Puzzle vs. Mystery

Business gurus Malcolm Gladwell and Chris Anderson have been in a bit of spat lately. They both put out books this year. Gladwell reviewed Anderson’s in the New Yorker. Anderson responded. Those of us with too much time on our hands and a cheap or free medium to express ourselves put in our two cents. Though not as cool a brawl is as Salman Rushdie vs. John le Carré or even Jay-Z vs. the Game, it does give me an opportunity to bring up an old Gladwell article of that’s a good read for investigators.

My favorite Gladwell article – fraud-related – is “Open Secrets—Enron, intelligence, and the perils of too much information.” In it, he discusses the difference between solving a puzzle and solving a mystery: In a puzzle, you need one more key piece of data to figure out an answer; with a mystery, you have too much data and must interpret it to find the outcome. He uses Enron as the example of a mystery, in that the company’s malfeasance was available in public records. Enron wasn’t hiding its accounting fraud, other than trusting that the excess of data about its operations would obscure the true actions behind them.

It’s a compelling construct for an investigator. Are you looking at a puzzle or a mystery?

I had minor beef with the article. Gladwell leaves the reader, or at least this reader, believing that there is as clear a way to solve mysteries, as there is to solve puzzles. I think a mystery is ambiguous and conclusions about a mystery are chock full of opinions.

To look at a modern case of fraud— the Madoff case was a mystery. The Madoff whistle blower, Harry Markopolos, didn’t stumble upon some sort of internal Madoff documents that proved the fraud. He did a detailed analysis based in part on fact-finding but mostly on his knowledge of finance and investing. He relied on financial models. Financial models are based on assumptions. Markopolos was solving a mystery and using opinions to do it. (More on this in a following post when I’ve got these ideas a little better organized).

Anyways, back to Galdwell’s article. The article ends with a discussion of a paper about Enron written by a group of Cornell MBA students for a finance class. The students made the argument that the company stock was overvalued back in 1998—several years before it finally collapsed. Gladwell wrote, “there were clear signs that ‘Enron may be manipulating its earnings.’ ” If anyone had bothered to read the 23-page paper, which was posted on the school website, they would have known there was something wrong with Enron. It was the amount of information and the ability to process it that mattered.

As with any mystery, there is no clear-cut conclusion. The students made a great analysis that also happened to be right. They did it using tools that are subject to interpretation. For example, the students used the Beneish model, which uses financial ratios and variables to determine if companies have manipulated earnings. Enron’s score was higher than the standard, which pointed to possible manipulation. This, by itself or with any of the other ratios or models used by the students, did not prove the case. Beneish himself says that, while the model is useful, “it can classify a firm as a non-manipulator when it manipulates and it can classify a firm as a manipulator when it does not manipulate.”

Classifying fraud as either puzzle or mystery is a good place to start. But when you have a mystery there is no certainty, it’s all just opinion until you do get your hands on the same facts that you need to solve a puzzle.


Ben Stein steals your money

I know it. I’m a bit of a leech when it comes to the blog entry; I riff shamelessly off of other blogs. That said, I think I’ve got something to add to the story of Ben Stein’s descent from New York Times windbag to douchebag to scumbag.

As Felix Salmon discusses in his blog, Stein is shilling for a new website, freescore.com (also freescore.tv), that is running a “predatory bait-and-switch.” Freescore provides a “free” credit report, and then charges $29.95 per monthly for not doing so much else. I wonder what the FTC has to say about charging for a credit report when the Fair Credit Reporting Act requires the credit rating agencies to hand it out once a year via annualcreditreport.com.

To use some horrible business-speak, here goes my “value add” to the story:

Not shockingly, the company that owns freescore.com, Vertrue Inc., has a history of deceptive business practices. For years it has been figuring out creative ways to gain access to credit cards to charge monthly fees with the hopes that victims won’t notice. If a victim does notice, Vertrue makes them jump through hoops to get the monthly fees removed.


Freescore.com’s registration with the US Patent and Trademark Office lists the owner as Adaptive Marketing LLC. Freescore.com is also listed as an Adaptive Marketing product on its website. Adaptive Marketing is listed as Vertrue company on its website. Adaptive Marketing was the registered owner of the website freescore.com from at least April 2008 until sometime in late June 2009, when the registrant changed to Corporation Service Company of Yarmouth, Nova Scotia. I’m not sure why that would be.


