Securities Industry Commentator by Bill Singer Esq

Other big banks also are getting pressured. Officials from Citigroup and Wells Fargo said at an industry conference this week that they expect lower interest income as well, citing the growth slowdown as well as the Fed cuts.

In second-quarter earnings, Schwab's net interest revenue fell 4% from the first quarter. The company said in July that if the Fed cuts continued, it expected a further decline into the end of the year. A company official had told employees recently that Schwab was wrong this year in its rate forecasts, according to the Wall Street Journal.

The PCAOB is a nonprofit corporation overseen by the SEC that inspects the audit work performed by registered accounting firms ("Auditors") with respect to the financial statements of publicly traded companies ("Issuers").  The PCAOB inspects the largest U.S. accounting firms on an annual basis.  As part of the inspection process, the PCAOB chooses a selection of audits performed by an accounting firm for a closer review, commonly referred to as an inspection.  Until shortly before an inspection occurs, the PCAOB does not disclose which audits are being inspected, or the focus areas for those inspections, because it wants to ensure that an Auditor does not perform additional work or modify its work papers in anticipation of an inspection.  Following the completion of an inspection, the PCAOB issues an Inspection Report containing any negative findings or "comments" with respect to both the specific audits reviewed and the accounting firm more generally. 

KPMG is one of the largest accounting firms in the world.  In recent years, KPMG fared poorly in PCAOB inspections and in 2014 received approximately twice as many comments as its competitor firms.  By at least in or about 2015, KPMG was engaged in efforts to improve its performance in PCAOB inspections, including but not limited to recruiting and hiring former PCAOB personnel.  At the time, MIDDENDORF was head of KPMG's DPP, which was broadly responsible for the quality of KPMG's audits and KPMG's performance in PCAOB inspections. 

KPMG's efforts to improve inspection results, however, were not limited to legitimate means.  Instead, between 2015 and 2017, MIDDENDORF and others worked to illicitly acquire valuable confidential PCAOB information concerning which KPMG audits would be inspected in an effort to game the system and improve inspection results.  For example, beginning in 2015, Brian Sweet, a former PCAOB employee who had joined KPMG, provided MIDDENDORF, Thomas Whittle, and others with the PCAOB's confidential 2015 list of inspection selections, at MIDDENDORF's request, so that the information could be used by MIDDENDORF, Whittle, and others to improve KPMG's performance on PCAOB inspections. 

In March 2016, Jeffrey Wada, an Inspections Leader at the PCAOB, provided Cynthia Holder, a KPMG employee, with confidential information on certain of the PCAOB's 2016 inspection selections.  Holder, in turn, provided the 2016 inspection selections to Sweet, who passed them to MIDDENDORF, Whittle, and others.  MIDDENDORF, Whittle, Sweet, and others then agreed to launch a stealth program to "re-review" the audits that had been selected, and agreed to keep their stealth re-reviews within their "circle of trust."  In order to cover up their illicit conduct, other KPMG engagement partners were given a false explanation for the re-reviews.  The stealth re-review program allowed KPMG to strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.

In January 2017, Wada, who had been passed over for promotion at the PCAOB, again stole valuable confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to Holder, referring to it in a voicemail as the "grocery list."  At the same time, Wada provided Holder with his resume and sought Holder's assistance in helping him to acquire employment at KPMG.  Sweet shared with Whittle the preliminary inspection selections provided by Wada; Wada in turn shared them with MIDDENDORF, who approved their use to improve the audits on the list.

In February 2017, Wada texted Holder saying, "I have the grocery list. . . . All the things you'll need for the year."  Wada then spoke to Holder and provided her with the full confidential 2017 final inspection selections.  Holder again shared the stolen information with Sweet, who shared it with MIDDENDORF, Whittle, and others so that it could be acted upon to improve the audits on the list. 

In 2017, a KPMG partner who received early notice that her engagement was on the confidential 2017 inspection list reported the matter, and it was ultimately reported to KPMG's Office of General Counsel.   

[B]etween March 2014 and August 2016, Brown participated in two fraud schemes. He participated in a sweepstakes fraud scheme in which elderly victims were told they had won a sweepstakes but, in order to receive their winnings, they had to send money for "taxes" to Brown. In a second scheme, Social Security benefits were diverted into accounts opened in the name of multiple victims and sent to Brown's address. Once Brown received the fraudulent debit cards for those accounts, he used them to purchase money orders or obtain cash. Brown's specific role in both schemes was to receive mail containing victims' money or fraudulent access devices (debit cards) loaded with Social Security benefits and, in turn, send a portion of the money to others in Jamaica. The cash and debit cards were sent to Brown's home or another residence to which he had access.

During a search of Brown's residence, law enforcement officers recovered documentation for fraudulent bank accounts and debit cards that had been opened in the names of multiple victims. As a result of the diversion scheme, the Social Security Administration suffered a loss of $135,377.80. Losses related to the sweepstakes scheme are still pending.

Operation reWired, a months-long, multi-agency effort to disrupt and dismantle international business email compromise (BEC) schemes, resulted in 281 arrests, including 74 in the United States, officials announced. Arrests were also made in Nigeria, Turkey, Ghana, France, Italy, Japan, Kenya, Malaysia, and the United Kingdom. The sweep resulted in the seizure of nearly $3.7 million and the disruption and recovery of approximately $118 million in fraudulent wire transfers.

• Securities Industry Commentator
• Bill Singer