Dear Mr. President-Elect: Advice on Combating White-Collar Crime from a Convicted Felon

by: Sam Antar November 16, 2008    

Sam E. Antar

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To President-Elect Barack Obama:

While our capital markets require reform, no amount of regulation or oversight can be effective unless those persons charged with carrying it out, have the proper amount of experience, knowledge, competence, and professional skepticism to successfully perform their respective jobs and responsibilities. As the cold-blooded and heartless criminal CFO of Crazy Eddie, I had no fear of oversight from outside or independent board members and our external auditors.

I took advantage of their lack of requisite skills, knowledge, and experience to effectively carry out my crimes. If you want to see capitalism succeed as an engine for our future economic prosperity, I respectfully ask you to first consider the issue of competence, before looking at the issue of regulation and oversight.

Window Dressing Boards of Directors

We need better standards of qualification for public company board members. Too often, company boards are packed with people with great resumes but such persons have no specialized experience and training to effectively carry out their functions or boards are packed with cronies of company management. Instead, we must require that board members have the proper amount of specialized education, background, and experience necessary to perform their duties effectively.

We do not need well meaning, intelligent people, serving in positions they are not well suited for, since in many cases they make ineffective Board members. The time for “window dressing” must end.

Today, too many board members are appointed for “window dressing” purposes, rather than their specific competence to carry out their duties. Michelle Leder’s blog, Footnoted.org once noted:

So where do former members of the House and Senate, not to mention Governors and former Cabinet members go when they exit from the political stage? Many of them wind up filling seats on boards of directors.

For example, your new Chief of Staff, Rahm Emanuel, was appointed by President Bill Clinton to serve on Freddie Mac’s (FRE) board of directors, after serving in Clinton's administration. I am assuming that Mr. Emanuel took the job and served on Freddie Mac's board from 2000 to 2001 with the best of intentions. However, like many other well meaning but gullible board members, he found himself in the wrong place at the wrong time, in the hands of an unscrupulous management team.

According to the SEC complaint filed against Freddie Mac:

…Freddie Mac misreported its net income in 2000, 2001 and 2002 by 30.5 percent, 23.9 percent and 42.9 percent, respectively. Furthermore, Freddie Mac’s senior management exerted consistent pressure to have the company report smooth and dependable earnings growth in order to present investors with the image of a company that would continue to generate predictable and growing earnings.

“As has been seen in so many cases, Freddie Mac’s departure from proper accounting practices was the result of a corporate culture that sought stable earnings growth at any cost,” said Linda Chatman Thomsen, the SEC’s Director of Enforcement. “Investors do not benefit when good corporate governance takes a back seat to a single-minded drive to achieve earnings targets.”

Note: Bold print and italics added by me.

Rahm Emanuel was not named in the SEC’s complaint against Freddie Mac. However, in a statement before the Senate Committee on Banking, Housing, and Urban Affairs, Acting Director of the Office of Federal Housing Enterprise Oversight, James B. Lockhart III noted:

For the most part, the same long-tenured shareholder-elected Directors oversaw the same CEO, COO, and General Counsel of Freddie Mac from 1990 to 2003. The non-executive Directors allowed the past performance of those officers to color their oversight. Directors should have asked more questions, pressed harder for resolution of issues, and not automatically accepted the rationale of management for the length of time needed to address identified weaknesses and problems. The oversight exercised by the Board might have been more vigorous if there had been a regular turnover of shareholder-elected Directors or if Directors had not expected to continue to serve on the Board until the mandatory retirement age. Conversely, the terms of the presidentially appointed Directors are far too short, averaging just over 14 months, for them to play a meaningful role on the Board. The position is an anachronism that should be repealed so shareholders can elect all Directors. The Board of Directors was apprised of control weaknesses, the efforts of management to shift income into future periods and other issues that led to the restatement, but did not recognize red flags, failed to make reasonable inquiries of management, or otherwise failed in its duty to follow up on matters brought to its attention.

Note: Bold print and italics added by me.

The problem is that intelligent and well meaning board of directors are often duped by unscrupulous company management teams who take advantage of their lack of requisite skills and professional cynicism.

