what characteristics I look for in other people that alert me to possible criminal activity or at least unethical and deceitful people.

Not all questionable conduct is illegal. A person can be unethical or deceitful (however they are defined) without committing any illegal acts as defined under the law.

However, most criminals use tools like spinning (see below) in the conduct of their crimes.

The Art of Spinning:

• Sell people hope. My cousin ‘Crazy Eddie’ Antar taught me that “people live on hope” and their hopes and dreams must be fed through our spin and lies. In any situation, if possible, accentuate the positive.
• Make excuses as long as you can. Try to have your excuses based on at least one truthful fact even if the fact is unrelated to your actions and argument.
• When you cannot dispute the underlying facts, accept them as true but rationalize your actions. You are allowed to make mistakes as long as you have no wrongful intent. Being stupid is not a crime.
• Always say in words you “take responsibility” but try to indirectly shift the blame on other people and factors. You need to portray yourself as a “stand up” guy or gal.
• When you cannot defend your actions or arguments attack the messenger to detract attention from your questionable actions.
• Always show your kindness by doing people favors. You will require the gratitude of such people to come to your aid and defend you.
• Build up your stature, integrity, and credibility by publicizing the good deeds you have done in areas unrelated to the subject of scrutiny.
• Build a strong base of support. Try to have surrogates and the beneficiaries of your largess stand up for you and defend you.
• If you can, appear to take the “high road” and have your surrogates do the “dirty work” for you. After all, you cannot control the actions of your zealots.
• When you can no longer spin, shut up. For example, offer no guidance to investors or resign for “personal reasons.” Your surrogates and so-called friends can still speak on your behalf and defend you.
• If you are under investigation always say you will “cooperate.” However, use all means necessary legal or otherwise to stifle the investigators. Remember that “people live on hope” and their inclination is to believe you.
• When called to testify under oath (if you do not exercise your 5th amendment privilege against self-incrimination) have selective memory about your questionable actions. It is harder to be charged with perjury if you cannot remember what you have done rather than testify and lie about it.
• However, before you testify have other friendly witnesses testify before you to defend you. You need to “lock in” their stories first (before they change their minds) so your testimony does not conflict with their testimony and your story will appear to be more truthful.
• Try not to have your actions at least appear to rise to the level of criminal conduct or a litigable action. Being stupid or being unethical is not always a crime or a tortious action.
• One last rule, to be a most effective spinner always keep your friends close and your enemies closer. The kindness you show your enemies will reduce their propensity to be skeptical of you.

If you see some of the above similarities in people who are in authority such as executives, politicians, and others, you are forewarned to watch out. Before a person can be a white collar criminal, they must be deceitful and be able to follow most of the above rules of spinning.

Barry Minkow (former ZZZZ Best fraudster and now the respected co-founder of Fraud Discovery Institute which has uncovered over 18 frauds totaling over $1 billion) once taught me to “look for points of similarity” from our previous behavior as fraudsters as a guide to find other criminals. Another thing I have learned as a criminal is that “it takes one to know one.”

Written by,

Sam E. Antar (former Crazy Eddie CFO and convicted felon)

I used to tell and write financial fairy tales as a white collar criminal.

Trust

June 2, 2007: White Collar Fraud Blog - Advice about Trust from a Convicted Felon 

I often think about the words of our late and great former President Ronald Reagan:

“Trust, but verify.”

As a convicted felon, I say:

“Don’t trust, just verify."

"Verify, verify, verify.”

As a criminal, I considered people's humanity as a weakness to be exploited.

The inclination to trust first and then verify, gave me the upper hand.

The criminal always has the initiative.

While you initially trust us, we work on ways to solidify your trust before you verify.

Hopefully, you will never verify.

However, if you do verify, we will have corroded your skepticism to a large degree.

So if you ask questions, you will accept our deceptive answers as fact.

A word of advice from this convicted felon to the capital markets, securities analysts, journalists, the accounting profession, investors, and others:

The word "trust" is a professional hazard you can leave at home before you go to work.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO & convicted felon)

PS: I committed my crimes with a cold, dark, and heartless soul.

Do you trust my advice?

Recommended blog: Brainy Quote

Advice for  Investors

March 3, 2007: Wall Street Journal - My Lunch with 2 Fraudsters: Food for Thought for Investors  (subscription required) and March 5, 2007: Marketwatch.com - What 2 Crooks Told Me Over Lunch - Commentary: "You Cannot Accept Information at Face Value" by Herb Greenberg

My lunch with two crooks: "Hi Sammy, it's great to see you." Barry Minkow gave Sam E. Antar a hug as we walked to our table at a fish restaurant overlooking San Diego Bay. It was a Friday, and Antar made the trek to San Diego from Los Angeles, where he was visiting his son; a few days earlier, this convicted felon had lectured students and faculty at the Stanford Law School on how not to get taken by a crook like him.

