Relevant and even prescient commentary on news, politics and the economy.

Accountability for Judges in the Criminal Justice System

Here’s an article entitled I Set a Defendant Free And Got Blamed When He Raped Someone. This is what the article is about:

A judge explains how he decides whether to release a defendant before trial without bail — and how it can go bad.

I found reading any further into the article was a complete waste of time, but the little bit I quoted above does raise an important point. Pretty much every job includes some measure of accountability based on outcomes. Presumably our betters on the bench should also operate under the same principles. If someone actively sought out a position in which they decide whether defendants get released before trial, it isn’t too much to expect them to be pretty good at figuring out who should be released before trial and who shouldn’t.

I don’t know what the guidelines are – I try to keep my involvement with the legal system to a bare minimum. Still, I imagine a simple rule would be something like this: defendants who aren’t a flight risk, who aren’t a danger to others, and who aren’t likely to be found guilty probably don’t need to be behind bars awaiting trial. Those who are a flight risk, are likely to cause harm, or can reasonably be expected to be found guilty of a serious crime should not be walking around.

If someone can’t distinguish between these sorts of situations reasonably well, it is hard to see how they have any business making decisions about such matters. In fact, it seems pretty immoral not to have such an expectation of those who use the power of the state to make decisions that affect the freedom and well being of the rest of us.

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… to Hold “Untouchable” Fraudsters Accountable

By Jeff McCord, The Investor Advocate

Take Lincoln’s Approach to Hold “Untouchable” Fraudsters Accountable

Within recent months, two media events captured the attention of many Americans: the premier of the Spielberg movie “Lincoln” showcasing the 19th century federal government’s ability to end our nation’s crime against humanity; and, the airing of the PBS Frontline series (“The Untouchables”) showcasing the inability of the twenty-first century federal government to prosecute those responsible for our nation’s largest financial crime spree.

Now, the public watches mindless budgetary slashing of federal regulatory agencies – already underfunded and understaffed – charged with enforcing civil and voting rights and financial laws. And this “sequestration” proceeds at a time of widespread attempts to suppress people of color’s ability to cast ballots in federal elections, and financial fraud and abuse robbing and cutting the savings and assets of tens of millions of Americans.

Half Billion Dollars to be Cut from Fed Investor Protection, Law Enforcement

Aside from federal civil and voting rights programs, investment law enforcement agencies and commissions on the chopping block include the Securities and Exchange Commission (a possible $115 million reduction), Commodity Futures Trading Commission ($17 million), federal courts ($384 million at risk), Public Accounting Oversight Board ($18 million) and the Securities Investor Protection Corporation ($23 million). In sum, $557 million could be cut from investor protection programs, barring Congressional intervention. For more, see Appendix A of the Office of Management and Budget report issued September 15, as required by The Sequestration Transparency Act of 2012

In this environment of federal inaction and cut-backs, it has never been more important for private citizens and investors to be given the legal tools and authority to protect themselves.

Lincoln Knew How to Deter Fraud: Hit Wrongdoers in their Pocket Books

During the Civil War, Lincoln adroitly dealt with rampant fraud by Union Army contractors by empowering ordinary citizens with knowledge of the crimes to take civil action against wrongdoers on behalf of the government and themselves. Often called the “Lincoln Law,” the federal False Claims Act was modernized in 1987, with Republican Senator Charles Grassley leading the effort. Since then, whistleblowers acting under its authority and protection have recovered more than $40 billion of taxpayer money otherwise lost to fraud and abuse against federal and state governments.

Nine billion dollars was recovered by citizens blowing the whistle during just one year (2012). Compare that with the Securities and Exchange Commission’s total of only $2.6 billion in funds recovered for investors from financial wrongdoers during the past three years during which people on “Main Street” have become painfully aware of their being fleeced by Wall Street.

What’s good for the taxpaying public would also be good for the investing public whose own personal funds are on the line. Although the withering federal government portion of the nation’s GDP (7 percent in 2012) is surprisingly close to the financial services industry’s contribution (5 percent), citizens can take very effective action against thieving federal contractors, but remain vulnerable against those who rob them of their homes, savings and investments.

