Roddy Boyd presented on identifying corporate fraud through investigative reporting. He discussed looking for logical inconsistencies in companies' claims, the importance of cash flow generation over time, being wary of companies experiencing manias or fads, and scrutinizing related party transactions and executive perks for potential self-dealing. The key is to question unusual situations, compare companies to peers, and identify discrepancies between what companies say and their underlying financial realities.

1. Title Slide
If You See Something, Write
Something
Roddy
Boyd,
founder
Southern
Inves3ga3ve
Repor3ng
Founda3on
SABEW
conference,
Bal3more,
Md.,
March
27,
2014

2. Boyd
Roddy
Investigative reporter and founder of the
Southern Investigative Reporting Foundation.
He has worked for Fortune Magazine, the New
York Post,The New York Sun and Institutional
Investor News; founded The Financial
Investigator website; and wrote "Fatal Risk," on
the collapse of AIG.
An independent nonprofit, SIRF provides
document-driven investigative and
accountability reporting on publicly traded
companies.
Twitter: @boydroddy
Web: SIRF-online.org

3. 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 profit.
One definition:
“Business fraud is, very simply, fraud
in any business activity that resorts
to deceitful practices to cause
economic injury.”
-- Cochran law firm (plaintiffs’
attorneys)

4. Things That Make You Go Hmmm
• Logic Leaps
• Cash is King
• Manias of the Moment
• We Take Care of our Own
Image:
Wikimedia.org

5. Logic Leaps
Save Suspension of Disbelief For The
Movies
Does What They Say Make Sense?
• Spectacular Results
• Taking on Entrenched Competitors
• What The Hell?

6. 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

7. Dancing With The Big Boys
• Watch for WCOM: Fast Rising in Brutal Industries
• How Come No One Thought of it Before?
• Are Independent Experts Wowed or Impressed?
• Common Sense: Killing a King Ain’t Terribly Easy

8. 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

9. 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

10. 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

11. Manias and Fads
Companies in Manias are definitionally 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

12. Look for incongruities

13. We Take Care of Our Own
• Related Party Transactions
• 10-Ks and especially Proxy (Def-14A) filings
• Why have an RP for SOP deals?
• Major red flag: RP receivables
• Don’t sweat a relative (usually)
• Look for “once removed” RPs, like real estate
• Hidden RPs: board consulting deals

14. Son of Related Parties: Perks
• Rank Excessiveness
• Hidden Comp: Well into six figures 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