From The Radio In The News My Two Cents PSA

Know When to Hold Them

I am the absolute worst gambler. Several years ago, I headed out to Las Vegas to celebrate a friend’s 30th birthday, spent a lot of time in the casinos, and very little time gambling. My friend discovered that if she was sitting in front of a slot machine, occasionally pushing the button, she got drinks for free. Sitting next to her, I benefitted from this perk. Thus, we spent a lot of the long weekend chatting and sipping on drinks, while hanging out near a slot machine. It was a lot more fun than it generally has been when I lose my money in a casino. I am sure there are may strategies and techniques that people employ when gambling, but I don’t even know the theories, so I tend to essentially throw my money at a machine or croupier and hope for the best.

When it comes to some financial terms that are being bandied about in discussions about GameStop, I can at least try to explain what the terms mean. I find that what is going on in the stock market right now involves many short words that may be more complicated than they sound. Hopefully, clarifying them will help us all get a better idea of what is going on. I am going to speak about shares (because that is what is at play with GameStop) but these financial terms apply to all kinds of securities. Securities are financial instruments that are tradable and fungible, or mutually interchangeable. The fungible characteristic is what makes securities so easily tradable. Securities being fungible means that they are for all practical purposes, considered to be identical and can be exchanged for one another. You can exchange one $20 bill for two $10 bills. In contrast, though they are both seats one does not consider a front row seat to be the same as a back row seat, especially if everyone in front of you is way taller, so these seats are non-fungible.

I shall start out by talking about buying on margin. In the stock market, when you buy on margin, it means that you are buying securities using only a percentage of your own money. For example, say you want to buy a share for $100 but only have $10 to your name. You approach your local broker and that broker agrees to lend you $90 to get you to the $100 to buy that share. Because just about nothing in life is free, the broker charges you 10% interest on the $90. In a year, you decide to sell that share. When you do that, you will need to repay the broker $90 plus $9 in interest. If you skipped over those sentences because you saw numbers and didn’t want to to math, buying on margin means you only need to use a fraction of the money needed to buy shares and you can borrow the rest, paying interest. If you are able to sell the shares for more than what you paid to buy it, that’s great. You can use your profit to pay back your loan (plus interest) and happily take the rest home with you to do with as you please. However, if the price of the shares goes down, you will lose your money and may have to find money elsewhere to repay your loan. In the United States, the Financial Industry Regulatory Authority (FINRA) generally requires that a customer use 50% of their own money for their first time or initial purchase of securities. People who want to short sell securities, also need margin accounts.

For all the people who are optimistic about share prices and financial markets, there are those who look at securities and believe that the value of the securities will go down. Some may call these people pessimists, and these people may call themselves realists. Po-tay-to or Po-tah-to, these folks seek to benefit from their price downturn point of view by doing what is called short selling (or shorting) the security, and this is how shorting works. Pessireal (as we shall call them) goes to their broker and says, “I would like to borrow one $100 share of Tulip stock. Everyone is all about Tulip these days, but I just don’t see that ending well.” The broker will then sell a $100 share of Tulip stock, and give the $100 to Pessireal, less any transaction fees (again, nothing for free). Pessireal will then sit back, wait, and watch the market. If Pessireal’s gut is correct about Tulip and that the value of the share goes down to $50, Pessireal will take $50 of the $100 and buy a share of Tulip stock which they will give to the broker to, as they say, close the short position. So, Pessireal is giving back the borrowed share and has made $50 (less fees) while they’re at it.

Suppose, however, that Pessireal is wrong about Tulip, it becomes the best thing since sliced bread, and nothing can keep its price down. Pessireal may realize the error of their ways and decide to cut their losses when the share price is $200. In addition to the $100 they got from their borrowed share, Pessireal will have to spend an additional $100 of their own money to buy the share they need to return to the broker. Although this is rare, sometimes it is the broker who may decide that they want their share back. It could be because the broker has been watching Tulip’s share price going up and when it gets to $300 a share, they start to fear that Pessireal won’t be able to pay them back. So they call Pessireal up and, despite’s Pessireal’s attempts to assure them that Tulip’s demise is on the horizon, they demand their share be returned. This means, whether they like it or not, Pessireal will have to find an additional $200 to bring the $100 from the borrowed share up to the $300 needed in order to buy a share of Tulip and return it to the broker.

