Corporate fraud didn't start with Enron, Tyco, and WorldCom and it didn't end with them, either. Fraud is rampant in the technology industry. What most employees, investors, and consumers don't realize is how much it costs them.
Excuse me for stating the obvious, but you'd be surprised how many people think there's some magic pile of dough somewhere that pays for companies to comply with investigations, contest charges, and remedy issues. In fact, the costs are born primarily by the corporation. That means it comes right out of shareholders' and employees' pockets. Consumers also pay, albeit indirectly.
And yes, we're talking about costs that materially impact earnings, balance sheets, and cash flow. We're talking about internal and outside lawyers, accountants, consultants, crisis PR, D&O (directors and officers) insurance, Sarbanes-Oxley compliance, exit packages, and even recruiting costs to replace executives.
Of course, the biggest cost is in terms of loss of market capitalization. ... Read more
In case you've been in a sensory deprivation tank for the past few days and missed the news, Henry T. Nicholas III, founder and former chief executive officer of chipmaker Broadcom, was indicted on securities fraud, conspiracy, and federal narcotics charges on Thursday.
Henry T. Nicholas III
One of the indictments was related to options backdating, the cause of a $2.2 billion charge Broadcom took last year. But it was the sex and drug-related indictment that captured the media's attention.
If you read the indictment (PDF), you'll understand why one report said, "You can't make this kind of stuff up," .
Rarely does a billionaire and technology industry legend self-destruct in such dramatic and flamboyant style. But there's more to this human tragedy than meets the eye, and it almost surely extends beyond Nicholas. ... Read more
A California man may have figured out a novel way to make money at home with little effort, but the alleged penny-pinching scheme may land him in jail.
Michael Largent, of Plumas Lake, has been indicted on nine counts of fraud for allegedly creating thousands of accounts creating a script to open up more than 58,000 online brokerage accounts at E-Trade and Schwab.com using bogus information and aliases, including cartoon characters, Wired.com reported on Tuesday.
As is customary when new accounts are linked to bank accounts, the brokerages sent "micro-deposits"--anywhere from 1 cent to $2--to verify that the bank account number and routing data were accurate, which totaled about $50,000, according to the indictment. He then allegedly transferred the money to pre-paid debit cards.
According to Wired.com, Largent did not return repeated phone calls Tuesday.
Largent also is accused of defrauding Google Checkout out of more than $8,000, according to a Secret Service search warrant. He said he needed the money to pay off debts, the document says.
The brokerages became aware of the situation when they had to verify the identity of the account holders as required under the USA Patriot Act.
A New York State Supreme Court said Tuesday that Dell and its financial services arm misled customers.
Judge Joseph Teresi ruled that the world's second-largest PC maker engaged in fraud, false advertising, deceptive business, and abusive debt collection practices. The company was accused by the state of New York of offering no-interest or no-payment financing options for its products while Dell Financial Services would fail to honor them.
New York Attorney General Andrew Cuomo filed the suit in May 2007, asking for an injunction against the company's business practices and monetary damages for affected customers.
Further court proceedings will need to be held to determine what those damages will be.
Dell told Reuters it "disagrees" with the ruling. "We are confident that when the proceedings are finally completed, the court will determine that only a relatively small number of customers have been affected," according to the company's statement.
(Credit:
Steve Tobak)
Here's the first installment of Train Wreck's first recurring post: Dysfunctional Executive Watch. It'll show up whenever there's enough material. Enjoy the lunacy, and let us know if you've got something to report.
You've got fraud
On Monday, the Securities and Exchange Commission filed civil charges against eight former executives of AOL Time Warner for fraudulently inflating online advertising revenue by more than $1 billion. Four of the executives agreed to pay millions in fines and return ill-gotten gains. Charges against the other four, including former CFO John Michael Kelly, are still pending.
The company had previously agreed to fork over $500 million to settle civil and criminal charges brought by the SEC and the Justice Department. ... Read more
Securities and Exchange Commission regulators on Monday filed civil fraud charges against eight former AOL Time Warner executives over allegations they overstated the Internet company's advertising revenue in excess of $1 billion.
The lawsuits, filed in U.S. District Court for the Southern District of New York, allege John Michael Kelly, former CFO of AOL Time Warner; Steven E. Rindner, a former Business Affairs unit senior executive; Joseph A. Ripp, former CFO of the AOL division; and Mark Wovsaniker, former Accounting and Policy head, created a fraudulent scheme where AOL Time Warner funded its own advertising revenue by giving purchasers funding to buy their own online advertising. That, in turn, allegedly created fraudulent transactions at the media titan between the mid-2000 and mid-2002 period, according to the SEC statement.
The SEC also filed a lawsuit against David M. Colburn, former head of AOL Time Warner's Business Affairs unit; Eric L. Keller and Jay B. Rappaport, former senior managers in the same unit as Colburn; and James F. MacGuidwin, former controller, over allegations the group artificially inflated the company's reported online advertising revenue. These four executives, however, reached a settlement with the SEC.
Under the settlement, all four will pay disgorgement and pre-judgment interest, as well as civil penalties. The total fines and penalties these four executives will pay will reach nearly $8.1 million.