Vertrue started out life as CardMember Publishing Corporation in the late ’80s. In 1996 it changed its name to MemberWorks Incorporated and then again in 2006 to Vertrue Incorporated. It went public in 1996 and then was taken private again in 2007.


So just to start with, take a look the Better Business Bureau report on Vertrue. BBB is a fairly conservative organization, and it gives Vertrue an “F”! BBB received more 2,595 complaints against the company.

Complaints reported to the Bureau primarily involve claims of unauthorized charges by the Company’s affiliates. In such cases, customers reported no recollection of having agreed to the programs that were billed to their credit card, debit card or bank account. In some of the cases, consumers reported being charged for two or three years.

In 2000, when Vertrue was still called MemberWorks, it settled a case brought by the New York Attorney General. MemberWorks offered a free 30-day trial membership in discount programs. It then charged the victims a $144 annual fee without their knowledge.

At about the same time, according to the FTC,

. . . Minnesota, New York . . . , Nebraska, and California—have obtained either an Assurance of Voluntary Compliance (“AVC”) or a court settlement with MemberWorks. Nebraska obtained an AVC in February 2001 that applies nationwide. The AVC requires MemberWorks to provide refunds to consumers alleging unauthorized charges and includes detailed conduct provisions applicable to MemberWorks’ marketing of membership programs.


Vertrue received a request in May from the Senate Commerce Committee regarding its billing practices. It’s the same old Vertrue story—monthly charges on a credit card unless the dubious subscription is canceled.

In January of this year, a civil case was filed in Cuyahoga County Court of Common Pleas against Adaptive Marketing and Vertrue. The case made its way into federal court as a civil fraud case, Smith et al. v. Vertrue Inc. et al., in U.S. District Court in Cleveland, and is now listed as Vertrue Inc. Marketing and Sales Practices Litigation case number 09-vm-75000-PAG. It remains to be seen what will happen with this case, but the complaint tells the usual story of no permission and monthly fees etc.

For the obsessed there are also these cases here, here and here.


So the co-founder, CEO and president at Vertrue lists on his LinkedIn profile that he has a Harvard MBA. He probably should have taken Harvard’s new MBA oath.

And Ben . . . WTF? Did you really need the money that badly? I hope the NY Times drops you over this.


Goodbye Mr. Stein.

Science for investigators

I recently found the podcast/radio program Radiolab through a post on The Baseline Scenario.  It’s a great science show with similar production to This American Life.  For investigator types,  this show (on deception) and this show (on forensics, archeology, genealogy, and genetics) are a lot of fun.

Does Goldman Sachs do due diligence?

I’m commenting again on something Matthew Goldstein posted a couple of days ago. Apparently, Sergey Aleynikov (aka Serge Aleynikov), an IT professional and former employee for Goldman Sachs, stole the company’s trading software to sell to a foreign company. Take a look at Goldstein’s posts here and here and Zero Hedge’s post here for the details.


Goldstein says he found Serge Aleynikov  “on the social networking site LinkedIn (the difference in spelling of the first name could not be immediately explained).”

It seems pretty likely that the Serge Aleynikov Goldstein that is found on LinkedIn and the one charged by the government are one and the same.

1. The ages match up. The Sergey Aleynikov in that was in Bureau of Prison’s custody is 39 years of age (for those interested, he is currently housed at the Brooklyn Metropolitan Detention Center). The Serge Aleynikov on LinkedIn started his associate of applied mathematics at the Moscow Institute of Transportation Engineering (MIIT) in 1987. This would put him at around 17 when he started this degree. A website run by an Israeli programmer John Neystadt lists Sergey Aleynikov as graduating from MIIT in 1992 along with photos that look to be the same person from the LinkedIn page.

2. Company records and lawsuit filings indicate that Sergey and Serge are the same person. LinkedIn lists Serge Aleynikov as the President and Senior Technical Director at Orbit Communications and Networking Dimension from 1996-98. In 1997, Merv Griffin Productions sued Networking Dimension Corporation, along with Sergey Aleynikov, Vadim Resyev, Leonid Ivanutenko and CIS Development Foundation Inc. in US District Court, Central District of California (civil case number 97-cv-08408-AAH-RC) for trademark infringement.

