Microsoft PowerPoint - Ficery Fr by fjhuangjun


									                                                                 Gregg Ficery
                                                      Director, SVB Analytics

“A History of the Destruction of Value through Creative Corporate Fraud:
Lessons in Integrity Learned through a Career Journey”
Gregg Ficery will describe various types of fraud publicly known to have been perpetrated by
organizations for which he served in “outsider” roles early in his career, as well as other well-known
cases of corporate fraud. He will discuss his experience at Freddie Mac, MCI/WorldCom and Unisys,
as well as the impact of corporate fraud on employees not involved in the fraudulent activity.

Gregg Ficery is a director for SVB Analytics, a non-bank subsidiary of Silicon Valley Bank,
providing business valuation services. He has over 20 years of consulting finance, corporate
development and business development experience in the business valuation, financial services,
technology and telecommunications industries.

Prior to joining SVB Analytics, Ficery held a senior director position at Taylor Consulting Group, a
boutique valuation consulting firm in Atlanta where he was responsible for valuation analysis,
financial, and transaction advisory services covering public and closely held companies. He has
experience in engagements requiring valuation of companies for purposes including mergers and
acquisitions, strategic planning, financial reporting, tax compliance and litigation support, including
providing expert testimony. He has served clients in a wide variety of industries, including
technology, telecommunications, renewable energy, food and beverage, financial services and

Prior to joining Taylor Consulting Group, Ficery was the business development manager for the
southeast region for DoveBid Valuation Services. He was also district sales manager for Access
Integrated Networks, now Birch Communications, a regional provider of business

Before Access, he was director of business development for Consumer Financial Network (CFN), a
subsidiary of iXL, developing and executing strategic initiatives for a financial services e-commerce
platform, Prior to CFN, he held senior financial analyst positions managing the
companies' largest accounts at MCI and Freddie Mac and he was also a trading analyst in Freddie
Mac's Securities Sales & Trading Group.

Ficery has also recently served on the board of the Tax and Finance Society of the Technology
Association of Georgia. He holds a bachelor's degree in Finance from Georgetown University and a
master's in Business Administration from Marymount University in Arlington, Virginia. Ficery is
currently pursuing the Accredited Senior Appraiser (ASA) designation from the American Society of

                                                                                   Hometown Values
                                                                          Work Ethic
                                                                         + Commitment
                                                                         + Do Things the Right Way
  A History of the Destruction of Value                                  + Consistency
   through Creative Corporate Fraud:                                     + Humility
    Lessons in Integrity Learned through a Career Journey
                                                                         + Teamwork
               -Gregg Ficery, Silicon Valley Bank Analytics
                              May 27, 2009
                                                                         + Family Values
                                                                         = Progress
                                                                         = Growth
                                                                         = Transformation
                                                                         = PITTSBURGH

             City of Champions                                                        Career Dreams
    • Observing and Learning from Successful Strategies
    • Standard of Excellence
    • Expect to Win

       4 Super Bowls, 2 World Series, 1 National
               Championship in 1970’s                                               “I want to be a baseball player!”

  “There’s no money in that!”                                                   Sports – Life Lessons
                                                                                        The “Pine Tar Game” (7/24/83)

Parents don’t have all of the answers, but they may not be all wrong….           #1: Passion…Fight the Good Fight


             Sports – Life Lessons                                                             Sports – Life Lessons
      Yankees Chicanery Overruled by Commissioner, Royals Win                      “The Immaculate Reception” (1972) – Steelers Win First Playoff Game Ever

                         #2: Justice Prevails
                                                                                                      #3: Good Triumphs over Evil

            Sports – Life Lessons                                                             Sports – Life Lessons
“…I don’t think the Cowboys                  "If they beat you, you feel like
are as well-schooled in                      you've been tricked instead of
blocking and tackling as we                  whipped. I hate teams like
are.” – Joe Greene                           that." – Jack Lambert

                                                                                                                                      ALTA AA1 City Champs!