With the regular trading of securities, the worst that can happen is that the value of your investment can go down to zero. That hurts but at least you know that the most you can lose is what you put in. The best that can happen is pretty much infinite. Your gain is whatever the price of the security goes up to be, over what you put in. Short selling is the opposite. You can calculate the most you can earn on a security – the lower the price goes, the more you make, up until the security is worthless. On the very scary flip side, the most you can lose is pretty much as high as the share price soars, which could be, as GameStop short sellers are finding out, can be pretty darn high. Brook Gladstone, the host of On The Media, shared that she spent almost $1,000 on 42 shares of GameStop stock in 1999 and by April 2020, that investment was worth $3.50 a share – $147. She sold her shares when they were at $100 a share. Most of last year, GameStop’s stock was valued at $250 million. The stock has exploded to a point where GameStop’s stock value is around $20 billion! If you are a short seller, that hurts.

The last thing I will mention here is the short squeeze. Say, Pessireal was not alone in thinking that Tulip’s share price was going to crash, and that many had decided to short Tulip but, instead, that price was soaring. Some short sellers may take a look at the soaring price and at their sources of funds and decide that they were ready to cut their losses. If there were enough of these short sellers looking to buy Tulip shares so that they could return them to their brokers, and close the short position, this higher demand could push the share price even higher. Right now, with GameStop (and other stocks) there are a lot more people looking to buy shares than are looking to sell. The trusty supply and demand chart comes in to show how the increased demand will increase the price. The short sellers, looking to cut their losses and repay their borrowed stock, are, in turn, squeezing that price up too.

I can’t say when and how this will end; I am no good at the Vegas game. Heck, I can’t even let what happened in Vegas stay there. I do, however, hope that as you read or listen to stories that are throwing out financial terms, you will nod along and think – I get it.

At the Movies From The Radio Inspiration My Two Cents What's Going On?

Now That I Think About It…


When we talk about fraud and how it tends to happen, the classic fraud triangle is most commonly used to help us understand how it all happens. The sides of this triangle represent opportunity, pressure and rationalization. In this triangle there is a person, just a regular old person, like you and me. Fraud can happen to anyone and fraudsters are often regular people who find themselves under pressure, faced with the opportunity to perpetrate a fraud and the ability to rationalize it all.

Sometimes this person may face pressures. Maybe she has a family member who gets sick and now they have to deal with massive bills. Maybe the person has a gambling problem. Maybe he wants to live the jet set life that he sees his friends living. Whatever the reason may be, these people feel under a lot of pressure to get their hands on more money than they are currently earning.

Pressure or not, maybe this person sees an opportunity to defraud. Perhaps he can sign checks, AND, he has custody of the checkbook AND he performs the company’s bank reconciliations. He has all this access and responsibility and no one checking his work. So, now he has access to the money and he can doctor the books to cover up his wrongdoing. However it works out, these people see a weakness that they can take advantage of.

The third leg of this triangle is rationalization. This is where a person tells himself that there is a justification for what he is doing. Maybe she tells herself that she really needs the money to deal with this one emergency and this will happen only once. Maybe she then tells herself that this will happen only once and, to boot, she has been a loyal employee for a while so the company really owes her a little leeway for all that she has done. Maybe she tells herself that once she is out of this spot of trouble, she will pay the company back and it will be like it never happened in the first place. Maybe he tells himself that he is underpaid and that what he is doing is merely taking the money that he is rightly owed for all the hard work and time that he puts into the business. The rationalizations that people use are practically endless.