Networking Dimension was a New Jersey corporation from 1995 until it was suspended in 1998. In New Jersey corporate records, the company’s incorporator is listed as Alexsandr Bondarev (sic) and its agent as Serge Aleynikov. Alexander Bondarev is listed as the Chairman of the Board for CIS Development Foundation. I have not seen the original complaint, but according to The Pitch, the lawsuit claims that Networking Dimension operated an infringing online version of Wheel of Fortune at www.fortune-wheel.com. According to The Pitch, the registered domain owner was CIS Development Foundation. The Pitch notes, “The defendants made no effort to defend themselves, failed to appear in court, and in January 1998 were permanently enjoined from further infringement of the Wheel of Fortune copyright.”


The Pitch also claims, in a further twist, that CIS (where Serge worked which was sued along with Serge’s company in the Wheel of Fortune case and whose chairman was the incorporator for Serge’s company) is connected to Express Shipping Service, which was named as an organized crime front in an alcohol smuggling case both here and here. Express Shipping Service, Inc. of New Jersey was registered as a corporation in 1993-2005. Its mailing address was listed at the same building as Networking Dimension (Serge’s company), though Networking Dimension also listed a suite number. Its incorporation paper work lists its president as Mikhail Dyakovetsky. In a Federal Registrar report for 1997 (www.gpo.gov/fdsys/pkg/FR-1997-11-19/pdf/97-30404.pdf), Leonid Ivanutenko was listed as an officer (remember, he was also sued in the Wheel of Fortune case). A Mikhail Dyakovetsky was charged with conspiracy to defraud the United States and obstruction of justice. The case was filed in US District Court for New Jersey (case number 01-cr-00350-WHW-1). Dyakovetsky is now deceased. A Leonid Ivanutenko was also charged with conspiracy to defraud the United States during the same time period as Dyakovetsky. His case was also filed in US District Court for New Jersey (case number 00-cr-00259-WHW-1). Both plead guilty, and Dyakovetsky’s case was eventually dismissed because of his death while Ivanutenko received probation.

I’d be curious to know if Goldman Sachs knew anything about this (potentially tenuous) connection to dubious activities. At the very least did they look into it at all?

Stanford CFO to cooperate

Stanford’s CFO, who has also been charged along with Sir Allen in the Ponzi scheme, will be cooperating with authorities, according to the FT.

It’s been a while (and there’s been a Supreme Court decision) since I really understood how sentencing of cooperators works in US federal courts. If I remember correctly, the CFO will plead guilty to charges that get him the worst possible sentence he could get. After he has cooperated with the government but before he is sentenced, the government will file a 5K motion for a downward departure from the mandatory minimum sentencing guidelines. A cooperator can go from a mandatory life sentence to a year or even less. For a while there, judges could not give a sentence below the mandatory minimums without a 5K. This shifted a lot of the power for sentencing to the prosecutors. For a cooperator, it can be a lot of pressure to say what you think the prosecutor wants to hear.

If all goes right, the prosecutor will have the right incentives to get the cooperator to tell the truth and not say what conveniently fits in with the rest of the case. I’m guessing that in this particular case there is probably a fairly decent paper trail to corroborate anything the CFO has to say.

Stanford, Kroll and “reputational self-due diligence”

(updates at the bottom of the post)

In the new Vanity Fair article about Allen Stanford, there is a reference to Kroll, an investigative/professional services firm. If you are not familiar with Stanford, he was recently charged for a several billion-dollar ponzi scheme.  Both the Vanity Fair article and one in the New Yorker (which focuses more on Stanford’s cricket connections) are worth a read. Yes, he did sponsor a cricket team called the Stanford Superstars.  He also, oddly enough, invested some of his clients’ money with Bernie Madoff.

Kroll makes an appearance in the Vanity Fair article for being hired to interview/ vet a one-time Stanford employee, Lawrence DeMaria, who was hired to write speeches for Stanford and “supervise internal publications.” But they are also named in the “VF Notes” on the Vanity Fair website, which alleges that they were hired by Stanford to “fight back against anyone who questioned his integrity.”  Stanford apparently spent millions with Kroll to figure out “who was looking at him” and to conduct a defensive “propaganda campaign.”