Private Class Actions Recovered Three Times More for Investors than SEC
True, citizens can and do band together into class action lawsuits to take action against financial robber barons and such civil actions have won $7.9 billion from wrongdoers in the past three years – three times the amount the SEC recovered during the same period. (See: here)

But, the class action remedy has been under an unremitting attack by corporate and financial lobbyists for almost two decades and has been trimmed and nearly hobbled by Congress and the Courts, with some notable exceptions, during the very period that may best fit Lincoln’s prophesied “era of corruption”:

“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country….corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.”

Corporations and Lincoln

So, where are we to turn to recover some of the wealth wrongfully “aggregated” from the many by the hands of the few?

Restore Private Accountability for Aiders and Abettors of Investment Fraud

Certainly, securities class action lawsuits filed by pension funds, retirement plans and individuals against corporate and financial wrongdoers will continue to recover investor losses and nip at the heels of Lincoln’s “money power.” Private class actions could accomplish more to deter fraud and recover investor losses if Congress would overturn a misguided Supreme Court decision by restoring private liability for those who knowingly aid and abet securities fraud.

One early version of the Dodd Frank legislation would have done just that. Banking and accounting industry lobbying, however, killed that provision. Restoring accountability for aiders and abettors is a no-brainer that Congress can still accomplish.
Fortunately, the final Dodd Frank Act did provide an opening for authorizing a “Lincoln Law” providing financial whistleblowers with the policing power to help hold Wall Street accountable and recover ill-gotten gains.

SEC Takes “No Further Action” on Majority of Whistleblower Leads

Congress provided for a “whistleblower” program within the Securities and Exchange Commission enabling people with inside information to contact the Commission. Those providing leads retain anonymity and can win monetary rewards. Despite receiving more than 3,000 leads in 2012, however, only one whistleblower has won an award ($50,000, an amount only equal to an annual bonus for a relatively low level Wall Street employee).

In any event, the SEC takes “no further action” on 69 percent of whistleblower complaints, according to a recent report by the SEC’s Inspector General. The most common leads reported to the SEC relate to fraud and abuse in areas of systemic wrongdoing largely responsible for the financial meltdown: corporate disclosures and financial statements (18.2%); public offerings (15.5%); and, market manipulation (15.2%).

Powerful Senators (and the Public) Frustrated

The comments of two frustrated Senators during a 2010 hearing demonstrate that some powerful Members of Congress do understand what the public understands: big financial services malefactors are virtually “untouchable”:

Sen. Carl Levin (D-Michigan): “I believe in a free market. But if it’s going to be truly free, it cannot be designed for just a few people. It must be free of deception. It’s got to be free of conflicts of interest. It needs a cop on the beat, and it’s got to get back on Wall Street.”

Sen. Charles Grassley (R-Iowa): “If heads don’t roll, nobody makes any changes. I’m disappointed that in all of the wrongdoing that went on and all the fraud that went on, that there wasn’t an effort to go after bigger fish than the evidence shows they [federal government] went after.”

Transcripts PBS

Well, heads haven’t rolled Senator Grassley and, Senator Levin, there is still no effective cop on the Wall Street beat.

Congress Should Trust and Empower Lincoln’s “People”

Now, its time for Lincoln’s “government of the people, by the people and for the people” to actually empower the people.

First, Congress should restore the right of people to hold accountable those who knowingly aid and abet frauds that rob them.

Next, Congress should enact a real financial “Lincoln Law” empowering whistle blowers with the tools to catch the “big fish” on Wall Street and make them pay back what they have stolen. And, recoveries should be returned to the investors harmed by the underlying fraud and abuse whistleblowers uncover.

The False Claims Act now on the books authorizes treble damages for those who defraud the government, providing a real deterrent. Moreover, the whistleblowers (termed “relators”) who win their civil actions against fraudsters can be awarded up to 30 percent of funds recovered – a powerful incentive for Wall Street managers who know where the bodies are buried to go after big time wrongdoers.