Antar was chief financial officer of Crazy Eddie, a New York electronics retailer that in the 1970s and 1980s claimed "our prices are inSANE" as it bilked investors out of hundreds of millions of dollars. He stayed out of jail by turning on several others, including his cousin, Eddie Antar, who was Crazy Eddie's co-founder. Minkow, on the other hand, spent seven years behind bars after stealing more than $20 million from investors in the 1980s as founder and chief executive of ZZZZ Best, a once-hot rug-cleaning company whose books could've used a good scrubbing.

"He's an orthodox Jew and I'm a Jew who is a pastor," cracks Minkow, who like Antar now spends time lecturing and working with cops to bust white-collar financial frauds. Minkow has reverence for Antar, who looks like Carla's husband from the sitcom "Cheers" and who claims to suffer from a bipolar disorder and serious insomnia. (I can vouch for the latter because his e-mails and postings on blogs come at all hours, mostly in the middle of the night.) "Criminals don't sleep," he explains.

A former CPA, Antar makes no excuses for his criminal past, referring to himself in e-mails, casual discussion and his Web site -- whitecollarfraud.com1 -- as a "low life" and "convicted felon." Even the normally loquacious Minkow appears to enjoy leaving the talking to Antar, who takes no money for his speeches. "I don't want to be held up on the pedestal of redemption," he says. "I would rather people learn from my vile, ugly and vicious crimes. It is most important that they understand the ugly nature of criminality. My life is a mistake of history."

A mistake, maybe, but one other people can learn from. "Do not trust verify," was his mantra as the meal began.

Verify what? "Everything."

Even whether Antar and Minkow aren't still scamming?

"Everything."

And so it went, with Antar continuing with e-mails over several weeks.

"Watch how management handles bad quarters, earnings disappointments, criticism, skepticism and cynicism," he says. "Do they start by saying, 'We take full responsibility and make no excuses' only to follow by carefully worded innuendos, excuses and deflection? Do they question the integrity of those who ask questions?"

He continues: "Just because a CEO takes a $1 salary doesn't make that person immune to criminality. Just because I travel the country and teach the government, colleges and universities, and professional groups about white-collar crime and never collect a fee and pay out of my own pocket all travel costs, doesn't mean I am not a criminal today. Remember that many crimes are committed without economic gain for reasons of ego, status and sheer arrogance."

Antar says investors should do a better job "studying" financial reports, especially the footnotes and "risk factor" sections. "Notice that I used the word 'study' and not 'read' since all information is not meant to be read like a novel, but meant to be analyzed like a project."

He adds: "Criminals are scared of skeptics and cynics," he says. "We are petrified when you verify our representations."

Did he ever have remorse? "Never ... We simply did not care about any one of our victims. We simply committed crime because we could.

"As criminals we built false walls of integrity around us," he adds. "We walked old ladies across the street. We built wings to hospitals. We gave huge amounts of money to charity.

We wanted you to trust us.

"Simply said ... if you want to be an investor, you cannot accept information at face value. 'Unexamined acceptance' is the greatest cause of investor losses."

As for Minkow? He defers to Antar.

"He's the best," he says.

Lunch wasn't bad, either.

Wall Street Analysts

October 16, 2007: White Collar Fraud Blog - A Warning to Wall Street Analysts from a Convicted Felon

To Wall Street Analysts:

During my years at Crazy Eddie, I found that securities analysts often did not know how to ask intelligent questions. When they asked intelligent questions, they did not know how to formulate the proper follow up questions to our deceptive answers. Most Wall Street analysts were too trusting of the answers that they received from us.

Good questioning will often result in irritable behavior from company management. However, you are not doing your job to be in management's good graces. Your job is to obtain not readily apparent facts, analyze them properly, and communicate them accurately and effectively to your readers. Top notch financial journalist Herb Greenberg advises that you consider "what many companies don't say as they spin the story their way."

For example, be careful of corporate managements that:

• accentuate positive information and spin and deflect negative information
• blame others for their company's problems
• attempt to intimidate you.

Beware of companies that exclude critics and provide “selective” access to management. Too often, Wall Street analysts in their quest to gain access to management end up corrupting their required professional skepticism and cynicism. I played this game very well with Wall Street analysts, as the CFO of Crazy Eddie.

It’s not about gaining access at the cost of your professional integrity. It’s about understanding what is really happening and communicating it accurately and effectively to your readers.

I played you analysts very well by rewarding you with selective access as the CFO of Crazy Eddie. I had you eating out of my hand with “selective” disclosures and “favored” access. While you craved for access and wrote your glowing reports in gratitude for your coveted access, you unwittingly helped make the frauds that we perpetrated at Crazy Eddie easier.

