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By Ronald D. Orol, MarketWatch
WASHINGTON (MarketWatch) — Securities regulators are overwhelmed by the volume of fraud and insider-trading violations and don’t have the resources to pursue criminals effectively.
So says Sam Antar, a felon and former chief financial officer of Crazy Eddie Inc., a well-known criminal enterprise from the 1980s that cost many people their life savings and was even featured on “Saturday Night Live.”
Antar, 56, now teaches FBI agents and Justice Department officials about white-collar crime and how to spot it. He spoke to MarketWatch about the economics of white-collar crime; why he thinks “audit” is a fraudulent term; and why short sellers, along with well-compensated whistleblowers, are best at ferreting out fraud.
Here’s what he had to say:
MarketWatch: You were the CFO of Crazy Eddie, a criminal enterprise passing itself off as a New York electronics retailer in the 1980s. Can you tell me about It?
Sam Antar: It was an 18-year fraud with two parts. As a private company we understated income by skimming money to steal the sales tax and evade income taxes. As a public company we did the opposite: We overstated our income to sell stock at inflated prices.
The reason you do that is because as a public company you get a bigger bang for the buck by overstating income and overstating your taxes than understating income and understating taxes. That’s because as a private company you are not trading stock. As a public company your stock trades at a multiple of earnings. Let’s say I understate income by a million dollars, I may save $400,000 in taxes. But if I overstate my income by the same million dollars and overpay taxes by $400,000; that $600,000 in overstated net income, if the stock is trading at 30 times earnings, increases the value of the company by $18 million.
It is the economics of white-collar crime: Overpaying taxes and overstating income is better as a public company.
MW: As CFO of Crazy Eddie, you were involved in a lot of the accounting fraud. Do you think auditors are equipped to find fraud?
S.A.: I do not believe that most auditors are adequately trained to find fraud and do battle with fraudsters of my former caliber. Documents don’t commit fraud; the people controlling the documents commit fraud. For example, most auditors are not taught fraud psychology — the behavioral dynamics of fraud. Auditors are rarely taught about emotional manipulation and misdirection used by fraudsters to manipulate their behavior during audits and successfully carry out their crimes. They are unprepared for the psychological games played by fraudsters.
MW: Do retail investors have a false sense of security when they invest in an audited company?
S.A.: Yes, audits give retail investors a false sense of security. The term “audit,” as it is currently used, is a fraudulent term. It is meant to convey a sense of confidence in the financial reports. Audits are not designed to find fraud. However, the field work performed by what we call “auditors” is of a limited scope. They take samples. In reality, what we call “audits” are actually limited compliance reviews of the books and records. Currently, audits are essentially designed to catch accidental material bookkeeping errors, not deliberate fraud. To do an effective audit, the auditors would have to be in every single place all of the time watching every single bean come in and out of the company, which is clearly impossible. What they are doing now is basically potluck. That’s why most frauds are not caught by auditors.
MW: You’ve noted that the largest chunk of frauds is found by tipsters. The SEC has beefed up its whistleblower program and is offering greater rewards for tips. Is that positive?
S.A.: I agree with that. I can tell you that the last thing any criminal wants is an adversary with a profit motive. That’s why short sellers do a very good job, and a lot of times they do a better job than the auditors.
MW: What do you think about short sellers in general?
S.A.: There are good ones, and there are bad ones. The good short sellers know what they are doing, and they do a very good job at ferreting out fraud. That’s just the way it is. It just seems that short sellers uncover more fraud than the auditors that have access to the books and records.
MW: What do you think of the situation with Carl Icahn battling with Bill Ackman over Herbalife?
S.A.: America’s capital markets need lively debate. That’s what capitalism is about. So when Bill Ackman can get on the air with Carl Icahn, and they can both debate their positions, irrespective of which one is right and which one is wrong, I think that is great. We have debate in politics, [so] why can’t we have it with public companies?
MW: Are insider-trading laws effective?
S.A.: No. The problem with insider trading is it is very difficult to police. Most of it is basically invisible. Meanwhile, the Securities and Exchange Commission basically abrogated its obligation to prosecute sophisticated financial fraud where companies, financial or nonfinancial, have manipulated their books and records.
MW: Is your point that the SEC is allocating its resources to big insider-trading cases involving hedge funds and missing accounting-fraud cases and smaller insider-trading incidents?
