A.E. Feldman Blog

A federal judge rejected Bernie Madoff’s plea for leniency Monday, sentencing the 71-year-old to spend the rest of his life in prison for an “extraordinarily evil” fraud, according to the AP. The report notes that U.S. District Judge Denny Chin cited the unprecedented nature of the multibillion-dollar fraud as he sentenced Madoff to the maximum of 150 years in prison. Madoff pleaded guilty in March to a massive fraud, in which he paid off old investors with money from new clients. Prosecutors had identified 1,341 Bernard L. Madoff Investment Securities account holders who collectively lost more than $13 billion.

Meanwhile, New York hedge-fund manager Edward T. Stein pleaded guilty to running a $30 million fraud, according to Bloomberg. Stein, 59, recently admitted to four counts of securities fraud and one charge of wire fraud. The report adds that Stein faces as much as 19 years and seven months in prison.

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Transfer pricing - complex arrangements companies use to allocate costs and revenue between operations in different tax jurisdictions - has steadily become one of the top concerns of the IRS. The agency was recently handed a victory in a dispute with Xilinx that could have far reaching implications for other multinational companies that use transfer pricing.

In the decision, the U.S. Court of Appeals for the Ninth Circuit reversed an August 2005 ruling by the U.S. Tax Court concerning Xilinx’s cost-sharing agreement with its Irish subsidiary, Xilinx Ireland, according to the WSJ. The report states the dispute concerned a transfer-pricing arrangement that Xilinx had set up in which it allocated part of its R&D costs to the Irish subsidiary, but kept the entire value of its stock option deductions for its R&D employees in the U.S. None of the deductions were allocated to the subsidiary in Ireland, where corporate income-tax rates are significantly lower than in the U.S., thus lowering Xilinx’s global tax burden.

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Corporate bankruptcies are on track to hit a record high this year. There have been 100 public company bankruptcy filings during the first five months of this year, just shy of the 2002 high for the same time period, according to BusinessWeek, citing research from BankruptcyData.com. The American Bankruptcy Institute (ABI) also reports that business filings surged nearly 65% in the first quarter of 2009. Recent research from the Bain Corporate Renewal Group also predicts an unprecedented surge in U.S. corporate defaults this year with continuing high levels through 2010.

Now, as the number of Chapter 11 filings and corporate defaults continues to grow, executive search firm, A.E. Feldman, is already seeing a surge in demand for candidates with expertise in bankruptcy, crisis management, restructuring and valuation. A.E. Feldman’s CEO, Carol Schwam, says, “Accounting firms and other specialty advisory firms are looking for experts who can consult businesses on bankruptcy and restructuring.” Job opportunities exist for professionals with CPA, CIRA, CTP or CFA certifications.

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The Obama administration is launching its biggest plan yet to combat health care fraud. The U.S. Department of Health and Human Services (HHS) and U.S. Department of Justice (DOJ) recently announced the creation of a new high-level task force with the aim of detecting and preventing health-care fraud, which costs the U.S. billions of dollars every year. Meanwhile, research from the World Privacy Forum shows that medical identity theft has become deeply entrenched in the health care system, and reported cases continue to rise.

In today’s economic climate corporations, organizations or governments can not look at security (including physical security as well as IT or data security) as something that will be implemented after something has transpired, according to one corporate security expert consulted for this article. Rather, they must be keenly aware of what is out there to protect their people and their assets– especially during times of economic turmoil. Facing the growing threat of fraud and its costly consequences, executive search firm, A.E. Feldman, reports that corporations are increasingly looking to corporate security experts for fraud identification and prevention. The recruiting firm is already addressing this growing need and is currently working with the industry’s leading fraud specialists.

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The world of tax is changing and indirect taxes are at the heart of this change. Over the coming years KPMG says more jurisdictions throughout the world will introduce VAT/GST regimes (the current total is 135 and rising), and there will be an increased focus on protecting and broadening the taxable base on which VAT applies. In fact, KPMG’s April 2009 Global Indirect Tax Brief argues that one way governments and tax authorities will raise additional tax revenues is to focus on measures to broaden and protect the domestic indirect tax base, coupled with increased levels of penalties for non-compliance.

VAT is a billion dollar tax for many organizations. There is no disguising the vast amount of money tied up in VAT/GST. Thus, it may come as no surprise that investment in talent and technology are also key priorities for effective VAT management, according to the KPMG. The trend may be one reason why demand for global tax professionals is strong. Executive search firm, A.E. Feldman, says that international tax jobs remain hot right now. Firms are competing for experienced candidates who can navigate the intricacies of statutory reporting and tax compliance, forge cultural and political alliances, and create key operational strategies while mitigating risk. A.E. Feldman’s President, Mitch Feldman, says professionals who are able to master the global aspects of business are in high demand.

