Title Slide If You See Something, Write Something Roddy  Boyd,  founder  Southern  Inves3ga3ve  Repor3ng  Founda3on      

SABEW  conference,  Bal3more,  Md.,  March  27,  2014  

Boyd Roddy

Investigative reporter and founder of the Southern Investigative Reporting Foundation. He has worked for Fortune Magazine, the New York Post, !e New York Sun and Institutional Investor News; founded !e Financial Investigator website; and wrote "Fatal Risk," on the collapse of AIG. An independent nonpro"t, SIRF provides document-driven investigative and accountability reporting on publicly traded companies.

Twitter: @boydroddy  Web: SIRF-online.org

What is corporate fraud? A few kinds of corporate fraud

• Securities fraud • Ripping off investors • Consumer fraud • Ripping off (retail) customers • Tax fraud • Ripping off taxpayers (that’s you) Bottom line: Fraud boils down to to saying one thing and doing another, for pro"t.

One de!nition:

“Business fraud is, very simply, fraud in any business activity that resorts

to deceitful practices to cause economic injury.”

-- Cochran law "rm (plaintiffs’

attorneys)

!ings !at Make You Go Hmmm •  Logic Leaps •  Cash is King •  Manias of the Moment •  We Take Care of our Own

Image:  Wikimedia.org  

Logic Leaps

Save Suspension of Disbelief For "e Movies

Does What "ey Say Make Sense? • Spectacular Results • Taking on Entrenched Competitors • What !e Hell?

Spectacular Results It’s not easy for large companies to grow massively •  Ex: Merrill Lynch 2005 earnings •  http://tinyurl.com/kg7racw •  33% Rev boost = Massive risk! Common Sense is most uncommon

Image:  Jack-­‐Benny,  hJp://flic.kr/p/ePdxxP  

Dancing With !e Big Boys •  Watch for WCOM: Fast Rising in Brutal Industries

•  How Come No One !ought of it Before?

•  Are Independent Experts Wowed or Impressed?

•  Common Sense: Killing a King Ain’t Terribly Easy

Cash Is King

!  No doubt about it, companies not generating cash over time are in hot water. At some level, the inability to generate cash is involved in 99% of frauds.

Image:  Jack-­‐Benny,  hJp://flic.kr/p/ePdxxP  

Basics: Cash Flows Key points: • Find Statement of Cash Flows in 10-K, 10-Q • Check to see if company can generate cash • Look to see if company is “living in the market” • Discern trends, if possible Example • United Continental’s Conundrum (p.62): http://tinyurl.com/qx4r2yw   Example: • Google’s sweet spot: http://tinyurl.com/pgxymdf

When the Cash Generator Breaks...

When companies can’t, over time, generate cash they have to: • Access the markets by stock and debt sales • Dilution, interest expense and debt loads • Markets shut down (1989, 1994, 1998 & 2007-2008) • Asset Sales • Delayed Investments (Lower Cap-Ex, Maintenance) • Expense cuts

Manias and Fads Companies in Manias are de!nitionally at a higher risk for wrongdoing • Pressure to last beyond boom cycle • End of a mania is a brutal reckoning • Watch for late stage mania co’s e.g. Pets.com • Manias are funding grabs, pure and simple

Look for incongruities

We Take Care of Our Own

•  Related Party Transactions •  10-Ks and especially Proxy (Def-14A) "lings •  Why have an RP for SOP deals? •  Major red $ag: RP receivables

•  Don’t sweat a relative (usually)

•  Look for “once removed” RPs, like real estate •  Hidden RPs: board consulting deals

Son of Related Parties: Perks

•  Rank Excessiveness •  Hidden Comp: Well into six "gures annually •  ProTip: Look for “Gross Up,” or paying tax bill •  Compare to others CEOs, corp. Stock Px Perf.

•  Disclosure vs. Non-Disclosure •  Has the company been in a period of downsizing?

•  Unexplained & poorly explained capital raises