Prospective qualified board members must know how to make effective inquiries and spot "red flags." They must know how to ask questions, who to direct their questions to, and how to handle false and misleading answers by management with effective follow up questions. Such skills only come from adequately qualified board members who have proper training, education, and experience before joining company boards.

Lack of Truly Independent and Properly Qualified Audit Committee Members

So-called independent audit committee members of boards or directors are less independent and less competent than the external auditors, who they oversee. Too many audit committee members have no formal educational background in accounting and auditing or specialized training in fraud detection.

Many so-called “independent” board members own stock and receive stock options in their respective companies, while independent external auditors cannot own stock or receive stock-based compensation from their audit clients. Owning company stock and receiving stock-based compensation, provides a disincentive to effective independent audit committee oversight of financial reporting and can adversely affect an audit committee member’s professional skepticism. Therefore, audit committee members cannot be considered truly "independent" if they own company stock or receive stock-based compensation. I suggest that our securities laws be amended to require truly independent audit committees.

Lack of Properly Trained Auditors

External auditors receive too little or no training in forensic accounting, fraud detection, or criminology. Most Certified Public Accountants never take a single college level course devoted exclusively to issues of white collar crime or internal controls and many important subjects covered in the CPA licensing exam are learned after graduation in a cram CPA exam review course. We should mandate that a larger proportion of continuing professional education, required by CPAs to maintain their licenses, be devoted to issues of white collar crime and fraud detection.

Not Enough Law Enforcement Resources Devoted to White Collar Crime

While I never feared Crazy Eddie’s board of directors and auditors, I did fear the Securities and Exchange Commission and the Federal Bureau of Investigation. However, I doubt that many criminals have such fear for the SEC and FBI today.

Both the SEC and FBI are under-resourced and overwhelmed and as a result, they are unable to successfully investigate too many complicated white collar crime cases, unless such cases are handed to them on a silver platter by others. The most experienced SEC and FBI personnel are leaving government work for better paying private sector jobs. Therefore, if you really want criminals to think twice before executing their crimes, I suggest that you beef up our nation's investigative and law enforcement resources.

Our capital markets depend on the integrity of financial information that is supposed to be insured by external auditors, audit committees, and consistently effective law enforcement. Inadequately trained independent external auditors, the first line of defense for insuring the integrity of financial reporting, are supervised by even less competent and less independent audit committees. On top of that, our regulators and law enforcement agencies lack the required resources to effectively prosecute many crimes enabled by the lack of effective audits and company oversight by boards of directors. Therefore, we face a perfect storm for disaster, as the cancer of white collar crime destroys our economic fabric and inflicts a collective harm on our great society.

If you want capitalism to succeed as an engine of prosperity for our great nation, I ask you to heed my advice based on my experience as a cold blooded convicted felon.

Respectfully:

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

P.S.: While Rahm Emanuel may not have been an effective board member of Freddie Mac, he can provide valuable insight to you about the perils of lack of effective oversight by boards of directors. After all, the wisest people are those that learn from past mistakes.

In addition, I will continue to provide you with more unsolicited advice from time-to-time. You can learn a lot from a convicted felon who scammed the system and took advantage of gullible human beings in ways your advisors never dreamed of.

Disclosure: Registered Democrat (convicted felons can vote in New York State but don't get to serve on juries - which I don't mind) and I vote both Democrat and Republican depending on the best candidate for the job. In addition, I have no position in Freddie Mac securities.

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This article has 19 comments:

  •  
    Nov 16 10:01 AM
    I like your perspective, but alas you are whistling in the wind. Boards of Directors are politicians...you learn this is business school. Lesson 1:Pick a Board that helps with connections (i.e. regulatory hurdles, access to finance, access to politicians, CEO of a major supplier etc.). The money trail will lead you to Lesson 1 every time.

    We will pay some lip service to better financial management for the next few years and then it will be business as usual. We'll call CEO's and CFO before Congress and berate them mercilessly, and they will still go home with what they earned by ill-gotten gains. Hey, you still get to vote and I bet that you (or even more likely your family members) still have a comfortable nest egg.