Earlier this year, I listened to the podcast “Ponzi Supernova”, a podcast about Bernie Madoff’s Ponzi scheme and what has happened since. One thing that was fascinating about this series was the conversations that Steve Fishman, journalist and narrator of the series, had with Bernie Madoff, infamous perpetrator of a massive Ponzi scheme. Bernie talked about his childhood and how affected he was by his father’s financial failures. Bernie tells Steve that, after seeing his father lose a lot of money and what it did to the family, Bernie swore he would never let that happen to him (perhaps one could see this as a pressure looming over his life). In the early 1960’s, Bernie Madoff violated market regulations and his clients’ trust by losing their money on risky deals. Instead of letting them know that this had happened, he lied to his clients, borrowed money from his father-in-law and carried on as though he was a brilliant investor. Speaking with Fishman, Madoff made it sound as though, because he did not want to fail as his father had, he took these steps so that he could continue to, at least, appear to be successful and very talented.

Bernie Madoff spoke with Steve Fishman a couple of years after he was caught (though, in some versions of his story, he claims he quit). Bernie Madoff also spoke with Diana Henriques, who wrote the book The Wizard of Lies, which is now an HBO Film by the same title. Their interactions also occurred a couple of years after Madoff’s fraud was discovered. After he had plead guilty to his crime. Yet, over and over again, Madoff seemed to continue to make excuses for his behavior and try to minimize what he did. Even though, when pleading guilty, he claimed that he acted alone, he has since changed his tune and as co-conspirators have testified against him, he then seems to say, “well, except for that person, I acted alone”. So, it seems that even after being caught, he is only sharing as much of the truth as he needs to and, what I have found to be most interesting, is that he appears to continue to rationalize what he did.

In an ideal world, one would imagine that having a fraud exposed and pleading guilty would bring a fraudster to his senses. When we imagine a person committing fraud as a regular person who has fallen into irregular behavior, the hope is that putting an end to this irregular behavior will bring this person to her senses and get them to admit that what they did was without excuses; that, even though they rationalized their actions when they perpetuated the fraud, they now saw the error of their ways and realized that the rationalizations were all without merit. During the hearing when he plead guilty, Madoff read a prepared statement where he apologized to his victims. However, even that apology came with a “but” attached. “While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients’ expectations, at any cost.” Yet, listening to Ponzi Supernova, you learn that some clients would demand an adjustment to their statements when they did not receive the return they had been promised. Madoff has also placed blame on his victims, claiming that they knew, or should have known, what they were getting into, that he had warned them and that they did not lose as much as they claimed. And, I have found that it is not just Madoff who does this. The Association of Certified Fraud Examiners talks to people who were convicted of fraud and, in video after video, the perpetrators found ways to hold others responsible for what they did – and this is after they had been found guilty and served their sentences. For instance, one blamed her supervisor for being too trusting, “I don’t blame them but…” she started her sentence. Another stated, “I asked you for help and you said no”, while yet another said “I won’t get caught again”, not “I won’t do it again because I realize it was wrong.

It may be human to not want to admit full responsibility. Perhaps it is too hard for most of us to admit that we have done terrible things. Who really wants to be a monster, blamed for ruining lives, even when those lives are laid out in front for you? And if we are not harshly judging ourselves, even when caught, then can we really adjust our behaviors to do right and get back on the straight and narrow? I don’t know the answers to this but it is something I think about as I perform my work as a forensic accountant. If a person is not able to strip away rationalization and admit that they were just wrong when they perpetuated their fraud, then what are the chances that it won’t be so difficult to do it again?

From The Radio In The News NPR What's Going On?

Hold On!


A few weeks ago, I took a walk in Prospect Park with a friend. We had not caught up in a while and I had a lot to talk about. I am a judge for the Excellence in Financial Journalism Awards, presented by the New York State Society of CPAs, and I had just finished reading the many entries submitted by very talented journalists. Several submissions were on the subject of high-frequency trading and I was fascinated by the reports that I had read and watched. As I launched into my story, she interrupted me and asked, “What is high-frequency trading?”

I was less surprised by her question than I would have been three or four days earlier. This is because I had been asked that question every time I had started talking to people about high-frequency trading. Initially had been surprised that so few people knew about high-frequency trading but then I realized that I couldn’t assume that, just because I own the t-shirt, everyone else is a huge fan of Planet Money or, indeed just because I have the sweatshirt, the rest of the world is hooked on Radiolab. Both shows have covered the subject of high-frequency trading. Planet Money, in particular, has spoken extensively about high-speed trading.

