Link me to her website, i wish to visit it. Both are valid ways to trade and each has it s own advantages and disadvantages. Sorry, I m not aware of her website. She may not have one as she is a private trader. For those that can t get portfolio margin which is most traders then you can do what she does with es futures. Futures will give you a similar underlying but with margin similar to portfolio margin. Also since 1 es future is 50 instead of 100 contracts you will have more flexibility than spx.
As an example one atm option in es will cost. 8400 to open and only 6700 to hold. spx in reg-t margin will cost about 27,000 and portfolio margin will cost about 10,000 to open. Portfolio margin is still better as you would have to trade 2 es contracts to equal 1 spx but futures margin is still only 30 more than portfolio margin and half that of reg-t. I thought of this but wouldn t the commissions be very high with all those contracts. How about just sell call spread or put spread instead of naked call and put.
Less capitals and less profit, but safer. It certainly is Jeff, I think like to have the higher Theta associated with the naked options but they of course carry much more risk. One important point to keep in mind is that the growth of her assets under management of 100,000 to around 190 million is not purely from trading gains the majority is from new investment from clients. She has stated her annual returns from trading are in the 25-35 range. In 2013 she returned around 28.
She has returned more in years with higher volatility. Of course she s not a fraud, what a stupid suggestion. I don t think she s able right now to deliver those great return. Don t forget that she was trading over 30 stock at the start, and it s easier to deliver big return trading stock like aapl, nflx etc whit a small account Don t forget that selling option while volatility was surging in 2008-2012 should have been really profitable. I think in 2013-2014, she must have some trouble to deliver 2 iqoption blog returns.
But her strategy his great for a big account, i m trying to achieve the same kind of thing. 3 digit return so far this year. karen s strategy works. Is there a way to have your company manage my money. I have 100,000 dollars. Karen the super trader is no fraud. I googled her, found her name and name of the two funds. Her funds file every year with the SEC, all public records.
You can view her 2013 filings. This story certainly comes over as genuine. One issue is surprising to me. That is much of 2008 was a time when the market made major crashes. And yet she claims she started this strategy in 2007. There is no way she could have made money selling naked or even covered puts in such a major down market. Had she reserved her trades to only selling calls maybe.
Buying put options would have been a way to make a huge fortune in 2008 but this is not what she is claiming. 2008 was a tremendous year for trend following systems. Her system is the opposite of that to a significant degree. If not both margins are higher and there is a huge risk with limited reward. Since she claims her approach is conservative presumably the selling of options was hedged. And why can I not find her on searches that give more complete information.
What is her last name. Hi Stuart, I think she is reasonably private. I m not aware of what her last name is. Generated 64K in 6 months. This strategy works. Very volatile. And you can see - 20 or more swings in one day. If it s about put bullspreads and call bearspreads, I can believe something of this story but naked puts are gonna hurt some day. And the fact she s ads to losing positions, it can cause a margin call so she has to close thing and take a loss.
Maybe, at those difficult moments, she asks the investors to add money into the account so she can survive. Maybe the market tried to hurt people like her with the flashcrash some years ago. Another thing that s strange is the fact there s not even one chart or table of her performance. And why she would not give her last name and the name of the funds. I hear a lot of big numbers but just give the facts black on white.
It iqoption blog be great marketing for her. After all, it s not easy to raise money, or is it. This was in the interview. He Basicly people are throwing money at you right. Then a little further she says She Everybody knows how hard it is raising money, it s really hard for me to raise money. So, is it easy or hard. As long as I can t see an equity curve of the fund, it s CRAP and BS. All fair points Kirk. I think until people see her account statements, there will always be scepticism.
I think the key is money management. Be aware she sells on both sides of the market but not necessarily at the same time so although it is a sort of strangle, it is not managed as a strangle. Each side is managed independently. She sells at a delta of around 0. 15 on either side, and waits for a significant directional move in one direction first before selling into that move employing a mean reversion approach. During the crash of 2008, this would have been the best time to do this because the implied vols would have been massive, meaning that a 0.
