The Counter-deception Blog

This is a very interesting item that reflects the complexity of modern business deception operations. All the more reason to have analytic aids to help sort out these increasingly complex layers of fraud.

October 8, 2004 NYTimes.com

A New Morality Makes Old Deceptions Expensive for Wall Street
By FLOYD NORRIS

LYING may be a sin, but on Wall Street there has always been a spirit of understanding for those who merely help others to deceive - particularly because the fees for aiding in deception have often been far higher than those for simply arranging a straightforward financing.
But that is changing, and this is a case of today's new morality being applied to yesterday's conduct.
In North Carolina yesterday, Parmalat, the bankrupt Italian dairy company, continued its legal onslaught against everyone who helped the former management, filing suit against Bank of America. [Page C4.]
Parmalat contended one $80 million loan from Bank of America was not really a loan at all because the company had to deposit $81.6 million in the bank. And, Parmalat said, a secret side agreement obligated it to pay a far higher interest rate than was disclosed. In another deal, the bank is said to have misrepresented a real loan as an equity investment in a Parmalat subsidiary.
"The market was intentionally and falsely led to believe that Bank of America was standing behind Parmalat's creditworthiness, when, in fact, it was doing all it could to reduce its exposure while simultaneously siphoning off as much cash as it could before Parmalat collapsed," the suit said.
Parmalat said the bank made millions from the deals and should pay billions in damages. Bank of America said that the suit "defies logic and the facts'' and that its transactions were not "designed to disguise Parmalat's debt.''
There are other examples of the new morality. American International Group, the big insurer, has disclosed it is facing federal investigations into whether its own disclosures - regarding an investigation into whether it had helped others to deceive - were themselves deceptive. Now there's a tangled web.
In Houston, four former executives of Merrill Lynch are on trial in connection with the infamous Nigerian barge deal. Prosecutors contend Merrill provided phony profits to Enron by disguising a loan as payment for a barge. Two of the executives are also charged with lying to investigators.
The change in what is acceptable can be traced to Enron's collapse. There may have once been an unspoken understanding that companies used makeup to appear prettier than they really were, but this was a case of making Frankenstein's monster resemble Marilyn Monroe. It turned out the public, not to mention the prosecutors, did not accept what Wall Street thought was business as usual.
All this threatens financial institutions in two ways. They face liability for what they did, and their profits are likely to be lower if they cannot charge fees for performing what is really balance-sheet or tax-return magic.
The Republican leaders of Congress this week weakened provisions in a tax bill aimed at corporate tax shelters. But the Internal Revenue Service is already getting tougher, and is seeking to force disclosure of who bought some shelters whose evident purpose was to reduce taxes by concealing dubious maneuvers from Uncle Sam.
It is not only more lenient tax laws that have led corporate income tax receipts, as a percentage of gross domestic product, to fall by more than two-thirds since 1966 while proceeds from individual income taxes are roughly the same as they were then. Now with deficits growing, corporate shelter designers are feeling the heat.
There is a risk that the real perpetrators - the Parmalats and Enrons - may try to get off the hook by blaming those who facilitated the crimes. But Parmalat may be right when it argues that without help from some financial institutions, which surely knew they were helping to deceive even if they had no inkling of the extent of the fraud, the fraud would have ended sooner with smaller losses.