March 2, 2010
Markopolos (one of my heroes) recently lambasted the culture of lawyers at the Securities and Exchange Commission ("SEC").
In Markopolos' view, a key problem,
perhaps even the seminal problem, at the SEC is a lack of mathematicians,
accountants, and other finance professionals.
The rebuffed Madoff whistleblower argues that lawyers can't decipher
financial statements and have waylaid the federal regulator. In more stark terms, he said that lawyers
poisoned the SEC - he also calls many of them "idiots."
I understand where Markopolos' anger comes from. Been there, done that. However, I refuse to accept his thesis that
if there were simply more number-crunchers at the SEC that the failures to
competently investigate and examine Wall Street would cease. See, Harry, the fish stinks from the head down. http://www.brokeandbroker.com/index.php?a=blog&id=319
Lo and behold, this falls
into my lap this morning.
In the Matter
of Gerard A. M.
Oprins, CPA and Wendy McNeeley, CPAT&E Or T&A
(Release Nos. 34-61607, AAER-3116; File
No. 3-13787, March 1, 2010):
ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS
PURSUANT TO SECTION 4C OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 102(e)
OF THE COMMISSION'S RULES OF PRACTICE
After an investigation
by the SEC's Division of Enforcement and the Office of the Chief Accountant,
the regulator instituted public administrative proceedings against two CPAs (Oprins and McNeeley) -
the ultimate Wall Street number crunchers - for allegedly improper professional
conduct during Ernst & Young LLP's ("Ernst & Young") independent audits
of the 2004 financial statements for AA Capital Partners, Inc. ("AA Capital"),
an investment adviser registered with the Commission, and the AA Capital Equity
Fund ("Equity Fund"), one of AA Capital's affiliated private equity funds. During the
audits, Oprins, the engagement partner, and McNeeley, the manager, allegedly learned
that AA Capital's president, director and co-owner, John Orecchio ("Orecchio"),
purportedly had borrowed $1.92 million in funds belonging to AA Capital's
clients between May and December 2004 to pay a personal tax liability arising
from his ownership interest in AA Capital's private equity funds. In fact,
Orecchio had allegedly invented the story about the so-called "tax loan" to
conceal his ongoing misappropriation of client assets for his personal use.
Among the more lurid allegations in this matter, the
SEC alleges that shortly after he co-founded AA Capital in 2002, Orecchio began
spending lavishly on travel and entertainment. Among my favorite parts of his
business plan was the SEC's claim that in August 2003, Orecchio began a
relationship with a woman who performed at a Detroit strip club.
When the SEC says that she "performed" at the club, I'm not exactly sure what to infer. Perhaps she performed audits, but I'll have to look into that question further. Apparently
ever the civic-minded man, between 2003 and 2006, Orecchio spent substantial
amounts of money on his mistress and her family. Although the SEC doesn't exactly
spell-out how the strip club performer transitioned from an entertainment professional to Orecchio's
mistress, I suspect that I can leave that transformation to your imagination.
Alas, the cost of maintaining
mistress-strippers seems to be plagued by inflation
(now, c'mon! get your mind out of the gutter) because starting in 2004,
Orecchio allegedly began siphoning money from client trust accounts to fund his
lavish lifestyle. I don't know about you, but I've always wanted a lavish lifestyle. There's just something about that opportunity that has an enticing ring to it. Maybe there are some available on Craigslist?
Anyway, between 2004 and September 2006, Orecchio allegedly misappropriated
more than $23 million in client funds, including at least $5.7 million under
the guise of a purported "tax loan."
Like how many lap dances are we talking about here? In hindsight, Eliot Spitzer paid Ashley Dupre what?... a measly $4,300 for an hour? Can you imagine the bill if Spitzer and Orecchio had ever joined forces? Of course, then you have to wonder if those two playboys would have tossed a couple of bucks towards, let's say a sitting governor, I don't have one in mind, you use your imagination, and maybe that state elected official could make some phone calls to make any problems go away. You know -- come to think of it -- that's a great idea for a screenplay. Lemme make a note here.
So... getting back to our story, in
May 2004, Orecchio allegedly told his CFO that he needed to borrow money to pay
a significant tax liability based on his ownership interest in an affiliated
private equity fund and a failure by Ernst & Young to timely file certain
tax returns. At Orecchio's direction, the CFO withdrew $602,150 from client
trust accounts and then wired the money to Orecchio's personal bank account. Through
the balance of 2004, the CFO allegedly made four similar disbursements to
Orecchio in the amount of $1.92 million - the amount Orecchio claimed was
needed for his IRS estimated taxes (in reality, the amount owed was about
$25,000). By October 2005, the CFO
allegedly made at least 20 such disbursements in the amount of $5.7
CPAs vs. Lawyers: Sudden Death Overtime But No One Ever Score
Okay - great,
nary a lawyerly type in sight at this point. If Markopolos' theory is correct, the Ernst & Young audit staff should nail Orecchio and the affiliated companies. The tip off
to the auditors will certainly be the fact that Orecchio never signed any loan documentation
for his purported "tax loan" and never agreed to repay the "tax loan" with
interest. Also, there is the simple fact that a call to the IRS will disclose no such liability. It's just a matter of asking the right questions, punching in the numbers, having fresh batteries in the calculators, and running the spreadsheets.
Ernst & Young's seven-member audit team including McNeeley,
as the audit manager, Oprins, as the engagement partner, an independent review
partner, two senior auditors and two staff members embarked upon their on-site
After learning about Orecchio's
purported "tax loan," the SEC alleges that Oprins and McNeeley largely relied upon
the CFOs' unsupported assertions and documentation about Orecchio's purported
"tax loan" as sufficient evidential matter.
audit team did not
- obtain any
documentation reflecting Orecchio's tax liability or the terms of the "tax
- discuss the "tax
loan" with Orecchio;
- take steps to
confirm Stevens' statements that Orecchio "made a payment to the IRS for
$1,921,050" or that the "tax loan" would be repaid by Orecchio or the IRS
- take steps to
assess the collectability of the "tax loan;" and
Orecchio's tax liability with their colleagues in Ernst & Young's tax
department who prepared the tax filings for AA Capital and its affiliated
private equity funds.
So, you see, Wall Street's
desultory regulatory scene is not simply the fault of mathematically challenged
lawyers - there are more than enough finance professionals who are regularly daunted by
uncovering fraud. And if the high-priced talent at Ernst & Young comes up short, what do you expect from the lower-priced civil service talent? I suspect that if you
transplanted all the CPAs from the top auditing firms into the SEC and the
Financial Industry Regulatory Authority ("FINRA") that things would still be
in the same sad state as they are. It's
not that all lawyers at the SEC are screwing things up - it's the incompetent ones (along with the cronies and toadies) who derail effective regulation. It's not all CPAs - it's the lazy and incompetent ones who screw things up.
Garbage in, garbage out.