1 delta at 30-60 days to expiry would have probably translated into strikes being several hundred points away from the current price on the SPX, and would have collected a nice premium to boot. She has explicitly said that portfolio margin is a big factor in making these returns. She also uses weekly options to manage positions. In the recent bull market it has been harder to make the gains as the VIX has been low for a long time. In this case they have resorted to using 50-60 day maturities on the put side and weekly options on the call side or at least less than 30 days.
Thanks for the input Sandman. Yes the VIX explosion in 2008 was a nice time to sell put spreads, as long as you weren t burnt on the initial move down. I think the idea of going out 50-60 days makes a lot of sense as the gamma risk is a lot lower. This is good for retail traders who can t watch the markets all day. The gamma on weekly options is a killer.
Trading the 50-60 options and using weeklies to hedge is a very good strategy. I think there is more than a fair chance she may be a fraud and possibly even an invention of TastyTrade. Any manager worth iqoption blog salt would be happy to provide audited returns, especially if only managing 150 million. Managers typically eager to accept more client money until the fund is so large that it hampers trading and is closed to new investors.
It s also worth noting that nowhere has this woman been interviewed other than TastyTrade even though her story is so remarkable that she would have appeared on several TV shows by now. I apply this strategy and have 85 winners with it but resulting a 1 to max 3. per win only. Karen uses up to 70 of her capital which to my mind is close to suicide. I personally use some single digit amounts. An unexpected 20 decline or even worse a nasty row of small declines with a sudden change in volatility plus spiking interest rates would kill.
Over a 10 years period this is almost sure happening and there is no way out as premiums go up and roll overs not affordable anymore. See Tasty Trade Aug 14 interview with Karen. She uses futures to hedge her positions. She also believes that market circuit breakers will prevent a drop greater than 10 in one day. She also keeps 50 in cash. A hedge can pay more than the loss. With the 50 cash available, she can take advantage of the opportunity that a crash opens.
After a market crash, reverse the hedge. I used this strategy purely inspired by her you tube interview I made 300 in about 12 months trading dax naked puts I failed few months ago when I sold puts and market went more down as a hedge I sold 10400 strike calls market was 8400 at the time after that market reversed up and those f. calls killed me At expiration they were both out of money but margin and stress was too much on calls. Strategy would worked out perfectly if I didnt take calls timing was very bad I was too gready and that hedge payed in the past about 32 a month i ve done it only once and market didnt go up like crazy.
Anyway what I wanted to say is that strtegy works but sooner or later you have to be prepared for some unexpected market moves in any direction and you must have a plan before you take a position. I thought I have one but huge bounce prove me wrong. And it was my hedge strategy that has failed not initial trade if I did not hedge just wait another 3 day I would made anoother 20 a month Good luck traders. Other than smaller sizing most traders over hedge on a draw down and that turns out to be their other biggest mistake.
The whole option market works best as a hedge mechanism or defend defend defend Now we want to make money out of that philosophy. Doable but it requires a different mindset and approach. The best thing to do is give your self a longer time to be correct and maintain the original position and direction. The first thing to realize about this story is that she has not personally generated 100M starting from 100K.
Most of the money she is managing is from investors, so most of the profits are from other people s investments. She is probably generating around 30 a year while taking a lot of risk. I don t know if that makes sense in the long run. Excellent comment Carlos. It s Finance 101 isn t it. The higher the return, the higher the risk you have to take. If she is generating 30 or greater per year, she is taking on a lot of risk.
Hopefully her investors realize that. I watched the Karen Super Trader videos several times last year and believe she is real. Her strategy is along the lines of the Turtle Trader Rules. A few things I got from her video outside of the Turtle Trader Rules are 1. Retail accounts are monitored constantly by Brokers for risk management for the benefit of the Brokers, not for account holders.