The lawsuits come more than three years after Time Warner agreed to pay a $300 million civil penalty, stemming out of a similar SEC investigation. That agreement called for the company to restate $500 million in advertising revenue for the two-year period ending mid-2002.
Click fraud decreased in the first quarter of 2008, in part because of measures Yahoo and Google took to counteract the bogus clicks on online advertisements that can waste advertisers' dollars, according to a new study.
Overall click fraud dropped to 16.3 percent of clicks in the quarter compared with 16.6 percent in the fourth quarter of 2007, said Click Forensics, a company that monitors the phenomenon and is in the business of helping clients prevent it. It was only the second time the rate dropped since Click Forensics started studying it, the company said.
"Yahoo and Google seem to be finally filtering out more of the click fraud and non-converting traffic they used to let through," Tom Cuthbert, president of Click Forensics, said in a statement.
The company also said that click fraud from botnets--groups of computers that have been taken over remotely that can be used to perpetrate click fraud--increased 8 percent from the last quarter of 2007.
Samsung Chairman Lee Kun-Hee is stepping down after 20 years at the company's helm, according to the Reuters news service.
Lee was indicted last week on charges of evading taxes on billions of dollars he hid in stock accounts under the names of his aides. Nine other Samsung executives were indicted on charges similar to Lee's, though nobody was arrested. Four other top executives quit Monday, according to Reuters, including the heads of Samsung's strategic division, Samsung Fire and Marine Insurance, and Samsung Securities.
Lee's son and heir apparent, Lee Jae-yong, will also step down from his current post but will continue to work for the company in an unspecified role, Reuters wrote.
If you can't beat 'em, join 'em.
Yahoo and Click Forensics announced on Monday that they will be working together to fight click fraud.
Click fraud has historically pitted advertisers, who claim they are charged for fraudulent clicks on paid search ads, against search engines, which claim they manage to catch most of the click fraud out there.
Then there are companies like Click Forensics, which tracks the rates people, or automated software bots, are "clicking" on ads (and also recently got $10 million in funding). Click Forensics also releases regular reports on the perceived click fraud rate, which it says grew by 15 percent in 2007 over the industry average rate the year before. The average click fraud rate of pay-per-click ads on search engine content networks, like Google AdSense and the Yahoo Publisher Network, was 28.3 percent in the fourth quarter of last year, the most recent report says.
Google dismisses those figures, contending that Click Forensics' methodology is faulty.
Instead, Google says its click fraud rate is in the single digits, while Yahoo claims its rate is a subset of the 12 percent to 15 percent of the clicks on its network that it does not bill customers for.
Regardless of what the actual click fraud rate is, the problem is large enough to have prompted class action lawsuits, which Yahoo and Google have settled.
There have been calls for an independent third party to oversee the business, but advertisers don't want to give up their server data to search engines and vice versa.
The Yahoo-Click Forensics relationship seems like a step in that direction. And it gives Yahoo a way to distinguish itself from Google, a company that is ultra-secretive about most things, not just click fraud numbers.
Asked for comment, a Google spokesman gave this statement: "We provide numerous tools and support for third parties so that they can learn from our data and experience, and we work with them every day to improve advertiser ROI, including investigating potential cases of click fraud. We've been sharing information and working with third parties ever since we launched AdWords, and we're constantly improving additional tools for third-party support."
Yahoo first stepped ahead of the search engine pack with regard to click fraud when it named Reggie Davis as its first click fraud czar (officially "vice president of marketplace quality") a year ago this week.
Davis says that at the time he knew "we needed to be much more forthcoming with our percentages."
Neither he nor Tom Cuthbert, president of Click Forensics, will say exactly what information they will be sharing, other than that Click Forensics will provide feedback from advertisers to Yahoo. My understanding is that Click Forensics will serve as a sort of clearinghouse for the click behavioral data that advertisers collect, and that the information will somehow be shared with Yahoo.
Meanwhile, Yahoo won't be sharing information on exactly how its 2,700 filters operate to detect fraud with advertisers because they could then figure out how to circumvent the filters and game the system, Davis says.
Yahoo's goal is to try to come up with a better consensus click fraud rate than the widely disparate figures now being reported, and to make advertisers more confident in the system, he says.
Since Davis took over the click fraud hot seat, the number of claims by advertisers alleging they were charges for fraudulent clicks or poor quality clicks has dropped from 800 claims a month to fewer than 80 claims a month, Davis says.
"It's a heated issue," he says. "It's all about advertiser trust and their confidence in us to deal with these issues."
Click fraud is the search industry's dirty little secret--one that Google and Yahoo like to keep mum about. But a company that tracks the rates at which people, or bots, fraudulently click on paid search links just got a financial boost to work a little harder on its beat.
Austin, Texas-based Click Forensics said Tuesday that it raised $10 million in a second round of funding led by Sierra Ventures, which was joined by early investors Austin Ventures and Shasta Ventures. Sierra's managing director, Steven Williams, will join its board of directors.
The company plans to use the money to further develop its tools for tracking click fraud for online advertisers, publishers, and advertising networks. It publishes independent quarterly reports on click fraud occurrences on sites like Google, but Google representatives have said in the past that the company's data does not match its own.
In the last quarter, Click Forensics said that of all the clicks on paid search ads in the fourth quarter of 2007, an estimated 16.4 percent were bogus.