That night, no joke, I tuned in to watch 60 Minutes and Steve Kroft was talking with Michael Lewis about his new book, Flash Boys, which talks about high-frequency trading and how it has negatively affected how stock markets work. Flash Boys is a popular book right now but, I wonder, though we are throwing around the term HFT (the now popular acronym for high-frequency trading) and discussing how markets are affected by HFT, how many of us really know what HFT is?

Watching television or the movies, the portrayal of the stock market has not changed much in decades. Bells ring to announce the opening and closing of the market and, in between, we see massive rooms of men (and it is just about always men) avidly watching screens of numbers, yelling madly and waving pieces of paper. Would you be shocked to discover that the stock markets are not “as seen on TV”? The markets have not operated in that way for a while now; things are far more complicated. Currently, there are 16 regulated national securities exchanges in the United States (and another 45 or so dark pools, which are not open to the public) and most of these exchanges are nowhere near Wall Street. Most trades are executed electronically and many of these trades are executed by computers using powerful algorithms. Initially, when electronic exchanges were first launched, there was a rule that, although the exchanges were computerized, orders had to be entered through the keyboard. The challenge to those using the electronic exchange, was how to be able to trade quickly and one such trader, Thomas Peterffy, built a typing robot to satisfy this requirement while increasing the speed of trading. The speed he achieved then is a joke compared to what high-speed trading looks like today.

Now there are no such rules and now the algorithms used by high-frequency traders have computers making multiple trades in fractions of a second. In addition to this, high-frequency traders can make trades and cancel them without paying fees for doing so. These traders are known to flood a market with orders, to get a feel of what is going on in that market, and then cancel the orders almost immediately. In fact, almost 97% of trades made in the US stock market are canceled and the bulk of these cancellations were from high-frequency traders. This activity tends to manipulate stock prices and, as a result, high-frequency traders can make pennies on trades. Because they can trade at incredibly high speeds and volumes, these pennies can add up pretty quickly to healthy returns. The returns are tempting enough that HFT entities are willing to pay to get information a mere two seconds before other people and are also willing to pay to get a few feet closer to the trading floor than their competition.

Now, how do two seconds and a few feet make a difference? This is because of the speed at which information can be processed and sent between traders and their markets. Any innovation that gets traders to the market before their competition so they can buy at a lower price and sell at a higher one is one worth spending on. This is the essence of high-frequency trading and traders able to execute millions of trades per second, can make many fractions of a cent add up to many dollars over a short period of time. The volume of trading has exploded in the last decade and the Nanex graphic of this activity is a very powerful visual.

Things can also go horribly wrong in markets with high-frequency trading. On May 6, 2010, at 16:42:44 (yes, down to the second) the stock market plunged 600 points in five minutes and this drop was stopped only when the market paused trading for 5 seconds and then started up again. The market regained the 600 points almost as quickly and as mysteriously as it had lost them. There is no consensus on what caused the Flash Crash of 2010, though most point to high-frequency trading as at least one of the factors responsible. That people cannot agree one what the causes of the crash were and that it took almost half a year for the SEC to come out with a report on what happened, shows just how complicated and difficult to understand trading and, in particular high-frequency trading are. I mean, once we start talking high math and algorithms, most of the world’s population is left cross-eyed and dizzy (and that means, me too).

There is no shortage of opinions to be found on high-frequency trading. Some use everyday English and exciting anecdotes to explain themselves while others employ fancy acronyms, mathematical phrases and financial-speak to put forward their thoughts. Whatever opinions and explanations you decide to explore, the first thing to do is to understand the basics of what they are talking about. How, really, can you have an opinion if you don’t even know what people are talking about? This is a very fast market. Nanosecond quick, so you better hold on!