For certain TDAmeritrade account size, there will be a human broker assigned to monitor the accounts daily. Must have sufficient capital. Karen keep her accounts 50 or more in non-leverage cash. Each option play is settled 10 days or more before expiration either by high probability of expiring worthless or well hedged so that worst case is a small profit.
Call and Put option plays are treated separate and independent from each other. Option strike price is at least one variation unit out of the money from current price. Put option is purchased with minimum 6 weeks from expiration and Call options are about 2 week minimum from expiration. Trade only Index options to qualify for benefit of the 1256 tax treatment 60 long term 40 short term from trading gain loss of 1256 qualified non-equity options. Need a lot of patience and self discipline coupled with strong risk management to get 15 to 30 percent annual gain.
Karen uses the word harvesting for her trading process. This means her performance depends on the size of market volatility, not the direction. Karen s day job was an accountant, she probably has a better conceptualization for the numbers than the average trader. So far we only know her first name and that is very strange. Where to find her registration information. Auditing information etc. Without that, it is very fishy.
Karen s last name is Bruton. If you manage other people s money with more than 100Myou need get registered with SEC Finra or NFA CFTC. She has made so much money and continues to amass such good returns that she is sharing her wealth through her charitable missions. Look up her name and you will find her website.
Her story is incredible and not for everyone. I don t need to make 100 s of millions i d be happy doubling my account every few years so that I would not need to work for others any longer. I love how humble and simple she is in her approach. But make no mistake, she is no dummy. She knows how to manage her trades without letting emotions get in her way.
My 2cents worth. Every options writer needs to know how to turn a losing trade into a win or a break even. i saw this interview and wish the moderator would shut up and let Karen speak. Does anyone know of a fund or manager that uses a similar strategy but with less risk to manage our funds. she really didn t get to say much and didn t seem to care that the guy just talked away the whole interview. i ve seen him 2 or 3 other times and it s the same thing.
he talks too much. so i really didn t learn much of Karen s trading plan. i know nothing about her and have no opinion but i would have loved to hear specifically what her trading strategy was and her hedge adjustment strategies are to that particular strategy. but i did learn most of her stock investing education was useless. i think she says she trades only indexes and plays to keep ALL the premium.
now how she does this i was never told. low, low delta ICs. wish she was more specific. Read the comments, um so noteworthy points Karen only started with 100k, she made 40k the her first year. The results were so impressive, wealthy clients and others started throwing money at here is a very large way. Within 2 years she had 300million under management and 600 million under management a few years later. That s how successful she was is.
These large trades are not uncommon in the larger indexes. Look at the SPX weeklies on any given day, you can see. 50 days out, there are credit spreads being put on that receive 9-13million in credit against 100-150million BPR or capitol at risk. These trades are easy to spot at SPX right now of 2100 in the 1800-1870 range and 2180-2220 range. These trades are very easy to spot everyday. These are not Karens trades, as she trades naked strangles 100-500 contracts at a time.
To put on Karens trades, you need a counter party, these are large PROP trading companies like Citadel, Susquehanna, and others who have 10s of billions and make markets to facilitate a liquid efficient market place. Most of Karens trades are in the 100-250 contracts at a time collecting. 300k and putting up 1-5million margin, BPR or capitol at risk, however you want to look call it. Then she ll ladder up or down depending on the market moves. She will close iqoption blog trade when she makes 25-50 profit.
When your trading at SPX 1820 puts, your just managing winners. It takes a really severe flash crash or recession for her to have margin callwhich hasent happened in 6 years. She also said she adjust the tested calls or puts at 30 Delta, so that also givesw more room to adjust losing trades if there need be. Great comment Trader QA. Hey lazy trader. you could always buy a call against it. Shorting options is something that can generate positive expected return by with enormous risk I also short options but with careful hedging and I m not making money as fast as her.