                       #4: Substance over Style                                                  #5: Practice, practice, practice…

             Sports – Life Lessons
                                                                                           Formative College Years

    1989                                                 1994 - 1st Place

                                                                                                        Reputation vs. Relationships
                                                 Cancelled due to player strike!
                                                                                                                 Career Decision?
                     #6: Greed is Destructive


       Most Prominent Alumnus                                                       Internships       Career Choices
                                                                                                               Summer 1987

                                                                                        “What would you do if your boss asked you to do
                                                                                        something that you thought was unethical?”
                                                                                                          Winter 1987

                                                                                              Career Decision: Turned PW down…didn’t enjoy the culture.

                   Career Choices                                                Narrowing it down…   Career Choices
                           NY vs. DC ???                                                            Finance vs. Accounting ???
                      The “Greed is Good” Era
                   Junk Bonds, Insider Trading, Crash of ’87

    Career Decision: DC. Impact: Turned down ~3X salary with BCG in NYC                              Career Decision: Finance. Impact: TBD…

                                                             Financial Analyst      Double Trouble!
    My First Job!!!

        “Jail Term for Ex-Unisys Official”
                                                                                       “Ex-Unisys Official Pleads Guilty in Ill Wind Probe”
                                                                                                                -Published: March 31, 1990
                                     -Published: March 16, 1989
-   Operation ILL WIND - FBI and Naval Investigative Service Project                • “Former Unisys Corp. marketing executive, Frederick J. Carville,
    aimed at routing out fraud in the defense industry                                diverted corporate money that was intended to bribe Defense
-   Bribed Navy and Air Force officials through off-shore accounts                    Department procurement officials and instead bought a $30,000
    and shell companies to gain military contracts                                    imported car for a company superior, according to the executive's
                                                                                      guilty plea entered yesterday in federal court in Alexandria.”
-   Consultants used illegal campaign contributions to members of
    House Armed Services and Appropriations Committee                               • In 1982, Carville was instructed by a former Unisys V.P. to set up an
-   Funneled money to brother of Sen. Alfonse D’Amato (R-NY)                          independent business that Carville would use to obtain inside
    (convicted on 7 counts of mail fraud) hoping he’d lobby his brother               information on defense contracts that the corporation might seek.
-   ~60 private citizens from 6 major defense contractors (mostly                   • Though Carville attempted to get information on defense programs,
    Unisys employees) and 12 government officials convicted                           he also bought a Jaguar automobile for $29,900 that was used
-   Unisys pays a record $190 million fine to settle criminal charges                 solely by one of Carville's superiors. The tax charge against
-   Unisys VP Charles Gardner sentenced to 32 months in prison                        Carville was brought in part because he took tax credits for
                                                                                      depreciation of the car in his 1983 corporate returns.”
-   Led Congress to pass the 1988 Procurement Integrity Act


Destruction of Investor Confidence and Value                                                  My Second Job!!                                                          Acct. I, II, Sr. Acct., 5/90-8/94
                                                                                                                                                                       Trading Asst., 8/94-8/96

 • Since ILL WIND, UIS stock has not
   surpassed $20 outside of .com era                                                                        What Freddie and Fannie Do…
 • 1/1/89 - $26.52/share

 • 5/09 ~ $1.50/share
                                                                         Really done!    Secondary Mortgage Market >
                                                                                         - Securities Sales & Trading Group
                                                                                             (SS&TG), Market Maker
                                                                                         - Massive Retained Mortgage-Backed
                                                                                             Securities Portfolio

                                                                                         Primary Mortgage Market >
                                                                                         - Operations, Mortgage Lender Acctg.

Career Decision (2/09): Turned down offer to move to the accounting department…
              …in favor of unemployment. Impact: 3 mo’s unpaid vacation.

Let the Good Times Roll!                                                                There Goes the Neighborhood!

