A Michigan man has pleaded guilty to fraud and money laundering in a scheme to acquire more than 9,000 replacement iPod Shuffle music players.

Twenty-three-year-old Nicholas Woodhams of the Kalamazoo area appeared in federal court in Grand Rapids on Monday, less than a month after charges were filed.

Woodhams had an iPod repair shop and knew that owners could get a replacement if their Shuffle had problems. He guessed valid serial numbers and entered them into Apple Inc. ( AAPL - news - people )'s Web site. Woodhams then resold the Shuffles shipped by Apple.

He has agreed to give up property, including a house, an Audi sedan, a race car and more than $570,000. Woodhams will be sentenced Aug. 25. A message seeking comment was left with his lawyer.

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As the world recoiled at the size and simplicity of Bernard Madoff's fraud, banks in Europe were one by one admitting to potentially being on the hook for millions through their exposure to the Wall Street money manager's scheme.

HSBC (nyse: HBC - news - people ), Royal Bank of Scotland (nyse: RBS - news - people ) and Banco Santander are some of the most exposed lenders, in some cases having indirectly invested in Madoff's funds through hedge funds, or directly through a private banking arm. Since news of his fraud broke last Thursday, banks have been scrambling to calculate their exposure to his firm and are now waiting for receivers to provide further information on the total value of assets in Madoff's portfolio.

Unfortunately, there appears to be little hope that banks who invested in Bernard Madoff Investment Securities will see much or any of their money again. Madoff was arrested on Thursday after reportedly confessing to running a "giant Ponzi scheme" in which he lost $50.0 billion of his investors' money. His two sons contacted authorities on the evening of Dec.10 after their father admitted to the fraud. (See "Madoff's Money.")

RBS said Monday that it could lose as much as 400.0 million pounds ($599.4 million) because of "trading and collateralized lending to funds of hedge funds that invested with [Madoff's] firm," the bank said, without giving further details. British hedge fund Man Group said it had approximately $360.0 million invested in two funds that were "directly or indirectly sub-advised by Madoff Securities," representing about 0.5% of its funds under management. Reports say that HSBC could lose as much as $1.0 billion through its exposure.

Banco Santander (nyse: STD - news - people ), one of Europe's most well-regarded banks for having largely avoided investing in the American subprime mortgage market, said on Sunday that one of its investment funds had exposure of 2.3 billion euros ($3.1 billion) to Madoff Securities. Most of this was invested directly by the bank's investment fund, Optimal, on behalf of Santander's overseas institutional investors and private banking clients. Spain's Banco Bilbao Vizcaya Argentaria (nyse: BBV - news - people ) had approximately 500.0 million euros ($673.3 million) of exposure to funds run by Madoff.

Investment bank Natixis (other-otc: NTXFF - news - people ) appears to be one of the worst hit so far in France, after it said Monday that it had exposure of up to 450.0 million euros ($600.3 million), while BNP Paribas (other-otc: BNPQY - news - people ) said its clients could lose up to 350.0 million euros ($471.3 million). Societe Generale (other-otc: SCGLY - news - people ) said Monday that it had less than 10.0 million euros ($13.5 million) in exposure to Madoff. Credit Agricole (other-otc: CRARF - news - people ) was scheduled to release details of its exposure to the fraud later on Monday, but this was expected to be negligible.

The Madoff case is a clear setback for European banks that have been pining for the end of billions of dollars worth of write-downs and losses that followed the the subprime mortgage crisis. Some, like Bramdean Alternatives, run by London-based fund manager Nicola Horlick, have criticized American regulators for not catching Madoff's fraud sooner. Horlick, who had 10.0% of her holdings exposed to Madoff, reportedly said that the regulators had "fallen down on the job."

For years, Bernie Madoff, all-around nice guy, pulled billions of dollars of foreign and domestic money into his investment fund. His lure? He promised the implausible combination of good returns and low risk—and people believed him.

Painfully, the allegations of fraud surrounding the Madoff affair are also exposing the fundamental fallacy of the global economy. Like Madoff's trusting investors, the rest of the world was willing to assume that the U.S. economy as a whole was a low-risk, good-return investment. This belief drove the entire structure of global trade and finance for the past 10 years. And when the subprime crisis showed this assumption of low risk to be false, the financial crisis resulted.

Consider this: Since the Asian financial crisis of 1997-98, the rest of the world has been willing to lend money to finance the U.S.'s huge and growing trade deficit. Not just small amounts of cash either: over the past decade, the U.S. borrowed a cumulative total of $5 trillion from foreigners at relatively low interest rates.

Why were foreigners so generous?

Without this flow of easy money into the U.S., globalization in its current form would not have been possible. The U.S. was the consumer of last resort, absorbing cars from Germany and Japan, electronics from Taiwan and Korea, and clothes and furniture from China. The earth was flat, and why not? Pluck a laptop from Taiwan and pay for it with a home equity loan, which—if you trace back the connections—was at least partly funded with foreign money, too.

The big unanswered question, for years, was why this money flow persisted. Why the heck were foreign investors willing to lend the U.S. such large amounts of money on such good terms? Economists and journalists spun out hypothesis after hypothesis (we'll see more below), but there was no agreement on why.