Is there any sense in doing an opposite strategy where you sell calls while following the down trend, and sell puts while following the up trend. I would imagine that you would have lower premiums with this type of strategy, but greater success, at least until you hit the point of mean reversion. Yes you could do this. As you said you would have to watch for the mean reversion. Bear market rallies could kill your calls. Well now we don t have to question it anymore. She s a fraud. Read the article below.
i can tell you this, i have been trading OPTIONS ONLY since 1995 and through TOS using portfolio margin since Jan of 2014. AND 80 of what i trade is naked SPX both sides, 10 is NDX and the other 10 is on stock options during earning season. that reduces the margin requirements. the way TD has the risk parameters setif you sell WAY out of the on both sidesyou ll be lucky to get 1-2 mo THATS IT. i had 3 losing months trading this exact strategy since 1998.
for what karen is doing, its taking on way too much risk, im way more OTM, besides there is a bug with the TOS platform, theres a inverse volatility curve on way OTM puts, so as the mkt goes higher the maintenance on the naked puts INCREASES, yeah i know its wrong. yeah its something that i have talked numerous times to the PM team and they all know the issue and no fix is in place. I hate to say I told you.
over a year ago. This incident is self evident of the fact that people who get attracted to Options Selling by the words of so called experts should be on toes before committing any money to be handled. Its much better to be mentored by an expert like Gavin and understand the in out of Options trading and venture out for a consistent income. Rick, if 1-2 per month includes the losses then there s absolutely nothing wrong with that.
Or were you referencing this to the supposed returns Karen had racked up. Sorry if I misunderstood. Speaking of criminal, it s too bad TOS can t get their margining straight. You re not the only one I ve heard complain of that, either. True or not, This is a negative. Just a reminder that if you get to big the government will look at you. Personal Checking Savings Deposits Online Mobile Banking. Access your accounts. Vehicle Loans Personal Student Loans Home Equity Mortgage Loans.
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Precise ID SM scoring models and Knowledge IQ SM interactive challenge-response questions provide innovative and integrated identity authentication and fraud detection on a single platform. Are You A Landlord. These Are Your Legal Rights. While we talk a lot about the rights of a tenant and how to safeguard them, there is other side of the transaction, too.
Under the rental laws in India, there are rights that safeguard the interests of a landlord, too. The Rent Control Act is one important act passed by the Government of India in 1948, post which several states like Delhi, Maharashtra and Karnataka have undertaken modifications to the same. Recently, various ammendments have taken place pertaining to new laws favouring landlords. Whether a first-time landlord or a seasoned renter, here s what you should know about the basic rights of landlords.
The act, however, seen as pro-tenant, also, talks about the protection of rights of landlords. Right to evict a tenant. With the Rent Control Act applicable only to a tenancy of over 12 months, things seemed tougher for landlords to evict tenants living in the property for years. The Draft Model Tenancy Act 2015, which has been in the news recently, aims to make things easier for landlords as well as tenants by addressing untimely eviction, repossession issues as well as mutually fixing and revising the rent.
The landlord also has a right to evict a tenant if he or she requires the building for his or her own occupation. To prevent tenants from overstaying, landlords can also add a clause of hike in rent in the agreement, if the tenant does not leave when the contract ends. Right to temporary recovery of possession. Laws now allow landlords the right to evict a tenant on the grounds of breach of rental agreement; subletting rented premises or a part of it without landlord s permission; default in payment of rent for specified period; misuse of the property; or conducting illegal activities in the rented premises.
A landlord is entitled to obtain possession of the property, in case there is a requirement for him to carry out repairs, alterations or additions to the building, which cannot be carried out without the building being vacated, after which the building will again be offered to the tenant. Or, if the rented accommodation has become unsafe for habitation and cannot be refurbished without being vacated, the landlord is entitled to get possession of the property.