 • IPO 1/3/1990
                                                                                              • ~1994 - “Affordable Housing Programs” forced government
                                                                                                policy upon business: noble policy or economically disruptive?
 • “Cookie Jar” Accounting Begins
                                                                                              • 2004 - Freddie Mac's Chief Risk Officer, David Andrukonis, sends
                                                                                                e-mail to CEO Richard Syron urging Freddie Mac to stop
 • Created the Slogan “Steady Freddie”=“We Smooth Earnings”                                     purchasing loans with no income or asset requirements as soon
                                                                                                   practicable                 fired.
                                                                                                as practicable. Andruknonis is fired

 • Stock splits 3:1 in 1994, 4:1 in 1997                                                      • Executive compensation skyrockets
                                                                                              • 2007 - CEO Leland Brendsel fined $16.4 million
 • Executive Compensation Escalates. CEO salary increases                                     • 4 CEO’s in 6 years
 from $200k to $1m to match Fannie Mae CEO
                                                                                              • $5 billion earnings restatement = $125 million fine
“The company’s consistent performance was not an uncanny coincidence, but a
product of executives willing to dip into “cookie jar” reserves to make up a                 Career Decision: MBA night program 1992-96, got married and moved to Atlanta
shortfall, then push excess earnings off into the future as a cushion for the next
bonus cycle.” – OFEHA investigation report                                                   Impact: Salvaged 401k, loss of equity value, received ~$700 class action settlement

       In hindsight…                                                                                                       “Study Finds 'Extensive' Fraud at
                                                                                                                                     Fannie Mae”        -5/24/06

  • Unethical compensation management                                                    •     “Fannie Mae was dominated by a corporate culture of arrogance.”
                                                                                                Investigative report commissioned by Fannie Mae and conducted by former Senator Warren Rudman. 2/24/06
  • CEO untruthful re compensation question at board
                                                                                         •     “…engaged in "extensive financial fraud" over six years by doctoring earnings
    meeting after IPO                                                                          so executives could collect hundreds of millions of dollars in bonuses,”

  • Gossip about “putting money away for a rainy day”
                  putting                        day                                     •     “…weak board of directors, which failed to install basic internal controls and
                                                                                               instead let itself be dominated and uninformed by CEO Franklin Raines and
                                                                                               CFO J. Timothy Howard, both later ousted.”
  • Executive hiring practices
                                                                                         •     "The conduct of Mr. Raines, CFO Timothy Howard, and other members of the
                                                                                               inner circle of senior executives at Fannie Mae, was inconsistent with the values
  • CEO misbehavior on multiple occasions                                                      of responsibility, accountability, and integrity," federal officials said in a report that portrayed
                                                                                               a company determined to play by its own rules.”

  • Correcting or altering daily trading P&L?                                            •     2007 - Company loses $2.1 billion. CEO Mudd compensation = $13.4 million.
                                                                                               $8.4 million golden parachute later reduced.
  • Playing fast and loose
                                                                                         • $11 billion earnings restatement (largest ever) = $400 million fine


 Stranger than Fiction…                                                          Career in Place   Stranger than Fiction…                                                             Career Disgraced

                       Barney Frank                                                                                                      Elliot Spitzer
     ~1989 – Male prostitute, Frank Gobie, living in Frank’s
     home, convicted for running a male prostitution ring out
     of Frank’s home

                    ~1990-2003 – Frank’s lover, Herb Moses,
                     1990 2003 Frank s lover          Moses
                    was the Fannie Mae executive responsible
                    for the company’s affordable housing
                    programs. Thus, Frank was voting to
                    approve the risky and unprofitable programs
                    proposed by Moses.

2003 - “These two entities, Fannie Mae and Freddie Mac, are not facing any kind
of financial crisis. The more people exaggerate these problems, the more pressure
there is on these companies, the less we will see in terms of affordable housing.”                                                                         “Something is not right!!”
July 2008 – “I think this is a case where Freddie Mac and Fannie Mae are
fundamentally sound. They're not in danger of going under. I think they are in
good shape going forward.”

                                Coincidence??                                                          Follow the Money….

  • Both Government Sponsored Enterprises
    (GSE’s) practicing the same type of “cookie jar
  • Who is calling the shots?
  • Where does the buck stop?
  • Where does “Government Sponsorship” end?