Time for a Financial False Claims Act

A “Financial False Claims Act” should do the same by authorizing Wall Street whistle blowers to take actions independent of often conflicted government regulators against fraud perpetrators “too big to jail.” Such a law could also authorize the government to intervene in support of such civil actions, if they wish to do so. This is how the False Claims Act works.

Unfortunately, worried that a real whistleblower law could complicate the SEC’s program, the Commission’s inspector general has concluded that it is not the time to:

[empower] whistleblowers or other individuals . . . to have a private right of action to bring suit . . . on behalf of the government and themselves, against persons who have committed securities fraud.

SEC audits inspections

If not now, when?

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Benford’s Law and the Decreasing Reliability of Accounting Data"

H/t Mike Kimel

Via Economist’s View

This is from Jialan Wang:

Benford’s Law and the Decreasing Reliability of Accounting Data for US Firms, by Jialan Wang: …[T]here are more numbers in the universe that begin with the digit 1 than 2, or 3, or 4, or 5, or 6, or 7, or 8, or 9. And more numbers that begin with 2 than 3, or 4, and so on. This relationship holds for the lengths of rivers, the populations of cities, molecular weights of chemicals, and any number of other categories. …

This numerical regularity is known as Benford’s Law, and specifically, it says that the probability of the first digit from a set of numbers is d is given by

In fact, Benford’s law has been used in legal cases to detect corporate fraud, because deviations from the law can indicate that a company’s books have been manipulated. Naturally, I was keen to see whether it applies to the large public firms that we commonly study in finance.

downloaded quarterly accounting data for all firms in Compustat,… over 20,000 firms from SEC filings… (revenues, expenses, assets, liabilities, etc.).

And lo, it works! Here are the distribution of first digits vs. Benford’s law’s prediction for total assets…

Next, I looked at how adherence to Benford’s law changed over time, using a measure of the sum of squared deviations of the empirical density from the Benford’s prediction…

Deviations from Benford’s law have increased substantially over time, such that today the empirical distribution of each digit is about 3 percentage points off from what Benford’s law would predict. The deviation increased sharply between 1982-1986 before leveling off, then zoomed up again from 1998 to 2002.  Notably, the deviation from Benford dropped off very slightly in 2003-2004 after the enactment of Sarbanes-Oxley accounting reform act in 2002, but this was very tiny and the deviation resumed its increase up to an all-time peak in 2009.

So according to Benford’s law, accounting statements are getting less and less representative of what’s really going on inside of companies.The major reform that was passed after Enron and other major accounting standards barely made a dent.

Next, I looked at Benford’s law for three industries: finance, information technology, and manufacturing. … [shows graphs] … While these time series don’t prove anything decisively, deviations from Benford’s law are compellingly correlated with known financial crises, bubbles, and fraud waves. And overall, the picture looks grim. Accounting data seem to be less and less related to the natural data-generating process that governs everything from rivers to molecules to cities. Since these data form the basis of most of our research in finance, Benford’s law casts serious doubt on the reliability of our results. And it’s just one more reason for investors to beware….

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Observations From the Past 3.5 Years

by Mike Kimel

Observations From the Past 3.5 Years

Being alive in the past 3.5 years provides the following lessons:

1. Significant elements of the government, influenced to one or another degree by private sector lobbying and contributions, have done a poor job at leading the country.
2. Significant elements of the financial industry, influenced to one or another degree by government rules and regulations, have done a poor job of investing assets.
3. Significant elements of the home buying public, influenced to one degree or another by government policy and the financial sector, have done a poor job at buying houses.
4. Significant elements of the economics profession, influenced to one degree or other by ideology and a mercenary mindset, have done a poor job of understanding the economy.

That raises a few questions:

a. Is there any way to show that of the elements described above, the private sector or public sector is more or less inefficient at what they do?
b. Of the elements described above, which of those that failed at what they did on average, have paid or will pay a price, and which of those that failed at what they did, on average, have or will “failed upwards?”
c. Given b, which of the elements described above can be counted on to create a “next time around” or of making that next time around worse?

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