If you had any backbone, you would all boycott any presentation that excludes the more skeptical professionals among you. Frankly, after reading many transcripts lately, you guys look like amateurs with your lack of questioning skills, your inability to ask proper follow through questions, and obtain straight, clear, unambiguous, and honest answers.

You seem like hand picked patsies as I read your unchallenging questions and the lame answers that management gives you without any challenge or follow up. You never seem to learn as you compete with one another for the affections of management and let access to them rule your work at almost any cost.

Eventually you will run into a guy like I was. You will wish you asked the proper questions and follow up questions too. You will wish that your other peers attended the meetings and asked questions you would not ask or could not ask. The questions that will never be asked by you and others will cause you to miss detecting the lies and deceit being spun upon you.

When the “earnings surprises” eventually come out, your previous work will be considered negligent and amateurish. Your future work will always be under a cloud of suspicion. You will be remembered for the glowing reports you made as management ran circles around you. Do you want people to think you are fools?

The managements that spread deceit and lies to the selective few who gain coveted access are not your friends. They are using your humanity against you as a weakness to be exploited in furtherance of their crimes. They know about how your efforts at coveted access end up corrupting your professionalism. They don’t care about what happens to you as a result of their actions. As a criminal, I never cared about you, too.

You have been warned.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO & convicted felon)

PS: I see that nothing much has changed since my time. Keep it up. When a company that you wrote a glowing report on ends up a train wreck will these same managements rescue you?

For additional information, please read the following posts in this blog:

06/02/07: Advice about Trust from a Convicted Felon

12/25/06: The Art of Spinning: How to Identify White Collar Criminals or at Least Unethical and Deceitful People Who You Should Avoid

12/19/06: Managing Earnings: Playing the Numbers Game

12/10/06: Hiding Your Dirty Laundry in the Footnotes: Anatomy of the Crazy Eddie Accounts Payable Fraud

Earnings Management

December 19, 2007: White Collar Fraud Blog - Managing Earnings: Playing the Numbers Game

Did you ever wonder why some companies always consistently beat their earnings targets?

Many accounting professionals have written extensively about how companies “manage earnings.” A company can arbitrarily reduce “excessive profits” in good quarters or fiscal years to “save” such earnings and apply them to future leaner accounting periods in order to avoid earnings disappointments.

Jeff Matthews has an interesting commentary in his recent blog post entitled, “And Beware CEOs Trying to ‘Hit the Numbers.'"

He wrote in part:

Not only can the focus on hitting a meaningless, and often unsustainable, profit forecast result in stupid, short-term decision making; it can also, as in the case of Tyco, Fannie Mae, Enron, and a list of other companies large and small too lengthy to bother with, result in fraud.

The problem is that management can become so focused and obsessed with hitting earnings targets that certain improper decisions will be made relating to the application of accounting principles to “smooth over” earnings. Ultimately the so called “professional judgment” that management uses in the application of accounting principles can lead to aggressive accounting techniques and even fraud.

The issue here is known as “managing earnings.” Accounting is more of an art than a science because of certain judgments regarding accounting principles by management with the acceptance of its Audit Committee and external auditors. For example, accounting principles relating to sales, leases, depreciation, accounts payable, and inventory all involve some amount of judgment or leeway.

In the Crazy Eddie fraud, one technique we used to manage earnings was by taking excessive arbitrary reserves against inventories in good years and reducing such reserves against inventory in lean years. In fiscal year 1986, we inflated our earnings by about $16 million due to fraudulent means. When Main Hurdman, Crazy Eddie's external auditors, completed their initial computation of the company's earnings, our gross margins were over 40% in the last quarter. Historically, Crazy Eddie’s gross margins were only about 20%. Our excessive earnings inflation should have been a "red flag" for Main Hurdman to investigate further.

Rather than investigate the red flag, Main Hurdman simply agreed to Crazy Eddie booking extra arbitrary “loss reserves” against our inventory valuations. The auditors thought that Crazy Eddie was being “conservative” but in fact they unwittingly helped us reduce our overly excessive fraudulent earnings inflation.

The use of such arbitrary reserves was known as “accountant’s legal liability insurance,” since the rationale was that no company was ever sued for being too conservative or under-reporting earnings. When I asked the auditors about what Crazy Eddie should do with these “excessive” reserves in future years, they replied to me that such excessive reserves was like “money in the bank.” The auditors explained to me that such excessive reserves can be reduced in future lean years to help Crazy Eddie make its future earnings targets.

In the next fiscal year, when Crazy Eddie started losing money and no amount of fraud could turn such losses into profits, we reduced our excessive arbitrary reserves that we had set up in the prior year, with our auditors’ collusion. 

While the external auditors were not involved in falsifying inventory, they were unwitting accomplices to our fraud, since they helped us “manage earnings” through the use of arbitrary inventory reserves.