                                                                                                   Former government officials brought on as employees
 Former government officials brought on as employees
                                                                                                   • Jim Johnson, FNMA CEO ‘91-98, Mondale campaign mgr., Kerry advisor, stepped down as Obama advisor
                      Fannie Mae CEO Franklin Raines                                                Fannie Mae hid a substantial amount of CEO Jim Johnson’s 1998 compensation, reporting between $6-$7
  • Former member of Carter and Clinton Administrations.                                            million when it was $21 million. Johnson acknowledged his goal, “”We are on course to meet the $1 trillion
                                                                                                    target we set, we’re ahead of schedule on the 11 initiatives put in place to carry out the commitment, and our
  • Carter Administration, served as Assoc. Dir. for Economics and Gov’t in the Office              efforts already have fundamentally transformed how millions of American families now gain access to the
  of Mgmt. and Budget and Asst. Director of White House Domestic Policy Staff
      g            g                                                    y                           mortgage credit system.”
                                                                                                    - Office of Federal Housing Enterprise Oversight’s May 2006 report on mismanagement and corruption inside Fannie Mae.
  • Clinton Administration, served as the Dir. of U.S. Office of Mgmt. and Budget
  • Of $91 million he received between 1998-2003, $52 million was tied to earnings                 • Rahm Emanuel, Obama Chief of Staff, named by Clinton to Freddie Mac board in 2000

  targets the company hit in part by "deliberately and intentionally" manipulating                  During a September 2000 board meeting, midway through Emanuel's 14-month term,
  its accounting.                                                                                   Freddie Mac lobbyist R. Mitchell Delk laid out a strategy titled "Political Risk
                                                                                                    Management" aimed at influencing lawmakers and blunting pressure in Congress for
  • 1998 earnings per share = $3.239. Max bonus payout target $3.24.                                more regulation. Through Delk's initiative, Freddie Mac sponsored more than 80
  • Raines paid $24.7 million to settle lawsuit.                                                    fundraisers that raised at least $1.7 million for congressional candidates despite a
                                                                                                    federal law that bans corporations from direct political activity.

   Unrepentant: "This settlement is not an acknowledgement of wrongdoing on
                                                                                                   • Jamie Gorelick, former Clinton Justice Department Deputy Attorney General,
   my part, because I did not break any laws or rules while leading Fannie
   Mae," he said in April following an SEC settlement that required him to pay                     named Fannie Mae Vice Chairman with no relevant experience. Earned $26m from
                                                                                                   1997-2003 during the heart of the scandal.
   just $2 million.


                                                                                                                                                                Financial Analyst,
                                                                                                  My Third Job!                                                 August 1999-August 2001

      “An orgy of junk mortgage development”                                                                   Don’t Bank on Bernie
•    Increased their nonprime business because they felt pressure
     from the government and advocacy groups to meet goals for
     affordable housing and pressure to compete with Wall Street.
•    $                     y g                 p      p
     $175 million in lobbying fees the companies spent over 10
     years, in part to counter attempts at stronger oversight.
•    “We face two stark choices: one, stay the course; two,
     meet the market where the market is.” – Daniel Mudd, June 2005
•    Enrico Dallavecchia, Fannie Mae’s chief risk officer, wrote to
     Mudd, “Dan, I have a serious problem with the control
     process around subprime limits.” - March 2006
•    2007 – Mudd receives $3.45 million cash bonus plus stock
     and other compensation for a total of $10.6 million. Syron
     receives $18.3 million, up 24% from the previous year.
                                                                                       …unless the FCC says it would be anti-competitive!!!

     Party Like it’s 1999!                                                                        In hindsight…

                                                                                           • Some mention of previous option backdating
                                                                                           • Profit margin goals eliminated in favor of
                                                                                             revenue. “Attaboy” for -70% contract renewal.
                                                                                           • MCI employees careers blocked
                                                                                           • Destruction of MCI culture
                                                                                              Impact: Salvaged 401k, loss of equity value.
                                                                                              Career Decision: No future at WCOM. Dot-com space offered increased
                                                                                              responsibility, salary, options and creativity.

          My Fourth Job                             Director of Business Development
                                                    August Aug.1999 – Oct.2001                2001 Space Odyssey!!                                         Atlanta, we have a problem!

