Teen Trader Dupes Journalist; It Happens To Auditors All The Time

Everyone wants to be a successful trader, even shy-looking high school seniors. Mohammed Islam, “Mo”, a 17-year old student at Bedford-Stuyvesant High School in New York had been featured in website Business Insider’s profiles of 20 such teens in a 20 Under 20 list for Finance while still a junior. He founded his school’s chapter of Leaders Investing Club, which has a Facebook page, and pens a blog (which he hasn’t updated recently).

The investment club is emblematic of a trend, highlighted by The Guardian’s Siri Srinivas, of teens fixated on investing instead of on the kinds of things I was interested in when I was 17–18 — football games, fast cars, and the opposite sex.

[Leaders Investment Club] counts among its top members other boys (and a few girls) like Islam who spend after-school hours on trading and count star investors such as Tudor Jones and Warren Buffett as their heroes.

“Mo” took quite a few people for a ride with his stories until it all broke down last week. Successful simulated trading, “paper trades”, suddenly became $72 million made trading oil and gold futures when he told his story to Jessica Pressler of New York Magazine. It was all a hoax.

The Guardian’s Heidi Moore, with independent investigative journalist Roddy Boyd, outlined all the ways everyone involved should have spotted the fish story. Basic restrictions on minors having brokerage accounts and lack of banking connections, wild exaggeration and the mathematical impossibility of the huge numbers being touted, and the vague nature of many of his claims including an obvious explanation of when and who paid the taxes on the gains should have raised serious doubts long before Pressler’s story got anywhere near print.

The Guardian reported that Islam showed Pressler and a New York magazine fact-checker a fake JPM Chase bank statement to back up his results. I found that to be the most intriguing part of the story.

As part of the research process, the magazine sent a fact-checker to Stuyvesant, where Islam produced a document that appeared to be a Chase bank statement attesting to an eight-figure bank account,” the magazine said in its statement. The author of the profile also said she saw a bank statement.

The boy’s spokesman now says that’s not true.

“Seventeen-year old boys don’t always tell the truth. Is that a mystery to anyone whether they are a reporter or not?” Ronn Torossian, a spokesman for Islam and his partner, Damir Tulemaganbetov, told the Guardian when asked if Islam provided falsified bank statements to the New York magazine reporter. “My client maintains that there were never bank statements of any sort shown to any reporter.”

In a Guardian story the same day by Jana Kasperkevic, the Guardian says Islam contradicted his spokesperson’s excuses when he admitted the hoax to the New York Observer. (Another story on December 20 by Heidi Moore and Jana Kasperkevic is even more detailed.)

At roughly the same time Torossian provided that statement to the Guardian, his client was speaking to the New York Observer, admitting that he created a false piece of paper meant to imitate a bank statement:
“New York magazine wanted a document, and I showed them what they wanted to see”, Islam reportedly told the New York Observer in the offices of Torossian’s firm. Islam told the Observer reporter he met Alex Yablon, a fact checker at New York magazine, “for maybe 10 seconds or so” and showed a single sheet of paper that he had doctored to prove what was in his bank account.

Although giving fake bank statements to an auditor is a federal crime, fooling a journalist with mock-ups is probably not. Dan Collins is a partner at law firm Drinker Biddle and a former Assistant United States Attorney for the Northern District of Illinois for 10 years where he investigated and prosecuted a wide array of white collar crimes including bank fraud. He told me:

“I doubt any prosecutor wants to spend time making a federal case out of a prank.”

New York magazine now says, “We were duped” and issued an apology to its readers over the hoax. The New York Times reports:

In its apology on Tuesday, the magazine said it had been shown a document “that appeared to be a Chase bank statement attesting to an eight-figure bank account.”
Despite that, it said, it was simply duped. “Our fact-checking process was obviously inadequate; we take full responsibility and we should have known better.”

It is tough to spot fake documents — for example bank statements, brokerage statements, bank confirmations used by auditors to verify bank balances and auditors’ reports themselves. Fake documents have played a significant role in some very big frauds in recent years.

Even experts like the global audit firms, paid billions by clients to “trust but verify”, have been “duped”.

An American Banker article in 2009 talks about an SEC enforcement order against Chicago firm Canopy and its co-founder Jeremy Blackburn:

[Which] induced investors between October 2008 and August 2009 to purchase preferred placement shares after giving them false financial documents “misrepresenting…Canopy’s financial condition.”… The false documents included 2007 and 2008 financial statements from KPMG, and a fake bank statement that claimed the company had $8.9 million on hand — “when in fact it was a custodial account of a Canopy client that held approximately $86,952.”

The CEO of Peregrine Financial Group (PFGBest) a futures brokerage, was sentenced to 50 years in prison and ordered to pay restitution of $215.5 million for stealing his customers’ money during a twenty-year fraud. He handed the auditor, a one-woman firm, fake bank statements and fake confirmations of the balances from his bank to back up his financial statements.

(He could have just bought the fake statements online.)

Even Big Four audit firms are duped. Reputation doesn’t matter anymore. There’s no shame in admitting to their professional stupidity to reduce the liability for frauds. Deloitte was “duped” by Parmalat and PricewaterhouseCoopers (PwC) was “duped” by Satyam — two recent cases that resulted in multimillion-dollar settlements and regulatory sanctions paid by the audit firms.

In the Parmalat case where audit firms Deloitte and Grant Thornton were fooled, fraudster executives faked a US$5.25 billion balance in a Cayman Islands bank account. In the Satyam case, PwC believed the Indian firm had an extra billion in a bank account that turned out to be non-existent. During their audit, PwC auditors asked Satyam’s criminal executives, instead of the bank, to confirm the fake balances.

Bernie Madoff faked just about everything to accomplish his multi-billion dollar fraud — bank accounts, clearing house balances, customer and account statements and all the trades. His accountant was complicit in the fraud but the Big Four auditors of the feeder funds that invested in Madoff never checked any of the documents themselves.

Floyd Norris at the New York Times reported in 2011 on Longtop, one of the first Chinese frauds of the recent spate of frauds coming out of that country.

Deloitte, which had given clean audit opinions to Longtop for six consecutive years, apparently was well on its way to providing a seventh, for the fiscal year that ended March 31. But for some reason — Deloitte did not say why — the auditor went back to Longtop’s banks last week to again seek confirmation of cash balances.
It appears Deloitte sought confirmations from bank headquarters, rather than the local branches that had previously verified that Longtop’s cash really was on deposit. And that set off panic at the software firm… A month earlier, Deloitte resigned as the auditor of another Chinese company, China MediaExpress, in part because of questions about bank confirmations.

It turned out the Chinese bank branch was in cahoots with Longtop. Longtop’s stock went to $0.

Fraudulent bank balances have been a prominent feature of frauds at the Chinese companies that were listed in the Us via reverse mergers. (Longtop was a traditional IPO with Goldman Sachs, Deutsche Bank and Morgan Stanley backing it.) Activist investor Carson Block currently alleges NQ, a troubled Chinese company originally audited by PwC , is faking bank statements to support non-existent bank balances.

Whether because they are “duped” or knowingly complicit, professionals frequently miss fakes. Purchasers of “journalism”, and audited financial statements, should bring a healthy dose of skepticism to any story that seems too good to be true.

Caveat emptor.