Detecting Corporate Fraud - SABEW Conference Session by Roddy Boyd
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Transcript of Detecting Corporate Fraud - SABEW Conference Session by Roddy Boyd
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Title Slide If You See Something, Write Something Roddy Boyd, founder Southern Inves3ga3ve Repor3ng Founda3on
SABEW conference, Bal3more, Md., March 27, 2014
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Boyd Roddy
Investigative reporter and founder of the Southern Investigative Reporting Foundation. He has worked for Fortune Magazine, the New York Post, !e New York Sun and Institutional Investor News; founded !e Financial Investigator website; and wrote "Fatal Risk," on the collapse of AIG. An independent nonpro"t, SIRF provides document-driven investigative and accountability reporting on publicly traded companies.
Twitter: @boydroddy Web: SIRF-online.org
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What is corporate fraud? A few kinds of corporate fraud
• Securities fraud • Ripping off investors • Consumer fraud • Ripping off (retail) customers • Tax fraud • Ripping off taxpayers (that’s you) Bottom line: Fraud boils down to to saying one thing and doing another, for pro"t.
One de!nition:
“Business fraud is, very simply, fraud in any business activity that resorts
to deceitful practices to cause economic injury.”
-- Cochran law "rm (plaintiffs’
attorneys)
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!ings !at Make You Go Hmmm • Logic Leaps • Cash is King • Manias of the Moment • We Take Care of our Own
Image: Wikimedia.org
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Logic Leaps
Save Suspension of Disbelief For "e Movies
Does What "ey Say Make Sense? • Spectacular Results • Taking on Entrenched Competitors • What !e Hell?
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Spectacular Results It’s not easy for large companies to grow massively • Ex: Merrill Lynch 2005 earnings • http://tinyurl.com/kg7racw • 33% Rev boost = Massive risk! Common Sense is most uncommon
Image: Jack-‐Benny, hJp://flic.kr/p/ePdxxP
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Dancing With !e Big Boys • Watch for WCOM: Fast Rising in Brutal Industries
• How Come No One !ought of it Before?
• Are Independent Experts Wowed or Impressed?
• Common Sense: Killing a King Ain’t Terribly Easy
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Cash Is King
! No doubt about it, companies not generating cash over time are in hot water. At some level, the inability to generate cash is involved in 99% of frauds.
Image: Jack-‐Benny, hJp://flic.kr/p/ePdxxP
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Basics: Cash Flows Key points: • Find Statement of Cash Flows in 10-K, 10-Q • Check to see if company can generate cash • Look to see if company is “living in the market” • Discern trends, if possible Example • United Continental’s Conundrum (p.62): http://tinyurl.com/qx4r2yw Example: • Google’s sweet spot: http://tinyurl.com/pgxymdf
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When the Cash Generator Breaks...
When companies can’t, over time, generate cash they have to: • Access the markets by stock and debt sales • Dilution, interest expense and debt loads • Markets shut down (1989, 1994, 1998 & 2007-2008) • Asset Sales • Delayed Investments (Lower Cap-Ex, Maintenance) • Expense cuts
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Manias and Fads Companies in Manias are de!nitionally at a higher risk for wrongdoing • Pressure to last beyond boom cycle • End of a mania is a brutal reckoning • Watch for late stage mania co’s e.g. Pets.com • Manias are funding grabs, pure and simple
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Look for incongruities
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We Take Care of Our Own
• Related Party Transactions • 10-Ks and especially Proxy (Def-14A) "lings • Why have an RP for SOP deals? • Major red $ag: RP receivables
• Don’t sweat a relative (usually)
• Look for “once removed” RPs, like real estate • Hidden RPs: board consulting deals
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Son of Related Parties: Perks
• Rank Excessiveness • Hidden Comp: Well into six "gures annually • ProTip: Look for “Gross Up,” or paying tax bill • Compare to others CEOs, corp. Stock Px Perf.
• Disclosure vs. Non-Disclosure • Has the company been in a period of downsizing?
• Unexplained & poorly explained capital raises