S.A.: The big [insider trading] cases, once the SEC gets the tips and information, are relatively easier to prosecute than accounting-fraud cases. I’m not saying that insider-trading cases are easy to prosecute, but they are easier to prosecute than financial-fraud cases. The SEC is not doing enough on financial cases involving accounting fraud. The SEC doesn’t have the resources: only 4,000 people at the SEC, [while] there are 35,000 cops in New York fighting blue-collar crime.
MW: You teach a class?
S.A.: l teach about white-collar crime. One thing that comes with the turf of being an effective white-collar criminal is that you have to be a good bullshit artist. You have to be a good communicator, which means I can be a good teacher, too. I’ve lectured at Stanford’s business and law schools, I taught at the College of New Jersey, I taught the FBI at their economic-crimes division, and I’ve taught the U.S. Justice Department at their training campus. I’ve talked to dozens of government agencies.
MW: I’ve heard a lot of concern from consumer-advocate groups about regulation under consideration by the SEC that would permit “crowdfunding,” which allows people to go online and invest in small businesses with very little SEC oversight or disclosure.
S.A.: The JOBS Act makes me want to reconsider my retirement from crime — ha-ha. It is a license to steal. Any time you take away a layer of oversight, a layer of checks and balances, the criminals are going to take advantage of it.
MW: Does the Internet make fraud easier?
S.A.: Just like regular people adapt to technology, criminals also adapt to technology and take advantage of it to commit different types of crimes or to help them commit even more crimes.
Somebody put out fake Twitter accounts for noted short sellers. We have identity fraud, and phony Facebook emails. So crime evolves. It is never going to go away. We are not going to structure our economy in a way that will eliminate crime. It is as old as the Bible.
MW: Is jail time a deterrent?
S.A.: No. I’ll give you a perfect example: Bernie Madoff. You think he read the papers every day? Watched TV ? He had to see other people being carted off to jail — did it stop him? No. Somebody else going to jail is not going to help me find God. It’s not going to help me find morality. It is not going to stop any crimes in progress. Most white-collar criminals are not going to be deterred because someone else got caught. White-collar criminals take precautions, so the possibility of jail time is not going to deter them.
By Ronald D. Orol, MarketWatch
WASHINGTON (MarketWatch) — Securities regulators are overwhelmed by the volume of fraud and insider-trading violations and don’t have the resources to pursue criminals effectively.
So says Sam Antar, a felon and former chief financial officer of Crazy Eddie Inc., a well-known criminal enterprise from the 1980s that cost many people their life savings and was even featured on “Saturday Night Live.”
Antar, 56, now teaches FBI agents and Justice Department officials about white-collar crime and how to spot it. He spoke to MarketWatch about the economics of white-collar crime; why he thinks “audit” is a fraudulent term; and why short sellers, along with well-compensated whistleblowers, are best at ferreting out fraud.
Here’s what he had to say:
MarketWatch: You were the CFO of Crazy Eddie, a criminal enterprise passing itself off as a New York electronics retailer in the 1980s. Can you tell me about It?
Sam Antar: It was an 18-year fraud with two parts. As a private company we understated income by skimming money to steal the sales tax and evade income taxes. As a public company we did the opposite: We overstated our income to sell stock at inflated prices.
The reason you do that is because as a public company you get a bigger bang for the buck by overstating income and overstating your taxes than understating income and understating taxes. That’s because as a private company you are not trading stock. As a public company your stock trades at a multiple of earnings. Let’s say I understate income by a million dollars, I may save $400,000 in taxes. But if I overstate my income by the same million dollars and overpay taxes by $400,000; that $600,000 in overstated net income, if the stock is trading at 30 times earnings, increases the value of the company by $18 million.
It is the economics of white-collar crime: Overpaying taxes and overstating income is better as a public company.
MW: As CFO of Crazy Eddie, you were involved in a lot of the accounting fraud. Do you think auditors are equipped to find fraud?
S.A.: I do not believe that most auditors are adequately trained to find fraud and do battle with fraudsters of my former caliber. Documents don’t commit fraud; the people controlling the documents commit fraud. For example, most auditors are not taught fraud psychology — the behavioral dynamics of fraud. Auditors are rarely taught about emotional manipulation and misdirection used by fraudsters to manipulate their behavior during audits and successfully carry out their crimes. They are unprepared for the psychological games played by fraudsters.