From The Radio

Back in the Day… Today


After my father passed away in late 2003, I went to Zimbabwe for a few months to spend time with my family, mostly my mother and sister. A lot of this spending time with my mother involved driving. Before my father passed, with his retirement looming, my mother had decided that she wanted to fulfill her childhood dream and become a farmer. They had bought a farm but they were still renovating the farmhouse. As a result, every day, my mother and I would drive from my grandmother’s home to the farm, hang out doing farm stuff, and then head back to my grandmother’s. Even though I was quite useless on the farm (I am allergic to nature) my mother let me tag along as we spent at least an hour on the road, daily. The car that my mother drove came with a tape deck and a shortwave radio. I am not sure why we never listened to cassette tapes; all I know is that we listened to a whole lot of BBC World Service. During one of these Coca Cola fueled drives, the story of the Parmalat bankruptcy broke on BBC. The reporter mentioned that, among many things, Parmalat had given their auditors fake bank confirmations. The confirmation fraud was a simple “cut and paste” fraud. Here, pasted a Bank of America letterhead onto a document confirming that a bank account held almost $5 billion (yes billion with a ‘b’). The document was then passed through a fax machine several times so that it looked authentic.

As I listened to the story, I started yelling, at no one in particular, “A faxed confirmation? You can’t accept a confirmation that is faxed to the client! Plus, you really want the original document. Faxes are so dangerous.” My mother looked at me as though I had lost my mind – I don’t think she had ever heard me get so worked up about auditing. But what had happened was quite unbelievable to me. When I worked in audit, the partners I reported to and my study materials, emphasized the importance of third party confirmations especially when it came to cash.

It does not matter how much you like a client or coworker, you should still practice professional skepticism and, although it is nice to trust, it is always smart to verify. Verification from an independent third party is the method that gives the most comfort but in order for the confirmation to be effective, it must be done correctly. Some ways to help ensure this are:

  • Begin by knowing what your goals are in the verification process. Are you trying to find out about assets, liabilities or both? Are you looking to find out if there are hidden accounts that you did not know about? Are you looking to find out balances on a particular date?
  • You should maintain control over the entire process. Do not let whomever you are verifying get involved in any part of the process, no matter how small. Do not let them give you the contact information, or let them send the confirmation out for you. You should know exactly what is going on every step of the way.
  • Do not let the confirmation be sent to the client or coworker whose information you are trying to verify. Have it sent back to you, preferably as an original. Photocopies and faxes are ways that counterfeiters try to hide the signs that a document is forged.
  • When I was an auditor, all my confirmations arrived via snail mail. Nowadays, balances and banks can be checked online. Because it is so convenient and easy, it is essential to ensure that you are getting your information from a valid source. If you can, verify a company’s website independently. Do not click on a link that client or coworker has provided – enter it manually. It is simple and relatively inexpensive to create a fake website so be vigilant.

It may feel a bit tedious to go through the steps of the confirmation but the information and level of comfort that you can get from a confirmation that is done correctly are very worth it.

If a company is trying to make its books look good and they know that no one is checking or that they can foil attempts at third party confirmation, it then becomes relatively easy to hide cash fraud. According to the Association of Certified Fraud Examiner’s, in frauds involving the misappropriation of assets, cash is the targeted asset 93.4% of the time.  I am not sure how the city of Dixon’s auditors confirmed bank balances, but they were not doing a good job. The discovery of its comptroller’s multi-year theft of over $53 million began with a confirmation sent by an employee to the city’s bank. People who steal, really like to steal money – shouldn’t you make sure that what you think is there really is?

From The Radio The Nitty Gritty

Be The Spider

ImageIt has been over three months since Sandy hit the Northeast, bringing unimaginable damage to New York and New Jersey and there are people who are still struggling to recover and rebuild their lives and homes. A lot of the challenges are related to delays in receiving insurance payments. It is already a stress to go through the trauma of a storm that destroys one’s home. The process of repairing the home and dealing with various insurance companies can become an overwhelming second job. In a situation like this it may be advisable for a property owner to seek the services of a forensic CPA to help navigate the insurance claim process.

There is a lot involved in filing an insurance claim and, in the case of events like Sandy, it is even more involved because there are different types of potential claims involved – FEMA, flood and wind, to name a few. Those filing claims will deal with their private insurance company (for their homeowner’s policy) and with the federal government (for FEMA and the National Flood Insurance Program). The probability of a smooth and successful experience is improved when the homeowner has knowledge of, or is working with someone who has knowledge of the insurance process. This is where a forensic accountant comes into play. There are a lot of parties at the table when filing an insurance claim including claims adjusters, engineering experts and construction experts and it is helpful to the homeowner to have a party overseeing the different players.