Right to increase the rent. Regulations allow landlords to have an upper hand as far as the collection of rent is concerned. Owners of residential or commercial properties not only have a right to charge rent at market rates from their tenants for taking the premises but also to raise the rent periodically. The Draft Model Tenancy Act is instrumental in creating a balance by bringing the urban rented accommodations under the purview of the formal housing sector.
The Act clearly specifies the period, inheritance, rents payable as well as the obligations of landlord and tenants. In India, the applicable rate of rent increase is around 10 per cent, every two years, for residential properties. But, mostly, there are laws governing this too. For instance, the landlords in Delhi can increase rent only as per Section 6 8A of Delhi Rent Control Act. To be advised of necessary repairs. It is the duty and the right of the landlord to respond to the requests for repairs in a reasonable amount of time.
Minor repairs of the property could be undertaken by the tenant. However, for all major repairs requiring reimbursement, prior permission needs to be taken from the landlord in writing. So, a landlord has the right to be informed about necessary repairs being made to his or her property. As per law, the landlord is under obligation to keep the property in good and tenantable form. But the rent control act provides the provision for both parties to share the financial burden of the repairs.
What the criminal was thinking and what can be done to prevent or uncover similar crimes. In hindsight, it seems obvious Nathan J. Mueller s pilfering of financial services giant ING should have never been allowed to start, much less last as long as it did. Lessons from an 8 million fraud. Finally, the evidence that he was living far beyond his means the expensive cars and watches, the lavish nightlife, the frequent trips from Minnesota to Las Vegas could have raised a few eyebrows among his co-workers, but nobody voiced any concerns for years.
In the end, Mueller embezzled nearly 8. Then, the check his credit card company returned to ING could have exposed his theft in the first year, but the accounts payable department simply returned the check to him. First, it was an accident that gave Mueller, an employee in ING s reinsurance division, the authority to approve company checks of up to 250,000. 5 million from ING over four years and three months. When he was caught, he was sentenced to 97 months in prison a term that he began in February 2009 at the Federal Prison Camp in Duluth, Minn.
His case is noteworthy because of the millions of dollars involved and the length of time that his scheme went undetected and because his scheme was made possible by a breach of controls. Why should anyone care about Nathan J. This article describes the fraud in Mueller s own words and examines the lessons learned with strategies for management on how to prevent and detect similar schemes. THE PATH TO ING. Mueller grew up in a small town in south central Minnesota.
A high school friend remembers that Mueller was popular in school, decent at athletics, and competent at his schoolwork, and that he liked to play rap music pretty loud in his car whenever he could. Mueller attended a private liberal arts college and graduated with an accounting degree in 1996. The friend also remembers that Mueller s family was always on a tight budget and that Mueller didn t like living that way.
He enjoyed the inner workings of accounting systems, and in 2000 he found himself part of ING after his employer, life insurance company ReliaStar, was acquired for more than 6 billion. Mueller played a lead role in transitioning his old employer onto a new enterprise resource planning ERP system. A mistake by his new employer created an opportunity for Mueller to steal company funds. In the next section of the article, Mueller describes the fraud scheme in his own words.
WE OFTEN LOGGED ON AS SOMEONE ELSE. As a part of the changeover team, I became an expert on all aspects of the ERP system including financial reporting, journal entries, and, most importantly, checks and wire payment processing. I was also, by mistake, along with a co-worker, given the authority to approve checks up to 250,000. I discovered this permission quite by accident some two years after the takeover.
Our accounting department consisted of a controller, assistant controller, accounting manager meand three people under me. Together with a co-worker CW and a subordinate SUBI was one of three of us in my division who could request checks. CW and I also could approve checks. In our small accounting department, we knew everyone else s system passwords. This was a practical workaround for when we needed to get something done when someone was out of the office. One morning, while sitting at my desk, I realized that I could log in as someone else, request a check, and then log in as myself and approve my own request.
I went to work every day for the next year tempted by the pot of gold that was there for the taking. We often logged on as someone else to get the job done. In June 2003, my wife was pregnant and my annual 80,000 salary was just not getting all of our bills and college loans paid. I thought that if I just paid off my debts, then we could do quite well with my income matching our living expenses.
