Fraud Assignment Case Study

Problem 1

On March 28, 2008, Jack Investor was sitting at home when the phone rang.  Jack picked up the phone and the other party on the conversation began as follows. . .

“Have you heard of the Cosmopolitan Resort Casino, the construction project on the Vegas strip in which the developer recently defaulted on a loan?  The primary lender, Deutsche Bank, has foreclosed, and because of the credit crisis, would like to liquidate the property as quickly as possible.

“My company, Vegas Bailout, Inc., has decided to make a bid in Deutsche Bank’s auction.  We are hoping to raise $ 1.3 Billion in cash by Tuesday, April 1, in order to submit a bid.  We are selling “investment units” at a price of $ 10,000 per unit in order to raise cash for our bid, and if we fail to win the bid, the full amount would be refunded.  We are hoping to resell the property to another developer by the end of the summer, and any profits associated with our bid will be allocated proportionately between the units sold.  Please understand that this is a risky proposition.”

Based on the information provided above, after sleeping on it for one day, Jack Investor decided to wire transfer $ 10,000 of cash to the bank account that the caller mentioned.  On April 15, 2008, Jack Investor called the phone number indicated for Vegas Bailout Inc.  The phone number was disconnected, and eventually Jack learned that the parties with whom he had spoken had taken all of the investor’s money and had lost it gambling.

QUESTION

If this case went to the Supreme Court, and they followed their historical precedent, would Vegas Bailout, Inc. be found guilty of fraud?  Support your answer by indicating whether each of the elements of fraud are present in this case.    (Fraud Triangle analysis framework is in the attachment.)

Problem 2

In April 2012, Groupon announced that they were restating their financial statements resulting from a “material weakness in internal controls”

http://online.wsj.com/article/SB10001424052702303816504577313983768173826.html

Based on information in the Wall Street Journal article mentioned above, as well as other information that you may find, please address the following questions:

1. With regard to the COSO Framework, in which category(s) of Internal Control would you place Groupon’s material weakness? (The COSO Framework is in the attachment)
2. With regard to financial reporting, when was this material weakness disclosed for the first time?   Do you believe that this weakness existed previously, but had not been reported previously, or that the material weakness did not exist previously, but conditions deteriorated to the point that it passed the threshold to be classified as a “material weakness”.
3. How did the stock market react to the disclosure of the material weakness?   Based on whatever evidence you may find, do you feel  that the market responded consistently with other firms who disclosed control weaknesses?
4. In the last three years (i.e. since April 2012), has Groupon effectively addressed this weakness in internal controls?   BRIEFLY describe the evidence that you found to support your conclusion (or alternatively, what evidence you hoped to find, but failed to find).
5. Suppose that you applied the Beneish Model (i.e. the M-Score) to the financial statements of Groupon for their year-ending Dec. 31, 2013 and Dec. 31, 2014.    Do you find evidence of “earnings  manipulation”?  Support your answer by performing the calculations.