    "It's tough to make predictions, especially about the future."                                                                            • IPO 6/99 raises $72m, closes at $17.85
                                                                  – Yogi Berra
    • 5/2000 - Raised $300 million at a $1.5 billion valuation                                                                                • Reaches high of >$50 in 2000, 1,500
                                                                                                                                              employees, $33 million revenue
      ($150m from Gateway+$150m mezz.)
                                                                                                                                              • 3/01 - Wife’s option shares in iXL vest at
      Offer t  ll         for $300-$400m
    • Off to sell company f $300 $400                                                                                                         intersection of profitability in 3/01
       (wanted $1 billion)
                                                                                                                                              • 8/01- Acquired by Scient in all stock deal
    • Bought 6 software companies
                                                                                                                                              • 7/02 – Scient declares bankruptcy
    • Changed company name to
       ProAct Technologies
    • Poor due diligence, failed technology                                                  Impact: Let go on the day the CFN acquisition closed after being told that I
                                                          Putting lipstick on a pig…         would be kept on after the acquisition. 50,000 worthless options in CFN,
                                                                                             6 months of unemployment (with new baby).
    • 10/2001 - Sold for $8 million
                                                                                                                           Career Decision: Back to finance


            How am I feeling?                                                       Something is not right!
                                                                         2001                                                                    2008
                                                                    Accounting Fraud                2002 - Tyco                            Madoff Ponzi Scheme
                                                                                                     Grand Larceny

                                                                 Martha – Insider Trading
                                                                                               2003 – Healthsouth
                                                                                                Accounting Fraud, Bribery

                      Kinda like Liz Taylor…

        Something is not right!                                                    Something is not right!
 One more thing…they all went to jail, right?

                                                               “Criminal investigation of Freddie Mac and Fannie Mae ends with no charges”
                                                                          “The investigation is said to have been inactive for two years.” -9/12/06

         Something is not right!                                                  Something is not right!
                                                                                       Who is Being Held Accountable???

• 2005 - Fannie Mae CEO after Franklin Raines,
  Daniel Mudd, speaks to Congressional Black
  Caucus to ask for support
                                                                                                                        …or just more finger pointing??
                                                                          Will we get the whole truth??
• Findings of OFHEO investigation of Fannie Mae
  and Freddie Mac are presented before
  Congress (Who’s on trial here?)
                                                               Is something funny, Mr. Mudd and Mr. Syron?                  Are we boring you, Mr. Raines?


         What happens when the wolves                                                                             Who pays the price???
          are watching the hen house?                                                                         - 1Q ’09 earnings under current administration not transparent

Affordable Housing Programs                                                                                   - Criminal investigation “reopened” 2/09, or is it?
  = Relaxed Underwriting

No documentation loans
= Relaxed Underwriting             Double Talk
      2000-2008           “I think the responsibility that the
                          Democrats have may rest more in
                          resisting any efforts by Republicans
                          in the Congress or by me when I was
                          president, to put some standards and
                          tighten up a little on Fannie Mae and
                          Freddie Mac,” – Bill Clinton, (9/2008)
                                                                                      David Kellerman–1968-2009

             Something is not right!                                                                 What’s the solution?
Capitalism: Growth through Creative Destruction or Destabilizing Cycles?                     Sarbanes-Oxley Regulations
                                                                                                 (~$3.2 million/year per public company)
           The “I’m gonna get “mine”!!” mentality
                                                                                       • Increased fraud = increased regulation
             The more people who get “theirs”,
                                                                                       • Increased regulation = increased expense
             the more the system breaks,
             the more everyone loses
                               loses.                                                  • Increased expense = decreased p
                                                                                                     p                 profits
             Who is getting theirs?                                                    • Decreased profits = decreased economic growth
             Are they getting it in money? (Execs)                                     • Decreased economic growth = decreased innovation
             Are they getting it in policy? (Pols)
                                                                                            Corporate Fraud Task Force
 Policy failure: Foreclosures: Who was ultimately served by tampering
 with sound practices and enabling bad behavior?                                       • Created by George W. Bush on July 9, 2002
 Economic disaster = Leveling the playing field? Redistribution?                       • Obtained ~1,300 fraud convictions (200+ CEO’s) through 2008

            Which Side Are You On?                                                         My sixth job…                                        SE Regional Sales Director