First, it is vital to understand the insurance policies and know what kind of coverage they offer. FEMA, for example, will help with minor repairs and temporary housing but FEMA is not where one should turn to rebuild a home destroyed by flooding. The National Flood Insurance Program (NFIP) is the program that provides flood insurance, through private insurance companies. Knowledgeable due diligence is necessary to make sure that the collection and submission of data to the insurance companies is done properly. After a large disaster, the insurance companies are inundated with claims and this means that a claim that is filed properly is more likely to be processed more quickly than claims containing not enough or extraneous information. A forensic accountant can help a claimant determine what the insurance company requires, what is relevant in order to file a claim and why the information is being submitted. In this way, the submission of information will be worthwhile and not just a process of checking boxes and giving the insurance companies all the information one has in the hopes that it will work.

Another thing a forensic accountant can help a property owner with is making sure that there is no crossover with claims. A claim to FEMA should not also be made to the NFIP and a claimant should be sure to use the correct entity’s forms when filing their claims. FEMA forms are to be used to file FEMA claims and NFIP paperwork should be used to file flood insurance claims. Administrative errors can create massive delays that serve only to make a stressful situation even more painful.

Having the right professional, an objective and realistic forensic CPA, helping drive the process can make a huge difference when filing an insurance claim. The forensic accountant can help the property owner make the most representative claim and not just push for the biggest number without a good basis. The claim process is a labor intensive process that involves an incredible number of documents and it is a process where the time, effort and documentation are severely underestimated. It is very easy for the property owner to get caught up in a web of paperwork, phone calls that seem to go nowhere and bureaucracy. A knowledgeable forensic accountant can minimize the frustrations and help put the property owner on top of the situation.

Enforcement From The Radio

I Don’t Always Drink Beer…


On Thursday morning, as I was getting ready to go to work, a Planet Money news story came on about the United States Department of Justice Antitrust Division. The Antitrust Division filed a complaint to stop the merger of the two beer companies Anheuser-Busch InBev and Groupo Modelo. Planet Money’s Caitlin Kenney began the piece by talking about what is needed to build a murder case – ballistics experts, medical examiners and so on. She then went on to say that if you are trying to determine whether an economic crime has been committed you need economists. “You need forensic accountants,” I muttered. An economic, or should we say financial, crime is a financial affair that will most likely end up in a court of law. That is the essence of what financial forensics are all about.

Caitlin then spoke about how the economists at the DOJ’s Antitrust Division analyze whether or not the merging of two companies will result in a reduction in competition. The Antitrust division’s team of economists evaluate whether or not businesses are behaving in anticompetitive ways. In addition to an economic research of whether the actions of businesses are contrary to free competition, when building cases, the Antitrust Division requests and goes through what could be millions of company documents, including emails, memos, business plans, and evaluate whether or not the businesses’ plans aim to kill competition. The process of combing through mountains of data related to an entity’s finances and emerging with straightforward information is the specialty of the forensic accountant.

I can’t blame Caitlin for not mentioning the important work of forensic accountants in antitrust cases; the Antitrust Division’s website speaks only of the lawyers and economists that are involved in resolving antitrust issues. If the Antitrust Division is not talking about what work financial forensic experts are doing, the only way a person could suspect that forensic accountants are providing their financial detective services to the Antitrust Division is if that person had an understanding of what forensic accountants do. The study of economic data and the interpretation of that data into opinions of whether or not a company is violating the economic principles of competition is, clearly, work best suited to an economist. However, the down and dirty investigation that involves combing through volumes of data and scrupulously following audit trails is the domain of a forensic accountant.

It was only when I actively searched for mentions of the involvement of forensic accountants in antitrust cases that I found them. At the conclusion of cases, when the Department of Justice issues its statement and thanks those who led to its resolution, the department has acknowledged, among others, “forensic accountants… who dedicated significant time and resources to investigating this case.” Alternatively, a search through documents on the DOJ’s site will unearth declarations filed that display the involvement of forensic accountants in antitrust cases. I’m thinking it is prime time for the input and value of the forensic accountant to be recognized.