In many of my conversations with Wall Street analysts, underwriters, and other CFO’s, I found out that the practice of “managing earnings” was prevalent and an accepted business norm.

Wall Street does not like surprises and the extra swing that management gets from applying so called judgment to accounting principles allows them to constantly beat their earnings targets. In good years, certain companies will save “unneeded excess earnings” through arbitrary excessive reserves, to save such earnings for the lean quarters or years when they do not make their earnings targets.

Government Investigations

September 10, 2007: White Collar Fraud Blog - Advice from a convicted felon: How the government investigates and prosecutes white collar criminal cases  

I am often asked by people attending my many free fraud presentations about the conduct of government white collar crime investigations. In almost every securities fraud, there is a hierarchy of criminals, which I will call:

• The big fish (usually the CEO)
• The middle fish (usually middle managers)
• The smallest fish (usually non management personnel)

The government works its way up the criminal hierarchy to get to the biggest fish

The government attempts to flip the smallest fish to get to the biggest fish. The investigators usually attempt to use the testimony of the smallest fish to work their way up the ladder to the middle fish and than use the middle fish to catch the biggest fish. The government uses the smallest fish to turn in the middle fish and the middle fish to turn in the biggest fish. Each level of fish is used as bait by the government to reel in the next higher level of fish.

The government would much rather deep fry the biggest fish than either the middle fish or the smallest fish. The government usually considers the smallest fish, small fry. The government expends enormous time and economic resources to investigate and prosecute white collar crimes. As the government works hard, its hunger grows. After so much work by the government, the smallest fish and the middle fish will hardly fill their appetite. The government wants to deep fry the biggest fish.

The Smallest Fish

The smallest fish have to worry about both the middle fish and the biggest fish distancing itself from them. In turn, the middle fish have to worry about the biggest fish distancing itself from both the smallest fish and the middle fish. The smallest fish need to worry about both the middle fish and the biggest fish leaving them hanging out to dry, all alone in the government's net. The smallest fish should look for any subtle changes in the behavior of both the middle fish and the biggest fish for clues as to whether those other fish (the middle fish and the biggest fish) will let the smallest fish fry. After all, if the government cannot eat one big fish or several middle fish, it can fill its appetite by eating plenty of small fish. As a result, the smallest fish become paranoid as their fears grow about the threat from each level of fish above them and the government right in front of them.

The Middle Fish

The middle fish have the biggest problem. The government usually flips the smallest fish to get to the middle fish that is closest to the biggest fish. The middle fish have to worry that the smallest fish do not turn them in to the government to fry. The middle fish also have to worry that the biggest fish may distance itself from the middle fish and leave them hanging out to dry. The middle fish should be alert for any subtle changes in behavior from both the smallest fish and the biggest fish. If the government cannot eat the biggest fish, it can always fill its appetite with plenty of small fish and several middle fish. It's particularly tough being the middle fish. As a result, the middle fish often becomes paranoid as they worry about the threat from the smallest fish under it, the biggest fish over it, and the government right in the middle.

The Biggest Fish

The government loves to feast on the biggest fish. After so much hard work and effort, the government's hunger can best be filled by eating the biggest fish. The biggest fish has to keep both the middle fish and the smallest fish in line, while distancing itself from the other fish. It is quite a balancing act. If the biggest fish stays too close to the other fish, it risks being cast too early into the government's net. Rather, the biggest fish hopes that the governments hunger is satisfied by eating only the smallest fish and/or the middle fish.

If the biggest fish distances itself from the either the smallest fish or the middle fish, it risks alienating the other fish who do not want to fry instead of the biggest fish. The biggest fish must remain alert for any subtle changes in the behavior of both the smallest fish and the middle fish. The biggest fish knows that the first one of the other smaller fish (the smallest fish and the middle fish) to cooperate with the government usually gets the best deal and does not become part of the festive meal. It is often called a race to the prosecutor's office to be the first fish in, so the winner may be able to cut the best deal with the government and avoid being fried. As a result, the biggest fish often becomes paranoid, as it fears the threat of the smallest fish and the middle fish below it and the government bearing down on it.

The Government

The government often casts a wide net in its investigation of white collar crime. The government investigators use the smallest fish from its net as bait to catch the middle fish and they use the middle fish as bait to catch the big fish. The government prosecutors feed on the paranoia of the little fish, the middle fish, and the biggest fish as they scramble to avoid becoming part of the government's festive meal.

As I said, the government's wants to fry the big fish to satisfy its strong appetite. However, if the biggest fish does not fry, the other fish will fry, instead of the biggest fish. Both the smallest fish and the middle fish would much rather be eaten raw by the government, than to be cooked deep fried.

After all, how many times have you heard criminals refer to government investigations as "fishing expeditions."

Written by:

Sam E. Antar (former Crazy Eddie CFO & convicted felon)

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