White-Collar Crime Exam 2

Telephone Phishing Schemes

Callers ask for last four digits of SSN, which are the most important 4. The rest can be discovered with location and DoB.

Madoff's Ponzi Scheme: Questions. 1. How much was stolen? 2. What did he do with the money? 3. Was it ever recovered?

1. $17.5 billion in principal money lost 2. Lavish lifestyle, paying early investors 3. Virtually all lost principal recovered

Enron: 1985-2000

1985: Founded by Ken Lay as Houston Natural Gas Company 1990: Jeffrey Skilling hired and appointed as chairman and CEO of Enron Finance 1990: Congress deregulates sale of natural gas, allowing Enron to trade its gas as a form of derivative 1991: Bull market combined with Skilling's aggressive trading led to accelerated growth and wealth 1997: Skilling becomes President and COO 1999: Enron Online launched as an internet-based trading operation 2000: Enron stock reaches all-time high ($91)

Madoff Ponzi Scheme: 1990-2005

1990: Madoff, an already successful investor, began operating second management business that was hidden from regulators 1992: SEC opens investigation, only to close it after Madoff provides fraudulent records 2005: SEC opens second investigation after continual complaints from Harry Markopolos, then closes it due to "limited resources" and trust in Madoff's records 2005: Madoff aggressively pursues new investors to keep scheme afloat after investors get spooked by investigations

Enron: 2001-Jan. 2002

2001: Economic recession begins and Enron continues to hide losses from public and employees February 2001: Skilling promoted to CEO of Enron July 2001: Analysts begin questioning Enron's financial situation August 2001: Skilling resigns due to "personal reasons" October 2001: SEC opens investigation, Enron stock plummets October 2001: Andrew Fastow fired November 2001: Stock falls below $1, Arthur Andersen begins shredding financial documents December 2001: Enron files for Bankruptcy, thousands of employees lose their jobs overnight January 2002: Ken Lay resigns

Madoff's Ponzi Scheme: 2008-2009

2008: Recession causes markets to fall and investors begin cashing out. Madoff's money runs out. Dec. 4, 2008: Madoff admits it's over and DiPascali winds down operation Dec. 10, 2008: Madoff confesses to sons Mark and Andrew ("one big lie") Dec. 11, 2008: Mark and Andrew notify authorities, and Madoff is arrested 2009: Madoff pleads guilty to all charges, sentenced to 150 years in prison

Public Resources to combat cyber-threats

Dept. of Homeland Security (DHS) and FBI have cybersecurity divisions

Frank DiPascali and Peter Madoff (Bernie's brother)

Accomplices to Madoff's Ponzi scheme, played pivotal role in deception from falsifying records to SEC

Antitrust

Actions by corporations that restrict or impede free competition and market fairness

How did people fall for the Madoff scheme?

Affinity Fraud Theory: A fraudster preys on members of groups that are similar to themselves i.e. Madoff on wealthy individuals Exclusivity: People wanted to invest because Madoff didn't let them Madoff had credibility Investor greed Passed due diligence tests: was investigated and cleared by SEC

Mark-to-Market Accounting

Allows company to put asset or liability on books as fair market value. Enron would put massive profits on books that were not liquid

Sam Waksal

CEO of ImClone Pharmaceutical. Arrested for insider trading (trading of material, non-public information) after telling family and friends about drug not receiving FDA approval

Mortgage Fraud

Any misrepresentation or concealment used to obtain a mortgage loan. Particularly prevalent since early 2000's due to idea that everybody has a "right to home ownership", even if they can't afford it

Ivan Boesky

Arbitrage specialist who made $200 million from insider trading about mergers and acquisitions. Cooperated with authorities to prosecute others, including Michael Milken. Sentenced to 3.5 years in prison and $100 million fine

Phishing

Attempting to obtain sensitive personal infromation through deceptive emails. Goes hand-in-hand with Advanced Fee Fraud ("Send me $200 now and I'll give you your winnings")

Arthur Andersen

Big Five Accounting firm that failed to report any misconduct to Enron board of directors Shredded financial documents ahead of Enron's investigation

Private Resources to combat cyber-threats

Bug Bounty Programs: offer financial rewards to anyone who exposes/discovers vulnerabilities in an organization's cybersecurity system Voluntary Disclosure Programs: Same thing bu without financial reward

Fred Wilpon

Close friends with Bernie Madoff and early investor in scheme. Made $200 million before giving it up to Irving Picard in lawsuit

Bid rigging

Competitors collude to give specific bids for goods/services Ex. All the painters in a town agree to bid no less than $25k per house

Irving Picard

Court-appointed trustee who settled lawsuits with numerous Madoff scheme investors in order to return money to rightful owners, including $7.2 billion from Jeffry Picower estate

Why it's difficult to prosecute cybercrime

Crime occurs very quickly Crimes occur in remote location and are difficult to track Jurisdictional challenges: whose job is it anyway? Difficult to ascertain complexity of the scheme Can be difficult to provide evidence: just throw away the laptop

Identity theft

Fastest-growing form of white-collar crime in the US. Used to obtain credit cards and gov't ID for loans. Children's identities stolen to be filed as dependents on tax returns.