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One of Orange County, California’s highest-profile luxury resorts, the St. Regis Monarch Beach Resort, is scheduled to be auctioned off on July 7^th, according to the Orange County Business Journal. The report states an affiliate of New York-based Citigroup Inc. is moving to foreclose on the 400-room hotel which opened in 2001. The hotel is currently owned and run by Newport Beach-based Makar Properties LLC, in a partnership with a unit of San Francisco-based hedge fund Farallon Capital Management LLC. Amid the recession, the report adds, the St. Regis was unable to maintain high occupancy levels particularly due to cutbacks by corporate-sponsored visitors.

The St. Regis is just one example of how the overall auction industry is thriving amid a slowing economy. In fact, the National Auctioneers Association (NAA) recently announced that in 2008, approximately $268.4 billion in goods and services were sold at auction in the U.S. Executive search firm, A.E. Feldman, reports that as the number of assets changing hands continues to increase dramatically, demand for talent is mounting. The firm’s President, Mitch Feldman, says that as the auction classifieds expand, opportunities are opening up for a wide range of professionals - from high level sales executives to CFOs.

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Mounting evidence shows that white-collar crime increases during a recession. The 2009 Report to the Nation on Occupational Fraud & Abuse study conducted by the Association of Certified Fraud Examiners (ACFE) reveals that more than half of the 959 fraud experts polled performed more fraud-related investigations in 2008 than in 2007. About as many respondents also say known perpetrators reported feeling financial pressure before they committed the fraudulent acts.

The report also projects that U.S.-based companies lose 7% of their annual revenue to fraud. The ACFE adds that if this figure is applied to the 2008 U.S. GDP, fraud cost companies a staggering $994 billion between January 2006 and February 2008.

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Private equity firms are following in the footsteps of Macquarie Group and the investment units at top investment banks like Goldman Sachs, JPMorgan and Morgan Stanley. According to Pensions & Investments, they are shifting gears to focus on a new area: infrastructure investing. The report argues the credit crisis and recession have put the traditional leveraged buyout businesses into “suspended animation.” P&I adds that right now some of the biggest names in the private equity field — Carlyle Group, Kohlberg Kravis Roberts and Blackstone Group — are raising infrastructure funds that can deploy large amounts of capital.

“Infrastructure is a rapidly evolving asset class,” P&I quotes Kathryn Leaf Wilmes, Principal in the infrastructure business of Pantheon Ventures Inc., a San Francisco-based private equity fund of funds manager, as saying. “In 2006, there were a number of bank-sponsored funds … that came to market. Most recently, traditional private equity groups are sponsoring infrastructure vehicles,” said Wilmes.

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Drug giant, GlaxoSmithKline, is battling the IRS over a potential $1.9 billion in back taxes, interest and penalties, according to Reuters. The case centers on a tax-savings technique used by the company known as “earnings stripping.” The practice involves reducing domestic taxable profits by claiming excessive interest deductions on intercompany loans from units abroad. Reuters adds that Glaxo is contesting the IRS claim over tax liabilities going back to 2001 and does not expect a court decision before 2011. This is just latest in a series of disputes between Glaxo and U.S. tax authorities. Reuters notes in 2006, the company agreed to pay more than $3 billion to settle a dispute over so-called “transfer pricing,” a year before it was due to go to trial.

Today, transfer pricing remains one of the most controversial international tax issues currently being examined by the U.S. Treasury Department as the global recession has put extreme pressure on company balance sheets… as well as tax revenues.

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Challenging financial times call for inspirational financial executives. Exactly what companies are looking for may depend on how the crisis is affecting them. One thing, however, has become clear: CFOs will be leaders in driving and implementing the strategies stemming from the economic turmoil, according to CFO.com. In a recent interview, Starwood CFO Vasant Prabhu told CFO.com, “I like to look at worst-case outcomes and know what I’m going to do in those situations. If I’ve already dealt with a nightmare while I’m awake I don’t have to dream about it at night.”

Amid the trend, executive search firm, A.E. Feldman, reports demand is growing for Finance Chiefs who can manage a balance sheet, who know the debt markets and are strong on valuing assets. Flexibility and the ability to adapt to the dynamics of the market during the recession are also critical. “It’s imperative to be ‘battle tested’ with regard to capital markets experience,” said one veteran CFO consulted for this article. CFOs need to be nimble and skilled enough to side-step the capital markets “call,” in any way they can (avoiding defaults, selling non-core assets, tightening working capital, etc.) Otherwise, they will inadvertently transfer value to lenders from shareholders.

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