                                                                                      • Auction machinery & equipment for
                                                                                        80+ years (sold the “Enron E” sign)
                               Get a T.O., baby!!!                                    • Successfully entered secured
                                                                                        lending appraisal business
                                                                                      • Started business appraisal/valuation
                                                                                        post SarbOx
                                                                                      • Exited business valuation after one
                                                                                        year due primarily to lack of focus
                                                                                        on the new group and culture clash
                                                                                                                                                The end of the flood?
                                                                                                    Impact: Four month unemployment.
    Success vs. Significance                         Transparent digital world
                                                                                                    Career Decision: Stay in valuation, learn the technical side.
                                                     requires integrity for success


                    What’s ahead?                                         Trouble brewing…        Derivatives

                                                                          “The chaotic profusion of derivatives used by companies and hedge funds to
                                                                          fund financial growth are financial weapons of mass destruction.”
                                                                                                                        - Warren Buffet (2003)

                                                                      • 75% of global liquidity trades in unregulated derivatives markets
                                                                                                             Why? Greed
                                                                      • Obama administration beginning to address the issue

                                                                          “There are two kinds of exchange. One may be called natural and necessary,
                                                                          by means of which one thing is exchanged for another, or things for money to
                                                                          meet the needs of life.... The other kind of exchange is that of money for
                                                                          money, not to meet the needs of life, but to acquire gain.... The first kind of
                                                                          exchange is praiseworthy, because it serves natural needs, but the second is
                                                                          justly condemned.”                              - Thomas Aquinas (~1250)
    Entitlement: What happens when the “Me Generation” takes over?

    Fairness Opinions – Are They Fair??                                                 Examples of Integrity
                                                                                   My seventh job                                   Sr. Director
              Trouble brewing…                                                                                                      2004-2008

                                                                                       Dr. Pepper Bottling Company of Texas case
   • “The only reason to work here is if you want to make
     a ton of money.” – Job interview with the largest                •    Hired by minority shareholders to challenge DLJ fairness opinion
                                                                           regarding acquisition of the private company by Cadbury Schweppes
     provider of fairness opinions in the U.S.
                                                                      •    CEO had limited options for buyers due to antitrust issues
   • Investment bankers opine on the “fairness” of their own          •    CEO sold company for $25/share (less than recent tranactions)
     merger transactions.                                             •    CEO had employment and equity incentives not available to shareholders

   • I-bankers are paid a % of the transaction PLUS an                •    I-banker gets paid % for transaction + % for “fairness opinion”
                                                                           (“We sold it, it’s fair!”)
     additional % for assuming the “risk” of litigation if the
     board sues.                                                      •    Settled in court for ~$33/share
                                                                      •    Compromise from TCG valuation of ~$45/share avoids CEO breach of
   • Independence? Why did Sarbanes-Oxley not address                      fiduciary duty
     this?                                                                   Impact: Credibility
                                                                             Career Decision: Step up with larger, growing, innovative organization

                Examples of Integrity                                                   Examples of Integrity
                                                 Analytics Director
My eighth (and current) job

                                                                          • A leading U.S. auto parts supplier
                                 • Prudent management
                                                                          • Founded 1899, ~$7 billion revenue, 40,000 employees
                                 • Innovative = “Find a Way”              • 1998 - Acquired Turner & Newell, UK manufacturer of
                                                                            asbestos with known pending liability
                                  Emphasizes t
                                 •E h i             lt
                                             team culture
                                                                          • Joined legal defense consortium to share expenses
                                 • Enlightened self-interest =              fighting bogus litigation in local courts
                                 win/win                                  • 2001 - Declared bankruptcy
                                 • Largest provider of valuation          • Battled Carl Icahn for control
                                 services (volume) in U.S. after          • 2007 - Emerged from bankruptcy
                                 three years                              • Saved the company and preserved shareholder value


          Examples of Integrity                                                    Themes….

                                                                 This little piggy went to market…

                                                                             …This little piggy stayed home

                                                                         This little piggy had roast beef…

                                                                              …This little piggy had none

CFO Mike Lynch – Retired after company emerged from bankruptcy   …and this little piggy went wee, wee, wee
                      My father-in-law                           all the way home.

                  Themes….                                       Good Fortune, Great People

     #1                                             #3
                            #2                                                 +                       = Truth

                           #5                       #6

                                                                                                     Finish strong!!


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