FFETF

Financial Fraud Enforcement Task Force created by Obama in 2009 following recession

Home Equity Fraud

Fraudster, using homeowner's identity, opens HELOC loan then disappears.

Hacking

Gaining unauthorized access to a computer system. Can be done to steal intellectual property and bank account information

Housing Fraud for profit

Goal is to misuse mortgage lending process to steal cash and equity from lenders and homeowners. Typically committed by industry insiders using specialized knowledge or authority. FBI really likes prosecuting these schmucks

Andrew Fastow

Hired by Jeffrey Skilling as CFO of Enron Oversaw numerous dubious account practices for Enron, including mark-to-market accounting and utilizing SPE's

HELOC

Home Equity Line of Credit Allows you to borrow money to the extent to which you have equity in a specific property

Sarbanes-Oxley Act of 2002

Imposed tighter standards and increased oversight for publicly-traded companies. Strict penalties for destroying, altering, or fabricating financial records

Operation Shrouded Horizon Investigation

In 2015, Western District of PA attempted to prosecute people behind the Darkode Forum. Partnered with law enforcement agencies from around the world to get their guys

Prosecutions of key players in Enron scandal (2004-2006)

Ken Lay: Died of heart attack in 2006, never received sentencing Jeffrey Skilling: Convicted for fraud, insider trading, etc. Fined $45 million and 24 years in prison Andrew Fastow: Plead guilty, sentenced to 10 years in prison Arthur Andersen: Criminally prosecuted as a firm, voluntarily relinquished license to be accounting firm

Special Purpose Entities (SPE's)

Legally separated business that a corporation can create Enron would use SPE's to hide its liabilities

Jeffry Picower

Most favored investor in Madoff's Ponzi scheme, making $7.2 billion before having to give it up due to Irving Picard lawsuit

Harry Markopolos

Made continuous complaints to SEC over Madoff, uncovering evidence that suggested the wealth management business was a Ponzi scheme

Housing Fraud for housing

Misrepresenting income or assets in order to qualify for mortgage Appraisal fraud: value of home deliberately appraised at inflated amount. Done by buyers to qualify for loan or sellers to get more commission Occupancy fraud: borrower lies to lender about "owner occupancy" to obtain loan for rental property. (Interest rates are lower in owner-occupied homes)

Foreclosure Rescue Schemes

Offer loan to homeowner who is behind on rent. Offer to pay back bank in exchange for loan, but instead take loan payments from homeowner without paying bank. Can also take out HELOC loans in addition to getting loan payments from homeowner while still not paying back bank.

Data Breaches

Organizations' computer systems shacked in order to gain personal information of members. 3 million Yahoo accounts compromised in 2017. 500 million Marriott guest info compromised in 2018

Harm caused by Mortgage fraud

People lose homes due to foreclosure Inflated home prices and real estate taxes due to false appraisals Destabilization of Financial Services Sector and Securities Market as a result of mortgage-based securities (2008 recession caused by mortgage fraud)

Price gouging

Pricing products unreasonably high when the need is great or when consumers do not have other choices.

Viruses/Denial of Service Attacks

Ransomware: Unless you give me $$$, you won't get access to your computer back. Municipalities and governments targeted; Atlanta ($7 million to reboot software) and Baltimore ($18 million to reboot instead of paying $75k ransom)

Ponzi Scheme (High Yield Investment Fraud)

Scheme in which perpetrator embezzles investors' money and pays off investors using money from other investors. Collapses after enough investors want out.

Advanced Fee Fraud Scheme

Scheme where someone asks for money up front in order for victim to receive money later on. "You won the lottery, just give us $250 and we'll give you your check later"

Pyramid Scheme

Scheme which provides no good or service, and profits are based on recruitment of new investors. Different from multi-level marketing, which has actual good being sold.

Straw Purchaser/Illegal Flipping Scheme (6 steps)

Straw Purchaser: an illegitimate buyer used in schemes to obtain a loan. 1. Fraudster buys home for $100k 2. Fraudster gets property falsely appraised for $200k 3. Straw Purchaser obtains $200k mortgage from bank 4. Property sells, fraudster gets $200k from bank and shares $100k profit with straw purchaser and appraiser 5. Straw purchaser disappears and loan goes into default 6. Bank left holding property worth $100k (if Federal Housing Administration loan, gov't absorbs loss)

Short Sale Fraud

Straw purchaser buys home, intentionally lets home go into foreclosure, then house is purchased by friend on short sale (for less than it's worth)

Price fixing

Using collusion between companies to charge a high cost for a product that cannot be purchased elsewhere

Martha Stewart

Was told by CEO Sam Waksal of ImClone's failure to get drug approved by FDA before public announcement. Her and her broker found guilty of misleading investigators and sentenced to 5 months jail and 5 months home confinement

Dark Web

Websites and chat rooms in whcih illegal goods/services are sold and purchased. Darkode Forum: Largest English-speaking cyber-criminal website

Short Sale

When the bank providing a loan allows it to be sold for less than what is still owed on it. Ex. You owe $200k on the house, and the bank allows it to be sold for less than $200k