I tested my scheme by paying the current amount due on one of my credit cards that had a name that included the word Universal. Just before I left the office late on a Monday afternoon, I logged on as CW and requested a check made out to Universal for 1,100. This check looked normal because we did a lot of business with an insurance company that had Universal as the main part of its name. After the check was prepared, I mailed it with my statement to my credit card company, and the amount was applied to my account without a problem.
For a while I felt guilty and worried. If I were caught, I d lose my job for only 1,100. Two weeks later, I decided to try it again, and my next check was for 1,800. During that summer, I transferred all my other debt balances to the Universal card and kept requesting checks made out to Universal. After 88,000 was paid against my credit card, I was free and clear of all debt, except for the mortgage on our house.
Just before I d cleared all the charges to the Universal card, I noticed that one of my checks for 4,500 had apparently gone missing. It wasn t posted against my credit card account, and it had not cleared the company s bank account. I was worried that something had caused the bank not to process the check or that my fraud had been discovered internally. For a few weeks I nervously looked at my emails each morning scanning the subject lines for words like explanation requested.
Each time the phone rang I assumed that I was going to be called upstairs for a meeting. Then at around 10 on a hot late-August morning, I received one of those brown interoffice recycled mail envelopes in my inbox from our accounts payable department in Atlanta. There was the check. I had forgotten to put my personal credit card number on the check, and so the card payment processors didn t know whose account to credit.
That stopped my 2003 fraud spree dead in its tracks. AFTER THE SCARE WORE OFF. By the middle of our bone-chilling winter, the effects of the scare had worn off, and I started thinking about how easy it was to get that 88,000 bonus. I couldn t help myself. The accounts payable people also didn t know what to do with the check, so they sent it back to me, the check s requester. I wanted to do it again, even though I didn t really need the money like before.
I remembered the missing check scare, and so I now wanted a scheme that bypassed mailing the checks to my credit card company. I chose Ace because our company did a lot of business with another company that had Ace in its name. On a Thursday afternoon, right before I left for the day, I logged on as SUB and requested a check made out for 27,000. I then logged on as myself and approved it. I registered Ace Business Consulting with our secretary of state, got a federal ID number, and opened a bank account at a major bank with lots of branches iqoption blog Minnesota.
I picked up the check on Friday and deposited it in Ace s bank account on Saturday morning. They then mailed the check to the head office address. The teller treated the transaction like any other routine transaction and handed me the deposit receipt showing that the whole 27,000 was available. I still remember her telling me to have a nice day.
Using this method, I stole about 1 million in 2004, 2 million in 2005, 4 million in 2006, and 1 million in 2007. Getting a check was easy because I logged on as CW or SUB and requested a check and then I approved the check. The checks were printed overnight, and it was SUB s job to collect the physical checks every day from the company building next door. I had to make sure that SUB had the day off the next day because, when SUB was away, I was the person who collected the checks.
At my desk I would remove the Ace check from the batch, and all the other checks were mailed off to where they were supposed to go. Normally, I would just wait for SUB to take the day off, and I d request an Ace check the day before. If I needed money urgently, I d give SUB the day off so that I could collect the checks. For every credit to the bank there has to be a debit, and my debits needed to be hidden somewhere. Our payments were usually for insurance claims, commission expenses, various refunds, or an administrative expense.
One of my accounting tasks was to record the investment income of our Canadian investments in U. In 2003 and 2004, I hid all the debits in ledger accounts that had a lot of reconciliation activity, making sure that my debit helped the account reconcile to zero. dollars USD in our U. accounting records. I was supposed to use the average Canadian-dollar-to-USD exchange rate to record the interest income.