MW: Do retail investors have a false sense of security when they invest in an audited company?
S.A.: Yes, audits give retail investors a false sense of security. The term “audit,” as it is currently used, is a fraudulent term. It is meant to convey a sense of confidence in the financial reports. Audits are not designed to find fraud. However, the field work performed by what we call “auditors” is of a limited scope. They take samples. In reality, what we call “audits” are actually limited compliance reviews of the books and records. Currently, audits are essentially designed to catch accidental material bookkeeping errors, not deliberate fraud. To do an effective audit, the auditors would have to be in every single place all of the time watching every single bean come in and out of the company, which is clearly impossible. What they are doing now is basically potluck. That’s why most frauds are not caught by auditors.
MW: You’ve noted that the largest chunk of frauds is found by tipsters. The SEC has beefed up its whistleblower program and is offering greater rewards for tips. Is that positive?
S.A.: I agree with that. I can tell you that the last thing any criminal wants is an adversary with a profit motive. That’s why short sellers do a very good job, and a lot of times they do a better job than the auditors.
MW: What do you think about short sellers in general?
S.A.: There are good ones, and there are bad ones. The good short sellers know what they are doing, and they do a very good job at ferreting out fraud. That’s just the way it is. It just seems that short sellers uncover more fraud than the auditors that have access to the books and records.
MW: What do you think of the situation with Carl Icahn battling with Bill Ackman over Herbalife?
S.A.: America’s capital markets need lively debate. That’s what capitalism is about. So when Bill Ackman can get on the air with Carl Icahn, and they can both debate their positions, irrespective of which one is right and which one is wrong, I think that is great. We have debate in politics, [so] why can’t we have it with public companies?
MW: Are insider-trading laws effective?
S.A.: No. The problem with insider trading is it is very difficult to police. Most of it is basically invisible. Meanwhile, the Securities and Exchange Commission basically abrogated its obligation to prosecute sophisticated financial fraud where companies, financial or nonfinancial, have manipulated their books and records.
MW: Is your point that the SEC is allocating its resources to big insider-trading cases involving hedge funds and missing accounting-fraud cases and smaller insider-trading incidents?
S.A.: The big [insider trading] cases, once the SEC gets the tips and information, are relatively easier to prosecute than accounting-fraud cases. I’m not saying that insider-trading cases are easy to prosecute, but they are easier to prosecute than financial-fraud cases. The SEC is not doing enough on financial cases involving accounting fraud. The SEC doesn’t have the resources: only 4,000 people at the SEC, [while] there are 35,000 cops in New York fighting blue-collar crime.
MW: You teach a class?
S.A.: l teach about white-collar crime. One thing that comes with the turf of being an effective white-collar criminal is that you have to be a good bullshit artist. You have to be a good communicator, which means I can be a good teacher, too. I’ve lectured at Stanford’s business and law schools, I taught at the College of New Jersey, I taught the FBI at their economic-crimes division, and I’ve taught the U.S. Justice Department at their training campus. I’ve talked to dozens of government agencies.
MW: I’ve heard a lot of concern from consumer-advocate groups about regulation under consideration by the SEC that would permit “crowdfunding,” which allows people to go online and invest in small businesses with very little SEC oversight or disclosure.
S.A.: The JOBS Act makes me want to reconsider my retirement from crime — ha-ha. It is a license to steal. Any time you take away a layer of oversight, a layer of checks and balances, the criminals are going to take advantage of it.
MW: Does the Internet make fraud easier?
S.A.: Just like regular people adapt to technology, criminals also adapt to technology and take advantage of it to commit different types of crimes or to help them commit even more crimes.
Somebody put out fake Twitter accounts for noted short sellers. We have identity fraud, and phony Facebook emails. So crime evolves. It is never going to go away. We are not going to structure our economy in a way that will eliminate crime. It is as old as the Bible.
MW: Is jail time a deterrent?
S.A.: No. I’ll give you a perfect example: Bernie Madoff. You think he read the papers every day? Watched TV ? He had to see other people being carted off to jail — did it stop him? No. Somebody else going to jail is not going to help me find God. It’s not going to help me find morality. It is not going to stop any crimes in progress. Most white-collar criminals are not going to be deterred because someone else got caught. White-collar criminals take precautions, so the possibility of jail time is not going to deter them.
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