ustxtxb_obs_2005_05_27_50_00019-00000_000.pdf

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May 27, 2005, 12:00 AM, CDT

FIFTY YEARS OF , ,14.74wer , EHTIFH OY CHAR MIL\( FR M

<div id="pico"><p>FIFTY YEARS OF , ,14.74wer ,  EHTIFH OY CHAR MIL\( FR  M<H1.1" I V INS intimacy. But some of us must remain intensely skeptical so  that others can continue to trust. The regulators need to be  skeptical \(accountants and most lawyers also have to redising the worst, but it does mean that one checks hard and skillfully. It also means that if the party being examined interferes  with the review, lies, or attempts to intimidate the reviewer, the reviewer's skepticism should spike, and the superiors  should support the reviewer.  We can do far better investigations. The S&L debacle is  again instructive. Mario Renda, a power broker for the mob,  was a control fraud who helped loot dozens of S&Ls and  banks. A Bank Board enforcement attorney investigated him.  Unfortunately, he had no experience in complex investigations, and he missed the fraud when he took Renda's deposition. Fortunately, Michael Manning of Morrison & Hecker,  outside counsel for the FDIC, the Federal Deposit Insurance  Corporation, discovered it. Manning contacted me, and we  \(the FSLIC, Federal Savings and Loan Insurance Corporation,  uncovered the widespread fraud. The lesson is that even fairly  small numbers of highly experienced, tenacious investigators  can greatly increase performance. Too many regulatory agencies refuse to use outside counsel to aid their investigations.  Daisy chains, informal groups of control frauds that  engage in transactions with one another in order to hide their  frauds from regulators, make it harder for examiners looking  at one entity to spot reciprocal transactions. But daisy chains  are also a weakness if one investigates properly. They are   highly susceptible to sting operations, as are S&L and bank  control frauds. Undercover employees could easily be placed  in corrupt financial institutions. FBI and IRS agents often  have the necessary expertise. Electronic surveillance could  provide direct evidence of conspiracy in reciprocal transactions. None of these techniques was used in any material  manner during the S&L debacle. In our experience, detailing  our examiners and supervisors to assist criminal investigations made all the difference. The SEC, of course, is so short  of experienced staff that it cannot afford to detail the type of  staff that would most aid the criminal investigation.  The SEC also needs to litigate more cases and sign far fewer  consent agreements. The SEC negotiates consents disproportionately with failed smaller firms and often gets no meaningful relief. On the contrary, it is harmed because it does not  establish precedents; its enforcement attorneys lack experience and may fear litigation; and the relief granted against  serious wrongs will often be inadequate.  Tougher prison sentences in real prisons remain the best  hope for deterrence. If the Justice Department had brought  a criminal action against Arthur Andersen in 1987, for its  role in abetting Keating's Lincoln Savings control fraud, the  accounting profession would have had a powerful incentive  to clean up its act. This could have reduced the ongoing wave  of accounting scandals.  My central message is that we can do things to detect and  terminate individual control frauds and to prevent, or at least  reduce substantially, future waves of control fraud. To do so,  however, we have to take it seriously.   Fifty Years of the Texas Observer  Edited by Char Miller  Foreword by Molly Ivins  "From Molly Ivins to Willie Morris, Jim Hightower to  Larry McMurtry, no other against-the-grain publication in  America has helped to nurture such a stellar array of writers."  Adam Hochschild  For updated event information, go to  www.trinity.edu/tupress   TRINITY UNIVERSITY PRESS -vvww.trinity.e  du/tupress  Distributed by Publishers Group West  MAY 27, 2005 THE TEXAS OBSERVER 19 
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