Now we see what happened. Wall Street firms—big operators like Lehman and relatively small fish like Madoff—told foreign investors they could put their money into the U.S.—the world's safest economy—and still make decent returns. Madoff, of course, appears to have lied. He allegedly ran an investment scam that has resulted in billions of dollars of losses reported around the world, including $4 billion in Switzerland and $3 billion in Spain.

exporting 'low risk' Derivatives

But it wasn't simply Madoff. The Wall Street boom of recent years was built, as far as I can figure out, on selling the low-risk story to foreign investors. In fact, most of the financial innovations of recent years were about making investments in the U.S. 'safer' for foreign investors. The enormous growth of foreign exchange derivatives enabled those abroad to protect their U.S. investments from exchange-rate fluctuations. The sudden increase in credit default swaps could be used to protect foreign bond investors from problems with individual countries. And collateralized debt obligations, which could be divided into high-risk and low-risk pieces, increased the supply of low-risk investments to be sold outside the U.S.

This low-risk, good-return story attracted investors from around the world. One example: Lehman sold $2 billion in 'mini-bonds' to Hong Kong investors, including many retirees.

However, the low-risk, good-return story simply wasn't true, for two key reasons: First, the U.S. economy was supposed to be on the cutting edge of innovation. Innovation through technological change, by nature, is a very risky activity. Sometimes it pays off and sometimes it doesn't. If the investment in innovation pays off, the economy booms, as it did during the second half of the 1990s.

U.S. Regulation Failed

But innovation has fallen short in recent years. Biotech and nanotech still have not come to fruition, and alternative energy is moving slowly. As a result, the U.S. economy has fallen short of expectations. The income isn't there, and the debt just piles up.

The second reason why the low-risk, good-return story wasn't true: the breakdown of regulation. And that's where we come back to the alleged Madoff scam. His was no complicated global securitization, based on black-box rocket science. Instead, it appears to be a good old-fashioned Ponzi scheme, enabled by a lack of government supervision.

What comes next? The fallacy is punctured. Globalization will be seen as what it is—a game with risks that can't be wished away. And U.S. prosperity will depend on the success or failure of its ability to innovate—not its ability to tell an implausible story to foreign investors.

A former executive of a New York company that ran dozens of Days Inn hotels has pleaded guilty to tax fraud and agreed to pay $105 million.

Federal prosecutors in Manhattan announced Friday that Stanley Tollman entered the plea via video link from London. The 78-year-old was immediately sentenced to one day of probation.

He agreed to pay $60.3 million in restitution to the Internal Revenue Service and $44.7 million to settle a civil forfeiture action arising from the multimillion-dollar tax evasion scheme.

Prosecutors say English courts ruled against extraditing Tollman earlier this year because of his wife's poor health.

Tollman was a principal in Tollman-Hundley Hotels, which owned and managed more than 50 Days Inn hotels nationwide.

A report released Oct. 8 by the U.S. Citizenship & Immigration Services (USCIS) reveals that 13% of petitions filed for H-1B visas on behalf of employers are fraudulent. Another 8% contain some sort of technical violations.

The study, released to members of the U.S. Senate Judiciary Committee, marks the first time the agency, part of the Homeland Security Dept., has documented systematic problems with the controversial program. Technology companies, in particular, have come to rely on the H-1B visa program to bring in skilled foreign workers to fill jobs that employers claim can't be filled with U.S. candidates. Tech companies like Oracle (ORCL), Microsoft (MSFT), and Google (GOOG) have pushed to get more visas, claiming that a shortage of skilled workers is hampering U.S. competitiveness. Microsoft Chairman and co-founder Bill Gates has twice testified in front of Congress on the issue.

Critics say H-1Bs help U.S. companies replace American workers with less costly foreign workers. "The report makes it clear that the H-1B program is rife with abuse and misuse," says Ron Hira, assistant professor of public policy at the Rochester Institute of Technology. "It shows the desperate need for an auditing system." However, both Presidential candidates, Senator Barack Obama (D-Ill.) and Senator John McCain (R-Ariz.), have said they support expanding the program.

Program Abuses Alleged

A USCIS spokesperson was not immediately available for comment. The report's conclusion states: "Given the significant vulnerability, USCIS is making procedural changes, which will be described in a forthcoming document." A spokeswoman, Beth Pellett Levine, says Senator Chuck Grassley (R-Iowa), a longtime critic of the H-1B program, is drafting a letter to USCIS in response to the study.

The H-1B visa program has become increasingly controversial in recent years as groups such as the Programmers Guild and WashTech, which represent U.S. tech workers, allege it is being abused, resulting in mistreatment of foreign workers, wage depression, and the displacement of U.S. workers. The program was originally set up to allow companies in the U.S. to import the best and brightest in technology, engineering, and other fields when such workers are in short supply in America. But data released this year by the federal government show that offshore outsourcing firms, particularly from India, dominated the list of companies that were awarded H-1B visas to employ workers in the U.S. (BusinessWeek, 3/6/08) in 2007. Indian outsourcers such as Infosys (INFY), Wipro (WIT), and Tata (TCS.NS) accounted for nearly 80% of the visa petitions approved last year for the top 10 participants in the program.

There is also evidence that workers on H-1B visas are being mistreated. In a pending case (BusinessWeek, 1/31/08), H-1B workers for State Farm Insurance allege they were underpaid.

Critics say such instances of abuse represent the tip of an iceberg of deeper problems with the visa program. Academics and U.S. tech worker advocates point out the requirement that even employers who abide by the law—for example by paying the required "prevailing wage"—are able to underpay workers .