    The overall lesson is that crime can still pay with low risk and if you are able to pull it off without any criminal activity (pure foolishness ala some of the Wall Street firms) all the better. Shame is dead...
    Reply | Link to Comment
  •  
    Nov 16 11:01 AM
    Excellent article and I hope you keep working against white collar crime. I believe Obama will make a very good president, but you are talking here about ending deception, poltitical maneuvering, and cronyism by the top people in corporations, their rating agents, and their accounting firms. And, you are suggesting that enough oversight and threat of criminal punishment may be possible to make corporate accounting honest. Good luck! This is an enormous problem. The political and deception skills are partly responsible for corporate people getting to the top and staying there in the first place. And suggesting that politicians, which are deception artists themselves, find a way to fix the broken system is a stretch. Look at all of the trillions of dollars of exotic financial instuments and off balance sheet accounts created by financial deception artists -- not to mention cozy boad of director ralationships and dishonest (but barely legal) corporate financial statements.. A whole culture has been trained to be white collar crooks. Any serious effort by government to restrain this insidious corruption will be met by waves of lobbyists hired by the same crooks that are the targets of the corruption. It will take a tremendously strong, dedicated, and incorruptible leader to even begin to fix this problem. Just my early morning rant, but I do believe some improvement will be made.
    Reply | Link to Comment
  •  
    Nov 16 04:40 PM
    Hopefully, those who read and agree with your comments ill take the time to forward your remarks as well as the comments on - by email - to any and all of OBAMA's staff with a request that it is brought to the attention of "the man" - in hopes that HE WILL BE THE "...tremendously strong, dedicated, and incorruptible leader to even begin to fix this problem".
    Reply | Link to Comment
  •  
    Nov 16 09:25 PM
    Interesting, but not complete. Most Boards are involved in systematically robbing the shareholders by diverting large sums to executive compensation, special pay to board members and compensation for "finding deals or finance etc.". The large corporations spend lavishly for training, meetings, tours and inspections. The crimes are many and the auditors go for, because you know who hires them.

    Congress robs the public with travel, health care, district offices and retirement
    pensions that are in effect golden dreams for little more than answering role calls. The days of citizen legislators is gone and the age of the professional legislature with a staff of twenty toads is here, yet they use our money to rob, misgovern and wreck the state.

    While we are at it, I spent some time as a senior officer the in the military. The problem of competency is very real there too. Promotions are very "club" oriented and if the best man is selected he will likely not be the most popular candidate with the selection board. And if the pols like an officer, who cares what the selection boards wants? The "Yes" man or women will be elevated even if he or she is known to be a ninny, incompetent and drag on the armed force. Who needs 110 admirals? Why 12 four star generals in peace time? Is it the responsibility or getting the old boys and girls their day in the values, and getting the retirement sweeten. If you go into retirement at age 50 as a bird col you, on average, earn more in retirement than during active service. Make sense?
    Reply | Link to Comment
  •  
    Nov 17 02:23 AM
    As a general comment to all your feedback, white collar crime will always be around since every person lives with sin and temptation. White collar crime is either more noticed or less noticed but is always there. Most white collar crimes are flushed out as the economy weakens, since it is harder to sustain such crimes. I thank you all for your comments.

    Sam E. Antar (former Crazy Eddie CFO and a convicted felon)
    Reply | Link to Comment
  •  
    Nov 17 03:39 AM
    Sam, the requirements for boards of directors comes from the states where the company is incorporated (you know this i was just talking to myself). there is little that can be done from a federal level.

    the board of directors is the weak link. what they see is whatever the corporate chiefs want them to see. the board meetings are orchestrated.

    the only solution is a full time board with an audit team that reports to them.
    Reply | Link to Comment
  •  
    Nov 17 05:00 AM
    The hand:

    Please check this out: www.sec.gov/rules/fina...