From 2005 to 2007, I would calculate the real exchange rate, and then I would purposely weaken the Canadian dollar by a few basis points to understate the USD value of that income. I was the only person who worked on this task for seven years, and because the accounting system had thousands of journal entries and billions of dollars of transactions, my Ace checks remained hidden. For every Ace check there was a deposit to my bank account, and I needed some explanation to spend my money without making my wife or my friends suspicious.
In the beginning I told my wife, friends, and family that I was doing some accounting work on the side. At that time my lifestyle wasn t very different, and so the moonlighting explanation worked fine. When my lifestyle included high-end European cars, costly Las Vegas trips, extravagant watches, and expensive nightclub entertainment, I told people that I was an amazingly successful gambler and I got my extra income from hitting large jackpots on high-dollar slot machines. To do this, I would first wire money down to the casino in Las Vegas, and then I d fly there first class on Northwest.
I d then carry up to 100,000 in cash back home at the end of the weekend with a stack of W-2Gs which report gambling winnings. This gambling success explanation wasn t working all that well after two years and just under 3 million in winnings, and in June 2006 I knew that I had to choose between my wife and my fraud.
It was either come clean to her about what I was doing or get away from her to insulate her from all the consequences coming my way. I knew I would eventually be caught, so I chose divorce. By mid-2007, my fraud had cooled off, and I d only taken 1 million so far that year. LET S DO LUNCH SOMETIME. CW and I were talking about it with my boss in the hallway outside our offices one morning, and we all agreed that since we were all involved in the accounting function, we should not have the authority to approve checks.
We actually revoked our own check approval authority. An internal company review showed that three of us in accounting had check approval authorities, and we all received internal forms that needed to be completed. At an afternoon lunch at Panera Bread in August 2007 they were surprise. talking about depressive, anti-social, hard-drinking, and overweight me.
My ex-wife told CW that she didn t really believe the lucky-at-gambling explanation for my life in the fast lane. CW and my ex-wife became friends while she and I worked together. CW s suspicions were raised, and a few days later she ran a query to list all the 2007 checks that she had requested or approved. The results included 10 Ace checks adding up to 1 million. on Friday, my boss asked me for the supporting vouchers for the Ace checks.
I said that since SUB was off for the day, we should get to the bottom of things on Monday morning. Monday morning s meeting didn t go very well, and I literally ran out of the office. On Tuesday at 10 30 p. It was an unpleasant conversation in which the word Ace was mentioned several times and ended only because I said that I wanted to talk with my attorney.two of the company s fraud investigators rang the doorbell at my home in the exclusive suburbs of Minneapolis.
AN OUNCE OF PREVENTION. Organizations need an effective antifraud strategy to deter and detect employee fraud. These programs should include fraud prevention activities, proactive detection activities, fraud investigation activities for suspected fraudsand the concluding civil remedies and criminal actions.
Effective prevention activities usually involve maintaining an organizational culture of honesty and high ethical standards, assessing fraud risk, and reducing the opportunities to commit fraud. Fraud investigations and obtaining civil remedies are very costly, and it is generally believed that prevention activities are the most economical way to control losses from fraud. This section discusses the prevention activities that might have played a role in preventing the Mueller fraud.
An organization s hiring policy where allowed by law should include past employment verification, a background check, a credit check, and education verification. These policies and procedures should be applied in every hiring instance, including those in which groups of employees are onboarded as the result of a corporate entity acquisition. Mueller found himself employed at a multinational company as a result of a takeover, effectively bypassing any screens that the company might have had in place.
After a takeover, management should be aware that the incoming employees likely will have less loyalty to their new employer than the original employees have. The acquirer should carefully weigh its options when it comes to an assessment of fraud risk and give due consideration to the previously mentioned new hire procedures. Management also should consider subjecting the new employees to a modified, and possibly less strenuous, version of the new-hire procedures.
In Mueller s case, a check of his credit report at that time would have shown that he was financially strapped and under real pressure for extra income, though that might not have been enough to disqualify him from receiving a job offer. IMPORTANCE OF ERP CONTROLS. The Mueller case is a good reminder of the importance of controls related to ERP systems. Authentication controls identify the person accessing the accounting system and ensure that only legitimate users can access the system.