I am hesitant to make any real judgments about Kroll’s dealings with Stanford.  Clearly there was nothing wrong with vetting employees for the company, but the allegations made in the “VF Notes” are a little troubling.  I’m sure if I thought law enforcement and civil regulators were unfairly targeting me, I’d want someone like Kroll to argue my case. But using lobbying, public relations and investigation in concert is a strange—and possibly toxic—blend.

I’d argue that a publicly traded investigative firm is more likely to lose perspective and find itself in a gray area, because it faces the pressures and the misaligned incentives inherent in all publicly traded companies. What is good for an employee may not always be good for a stockholder, and what is good for a short-term stockholder may not be good for the future of the company or society as a whole—as we have seen recently with publicly traded investment banks.  (There are a couple of good comments in the financial world that explain this issue much better than I ever could. Look here and here.)

A publicly traded investigative firm requires major cash flow to operate. I am sure the managers face constant pressure to grow net income for the shareholders. When a company’s business is to gather facts and analyze information, it puts it in a position to manipulate the regulatory system. The less pressure to do so, the better for society.

With a private company, and specifically an owner-operated firm, management is not beholden to shareholders and they don’t have to constantly show profit growth.  This is not to say that private companies don’t do bad things, they just have different, and possibly lower, incentives to offer questionable services.

A couple of other things relating to the Vanity Fair article:

I first learned of the Kroll connections by reading Felix Salmon’s blog. Salmon quotes additional information from the “VF Notes” page that appears to have been removed from the Vanity Fair website or is in some place I can’t find. Salmon quotes additional information from what I assume to be the “VF Notes” section. His post says he learned of this from a post from his colleague Matthew Goldstein.  To make this more confusing, it is Goldstein’s post that links to “VF Notes” section. I can’t find what Salmon appears to have quoted in “VF Notes.” If this info was removed, I wonder why? (see an update/ correction below)

Also, I noticed one of the comments at the bottom of Felix Salmon’s posts about Kroll and Stanford lists the website for “Stanford Group Information.” The website was registered on June 4th by Margaret Fang of public relations firm Qorvis Communications.  The subject header for the website lists: “This website will provide information and updates regarding the Stanford Group.” The media contacts for Stanford Group Information list Qorvis partner Don Goldberg and Qorvis managing director Karen Hanretty.  The website appears to be posting legal filings for the Stanford case. I wonder who is paying for this site and why?


Update 1:

All the references to Kroll, including the bits about “reputational self-due diligence” quoted by Salmon, all appear in the physical version of the Vanity Fair article.  It just looks like a couple pages of the physical article were skipped in the online version–possibly accidentally.

Update 2:

The first two Stanford related lawsuits have been filed against Kroll.  See here and here.

Update 3:

I noticed this article when I was searching the FT to find the reference to the two cases filed against Kroll. Obviously, Kroll is a large organization but still . . .

I’m amazed by the way people were taken in by Sir Allen,” says William Brittain-Catlin from Kroll, the risk consultancy, and author of Offshore: The Dark Side of the Global Economy. “There’s so much stuff out there that any one who wanted to do a cursory check would have seen. Various allegations have been flying around for years.

Update 4:

Apparently  Kroll went in for a helping of conflict of interest too according to Business Week via the Daily Caveat.

Update 5:

The FT got it wrong, it was two complaints and not two lawsuits against Kroll (see here).

Also, I started reading William Brittain-Catlin’s book and its good. Check out this article by him here.

Finally, Vanity Fair fixed the online version of the article so everything including the “reputational self–due diligence” is there.

Click Fraud

The New York Times wrote earlier this month about Microsoft’s click fraud civil suit. According to Microsoft’s complaint, click fraud or pay-per-click fraud “is an industry term used to describe a type of internet crime that occurs in PPC  (“pay-per click”) online advertising when a person, automated scripts, or computer program imitates a legitimate user of a Web browser by clicking on a sponsored site for the purpose of generating a CPC (“cost-per-click”) without having actual interest in the target of the sponsored site’s link.”

In this case, the defendants allegedly worked for companies with low rankings in the sponsored links section for Microsoft’s Live search. The defendants made it look as though hundreds of people were searching the same keywords on Live in a very short period of time, which exhausted the advertising budgets of the highest ranked advertisers and allowed the defendants’ clients to move up the list.

Advertising with sponsored links is less expensive and more targeted than traditional ads, but cases like this one show that the time, place and price of the ad are less controllable and the whole process can clearly be manipulated.