    Sam
    Reply | Link to Comment
  •  
    Nov 17 08:23 AM
    overpaid boards not doing their governance job goes back a long ways.

    boards being cronies of the chief executive goes back a long ways.

    self-perpetuating boards (obstacles to shareholders getting fresh names on the ballot).

    the primary function of many boards is to reelect themselves & then go play golf the rest of the day.

    carl icahn knows all about this.
    > jack (i am a member of a board)
    Reply | Link to Comment
  •  
    Nov 17 10:01 AM
    Interesting stuff about competency of boards, special committees , etc. I would agree with the author and Whidbey on their comments about the SEC and the military. Smells a bit of sour grapes, which is always the argument against real criticism from the self-serving elite who cripple their institutions. From my experience you can add education to the list of major institutions that has failed due to incompetent leaders. The scream for more accountability results in supreme cronyism, down-grading the best teachers and promoting the team players who in turn vote to support the leadership. Executive appointed committees are only as good as the executive and will forever reflect that. As Whidbey, I also am retired and my evaluation is based on 34 years of teaching in higher education. The quality of teaching is directly related to the quality of administrators who hire and promote them. It's time to distrust and critically evaluate the top as opposed to the bottom. My pick for the head of the SEC is Ralph Nader. I'll take a benevolent dictator every time over an ambitious idiot with the power to select committees to evaluate his own work.
    Reply | Link to Comment
  •  
    Nov 17 10:10 AM
    Remember the TV show, "It Takes a Thief"? It takes a thief to catch a thief. More recently there was the movie "Catch Me If You Can" with Leonardo Dicaprio playing a real life fraudster and counterfieter who was later hired by the FBI for his expertise. Computer hackers are briefly imprisoned then hired to do counter-hacking work.

    Repentant crooks like Sam are exactly who we need to defend our system against unrepentant crooks. It takes one to know one. We should applaud Sam for speaking out and explaining how the schemes are perpetrated. We need to send wolves into these woods, not innocent babes, if we hope to make a dent in white collar crime.

    p.s. sorry for using 3 cliches in 2 paragraphs
    Reply | Link to Comment
  •  
    Nov 17 01:52 PM
    Insightful comment of the day award.


    On Nov 16 10:01 AM mahony wrote:

    > I like your perspective, but alas you are whistling in the wind.
    > Boards of Directors are politicians...you learn this is business
    > school. Lesson 1:Pick a Board that helps with connections (i.e. regulatory
    > hurdles, access to finance, access to politicians, CEO of a major
    > supplier etc.). The money trail will lead you to Lesson 1 every time.
    >
    >
    > We will pay some lip service to better financial management for the
    > next few years and then it will be business as usual. We'll call
    > CEO's and CFO before Congress and berate them mercilessly, and they
    > will still go home with what they earned by ill-gotten gains. Hey,
    > you still get to vote and I bet that you (or even more likely your
    > family members) still have a comfortable nest egg.
    >
    > The overall lesson is that crime can still pay with low risk and
    > if you are able to pull it off without any criminal activity (pure
    > foolishness ala some of the Wall Street firms) all the better. Shame
    > is dead...
    Reply | Link to Comment
  •  
    Nov 17 02:01 PM
    AHAH. Whidbey as per norm has nailed it! Our culture has become corrupt, lazy and selfish leading to chroniesm. Why is the big question and the answer is based on human nature. When a culture has the basic necessities in abundance and NO national focus we become bored, nihlistic and self-destructive. In other words, we get BORED. Billionaires and large corporate interests, our culture focus on sucking what is left out of the little guy. Hence, government should act as a security guard but isn't because it has gotten it's nose too far into this profitable affair. There are only three outcomes possible based on human nature:

    1) Armed revolution
    2) Voter revolution
    3) The nation is conquered

    Actually, #3 has already largely occured with foreign interests of debt ownership controlling much of government policy. #2 is the likely outcome in the 2010 and 2012 elections. Meanwhile, more fleecing and backlash shall ensue. I am focused on moving along #2. Armed revolution is often as destructive as the tyranny it replaces, although France and the U.S. are rare exceptions. I am not sure exactly why.


    On Nov 16 09:25 PM Whidbey wrote:

