Soft Dollar Fraud

Diversion of Funds from a Directed Brokerage Account


By By Francis Marvin Doyal, CFE, CPA

Some cash has become a lot more pliant in the last few years. Politicians frequently discuss “soft dollars” – money donated to political parties rather than candidates but nevertheless used to benefit those candidates or causes indirectly. While political soft dollars technically may be legal, their reputation is questionable.

Soft dollars also exist in the business world. Examples include free tickets awarded through airlines’ frequent flier programs, points given by medical device suppliers toward free training programs in exotic locations or on cruise ships to healthcare professionals who prescribe the suppliers’ products, and points from national suppliers for retail store owners who feature the suppliers’ items.

These examples have certain common denominators. Soft dollars:

  • have a real value to the beneficiary;
  • are expended at the direction of the beneficiary, in support of the beneficiary, or in accordance with the known wishes and desires of the beneficiary;
  • are controlled by someone other than the beneficiary;
  • don’t appear as an asset on the books and records of the beneficiary; and
  • generally aren’t considered as revenue by the beneficiary and may not be subject to the beneficiary’s system of internal controls.

Neither the Financial Accounting Standards Board nor the Government Accounting Standards Board, which both set standards for financial reporting, have issued any authoritative guidance on soft dollar reporting. Consequently, a great deal of soft dollar activity goes unreported. The Florida State Board of Administration (SBA) – the organization that manages the more than $100 billion (yes- billion.) accumulated in the Florida Retirement System – recently had a bad experience that highlighted weaknesses in how it managed its directed brokerage program – a program that deals with soft dollars. (Directed brokerage arrangements at SBA instruct investment managers to direct trades to a particular broker-dealer. In addition to execution of trades, a broker-dealer establishes a commission banking arrangement and/or a commission recapture arrangement for SBA. Under commission banking arrangements, the broker pays third party providers for goods and services required by SBA. Under commission recapture arrangements, the broker provides cash rebates to SBA. Both arrangements are legal.)

Barbara Jacobs, a 13-year employee of the SBA, diverted more than $423,000 for her own use from a directed brokerage account managed by Donaldson & Co. Incorporated (DCI) – one of a number of broker dealers which participated in the SBA-directed brokerage program. Jacobs appears to have begun diverting funds from the DCI account in 1993 and she appears to be the only SBA employee involved in the scheme. The investment industry considered Jacobs an expert; she hosted or co-hosted a number of seminars on soft dollars and was an advocate of directed brokerage arrangements. When the U.S. Congress addressed soft dollar issues, Jacobs was a witness before the subcommittee in support of the concept. Her scheme demonstrated how well she understood the SBA process and how vulnerable it was to abuse.

The SBA experience can provide management a spur to inspect soft dollar relationships and fraud examiners methods to investigate suspected schemes.


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