These controls include passwords, smart cards, and biometric identifiers. In Mueller s case, the authentication controls failed because he effectively impersonated either SUB or CW. His fraud could have been prevented if the company had used multifactor authentication, perhaps by requiring both a password and a smart card inserted into a card reader. For two years, Mueller didn t even know that he had permission to approve checks. His approval limit of 250,000 was also excessive.
Authorization controls restrict the access of authenticated users to certain classes of information and capabilities. The ability to request and approve high-dollar checks, in part, facilitated the fraud. Processing controls ensure that data is processed correctly and, by implication, that obvious errors are not processed. The Mueller fraud was made possible, in part, by the fact that he could keep his fraud concealed by posting the debits to a ledger account of his choosing effectively journalizing his own fraud.
A control weakness related to physical safeguards was that the requesting and authorizing employees had access to the printed checks after they were printed. Employees who can request or approve payments should not have access to the printed checks. This control is also important in claims processing centers that, for example, process health insurance claims or tax refunds.
Good business practices together with the risk of fraud provide suitable reasons to avoid situations where just one or two people understand the whole system and where one or two people are responsible for reconciliations and write-offs. Because Mueller could control the ledger accounts that were debited, he could keep his scheme undetected. This case shows the importance of the separation of operational responsibility from recordkeeping responsibilities.
It is difficult to avoid the complexities and volume of transactions that come with being a multinational financial services company. The elements of the fraud triangle include pressure, opportunity, and rationalization. As a fraud prevention measure, organizations should have employee support programs in place to assist employees struggling with addictions, mental and emotional health, and family and financial problems. Extensive personal debts and a new child provided the pressure for the first phase of the fraud.
A POUND OF CURE. The main steps in the process are data collection; data cleansing; running the analytics tests; and evaluation, investigation, and reporting. The largest subsets growth test is based on the fact that people escalate their frauds at a much more rapid pace than what would be considered normal. The use of forensic analytics would have raised alerts with respect to the Ace vendor.
Forensic analytics is the act of obtaining and analyzing electronic data using calculations and statistical techniques to reconstruct, detect, or otherwise support a claim of embezzlement or other financial fraud. They also don t know when to stop. A fraudulent vendor often shows explosive year-over-year growth. An employee using a company purchasing card for personal expenses often has geometric growth in total purchases.
An employee with a fraudulent overtime scheme also often shows high growth in hourly totals, perhaps even to impossible levels. Running a computer-based test to review the vendors with the largest annual growth in total dollars would have shown that Ace s dollar growth was abnormally high and suspicious. People at work saw and heard that he was living the high life.
Mueller s lifestyle included expensive cars, trips, watches, and nighttime entertainment. Fraud awareness training reminds employees at all levels in the organization that fraud is real and that it could be happening in their departments. A co-worker living beyond what his or her salary should allow is a classic red flag for fraud. From early on, co-workers were aware of my trips to Vegas, my gambling, and my car, Mueller said.
As time went on, they would have noticed more and more things I had, and that should have sparked questions about where all my money was coming from. It was a relatively simple query that highlighted the Ace checks. Mueller was eventually caught because of suspicions of fraud, but it was more due to a coincidence than anything else. Frauds are often discovered by tips, and to benefit from this detection avenue, organizations need to make available to employees an anonymous fraud reporting channelsuch as a third-party hotline.
Had suspicions been raised as a result of fraud awareness training, this fraud could have been stopped as early as 2004. The fraud would have been discovered in 2003 if the accounts payable people had looked more closely at the 4,500 check that was returned to them. A financial institution returned a check to the company saying that it didn t know what the payment was for. It should have seemed odd that a credit card company was being paid with a single check for a single account.
One detection tactic would be to have all abnormal interactions with outside parties e.