    > Interesting, but not complete. Most Boards are involved in systematically
    > robbing the shareholders by diverting large sums to executive compensation,
    > special pay to board members and compensation for "finding deals
    > or finance etc.". The large corporations spend lavishly for training,
    > meetings, tours and inspections. The crimes are many and the auditors
    > go for, because you know who hires them.
    >
    > Congress robs the public with travel, health care, district offices
    > and retirement
    > pensions that are in effect golden dreams for little more than answering
    > role calls. The days of citizen legislators is gone and the age of
    > the professional legislature with a staff of twenty toads is here,
    > yet they use our money to rob, misgovern and wreck the state.
    >
    > While we are at it, I spent some time as a senior officer the in
    > the military. The problem of competency is very real there too. Promotions
    > are very "club" oriented and if the best man is selected he will
    > likely not be the most popular candidate with the selection board.
    > And if the pols like an officer, who cares what the selection boards
    > wants? The "Yes" man or women will be elevated even if he or she
    > is known to be a ninny, incompetent and drag on the armed force.
    > Who needs 110 admirals? Why 12 four star generals in peace time?
    > Is it the responsibility or getting the old boys and girls their
    > day in the values, and getting the retirement sweeten. If you go
    > into retirement at age 50 as a bird col you, on average, earn more
    > in retirement than during active service. Make sense?
    Reply | Link to Comment
  •  
    Nov 17 03:14 PM
    thinkbig - remember that the french revolution is still a work in progress. how many constitutions/republic... have they had? and mr. napoleon (the foreigner from corsica). and a second empire along the way.
    > jack
    Reply | Link to Comment
  •  
    Nov 17 03:20 PM
    in regard to mr. whidbey, achieving star rank in the military depends largely on the social graces of mrs. officer in the o-club. keeping your nose clean & your shoes & beltbuckle shined helps too. i never made it to bird col.
    > jack
    Reply | Link to Comment
  •  
    Nov 17 03:40 PM
    Very true. America will likely reinvent itself to be decent republic but how much pain in the transition to and from shall unfold. That's the pertinent question for the investment community. I am short the current U.S. government and long America. How's that for disclosing a position?


    On Nov 17 03:14 PM john s. gordon wrote:

    > thinkbig - remember that the french revolution is still a work in
    > progress. how many constitutions/republic... have they had? and mr.
    > napoleon (the foreigner from corsica). and a second empire along
    > the way.
    Reply | Link to Comment
  •  
    Nov 17 05:33 PM
    Oh I get it, we need a crook to catch crooks! In other words, your past felony level (which you seem proud of as if it were a merit badge) scumbag disregard for law and the rest of societal values make you UNIQUELY qualified for a high paying consultancy position in gov't right?

    Sorry, felon. We all know what the scams are that are being played. Did you think the stuff you pointed out required a criminal record to see and understand? Honest people work hard every day to avoid those obvious temptations. We are all bombarded by the desire to get ahead and it takes courage and a personal code of ethics to do the right thing in the face of all the seemingly shorter path to riches which can be had through criminal means.

    Again, it is all OBVIOUS to EVERYONE what a scumbag like you exploits in order to rip the rest of us off. You bring nothing of value to the table at all. What is lacking is the will to stop it because the gov't is full of a$$holes JUST LIKE YOU who do not want it stopped. They just don't want it known and the only reason you did the perp walk was that you got too greedy to the point where there was no covering it up anymore.

    So thanks but no thanks for the thinly veiled offer of your consulting services. We have enough criminals in the gov't already without employing convicted felons. Go get a real job now, maybe something you can do out of doors where you can get your hands dirty along with the rest of us.
    Reply | Link to Comment
  •  
    Nov 18 02:31 PM
    "Oh I get it, we need a crook to catch crooks! In other words, your past felony level (which you seem proud of as if it were a merit badge) scumbag disregard for law and the rest of societal values make you UNIQUELY qualified for a high paying consultancy position in gov't right?"

    I don't charge the government for consulting my work. As to your other points, there is a saying "it takes one to know one."

    Sam E. Antar (former Crazy Eddie CFO and a convicted felon)
    Reply | Link to Comment
  •  
    Nov 18 02:32 PM
    Correction:

    "Oh I get it, we need a crook to catch crooks! In other words, your past felony level (which you seem proud of as if it were a merit badge) scumbag disregard for law and the rest of societal values make you UNIQUELY qualified for a high paying consultancy position in gov't right?"

    I don't charge the government for my consulting work. As to your other points, there is a saying "it takes one to know one."

    Sam E. Antar (former Crazy Eddie CFO and a convicted felon)
    Reply | Link to Comment
  •  
    Nov 20 11:17 AM
    Note: Convicted felons are a key voting block for the democratic party.
    Reply | Link to Comment
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