Archived Forensic News July 2014
Financial/Accounting Fraud
Waste, fraud and abuse: Federal government acknowledges $100 billion in improper payments
Federal agencies reported making $100 billion in payments last year to people who may not have been entitled to receive them. Congressional investigators say the figure could be even higher. Each year, federal agencies are required to estimate the amount of improper payments they issue. They include overpayments, underpayments, payments to the wrong recipient and payments that were made without proper documentation. Some improper payments are the result of fraud, while others are unintentional, caused by clerical errors or mistakes in awarding benefits without proper verification. In 2013, federal agencies made $97 billion in overpayments, according to agency estimates. Underpayments totaled $9 billion. That adds up to $106 billion in improper payments, or 3.5 percent of all the payments made by the federal government. The Obama administration has reduced the amount of improper payments since they peaked at $121 billion in 2010. The administration has stepped up efforts to measure improper payments, identify the cause and develop plans to reduce them, said Beth Cobert, deputy director of the White House budget office. Federal agencies recovered more than $22 billion in overpayments last year, she said. “We have taken an aggressive approach to attacking waste, fraud and abuse within federal agencies, and we will continue to seek out new and innovative tools to help us in this fight,” Cobert told the subcommittee. However, a new report by the Government Accountability Office questions the accuracy of agency estimates, suggesting that the real tally could be higher. The Pentagon estimates that less than 1 percent of its payments are improper. However, the GAO found last year that the Pentagon’s estimates for 2011 “were neither reliable nor statistically valid because of long-standing and pervasive financial management weaknesses.” “We have reason to believe that the numbers are sound but we certainly understand why the skepticism exists,” Mark E. Easton, the Defense Department’s deputy chief financial officer, told the subcommittee. The largest sources of improper payments are government health care programs, according to agency estimates. Medicare’s various health insurance programs for older Americans accounted for $50 billion in improper payments in the 2013 budget year, far exceeding any other program. Most of the payments were deemed improper because they were issued without proper documentation, said Shantanu Agrawal, a deputy administrator for the Centers for Medicare & Medicaid Services. In some cases, the paperwork didn’t verify that services were medically necessary. “Payments deemed ‘improper’ under these circumstances tend to be the result of documentation and coding errors made by the provider as opposed to payments made for inappropriate claims,” Agrawal told the subcommittee.
British fraud prosecutor signals possible forex charges next year
British prosecutors could charge the first individuals in connection with a global investigation into alleged manipulation of currency markets as soon as next year, the head of the country’s Serious Fraud Office (SFO) said. David Green, who announced that the SFO would join U.S. prosecutors and regulators worldwide in investigating allegations of misconduct in the $5.3 trillion-per-day foreign exchange market, said he had “reasonable grounds” to suspect that an offense of serious or complex fraud was involved. “I think it would be ambitious to expect charges this year but ... I wouldn’t discount that possibility (next year) at all,” he said. “We’re (currently) having a fairly focused inquiry into a limited number of individuals and a limited number of financial institutions, including banks, and we’ll take that as the first phase and see where we go from there.” Having launched exhaustive internal investigations, banks including Deutsche Bank, Barclays, Citigroup, UBS and HSBC have fired, suspended or placed on leave around 40 foreign exchange traders globally. Green, who took over as SFO director in April 2012 vowing to focus on top-tier economic crime, has been tasked with restoring confidence in the agency after his predecessor was accused by lawmakers of running a “sloppy and slovenly” operation. The SFO, which operates on a tight budget of around 33 million pounds ($56 million), can request extra “blockbuster” funding from its government paymasters for exceptionally costly cases. It has yet to request such additional funds for its fledgling foreign exchange (forex) probe. He declined to be drawn on whether the evidence seen so far indicated that allegations of wrongdoing in forex markets eclipsed those that shredded faith in interest rate benchmarks such as Libor (London interbank offered rate), against which around $450 trillion of financial contracts are priced globally. Ten banks and brokerages have been fined around $6.0 billion to date to settle regulatory allegations of benchmark interest rate manipulation and 17 men have been criminally charged – 12 by the SFO. More charges and fines are expected. At the center of the forex investigations is activity around the 4:00 p.m. currency fix in London, a 60-second window where key exchange rates are set. These prices are used as reference rates for trillions of dollars of investment and trade globally.
Two charged with fraud after raising nearly $22-million from investors
Two Vancouver businessmen committed fraud when they raised almost $22-million from investors without telling them important facts about their group of companies – including that they were short of cash and near insolvency, British
Columbia regulators said. A British Columbia Securities Commission hearing panel has ruled Michael Lathigee and Earle Pasquill, who operated the Freedom Investment Club (FIC) Group of companies, fraudulently raised $21.7-million from 698 investors between
between February 1, 2008 and November 15, 2008, without telling them about severe cash flow problems, including an unfunded $8-million cost overrun on the company’s biggest real estate project in Alberta. The BCSC panel said Mr. Lathigee knew what was at stake
when he raised money from investors, writing in private e-mails in March, 2008, that the FIC Group needed $10-million “to stay solvent” and was in “the worst situation [it has] ever been in” and was “close to insolvency.” In a written decision, the hearing
panel said it was clear investors lost money as a result of dishonesty. “As a consequence of the respondents’ dishonesty, the pecuniary interests of the investors ... were clearly put at risk,” the BCSC panel said in a written decision. “The 698 investors
invested, and have lost, $21.7-million. It would be hard to find a more compelling example.” The panel ruled the men committed fraud when they raised $9.9-million from 331 investors for a fund to invest in foreclosed residential properties in the United States.
The BCSC panel said the men instead used 8.5-million of the funds to bail out related FIC Group companies with unsecured loans. Mr. Lathigee and Mr. Pasquill told the hearing panel there was no dishonesty in the case because the offering memorandum for the
foreclosure fund allowed them to invest funds in inter-company loans, citing provisions allowing the corporation to “reallocate funds for sound business purposes” or to other real estate investments. However, the BCSC panel ruled that investors were clearly
told the money was meant to be invested in the U.S. housing market. “Even if the evidence had shown that there was a ‘sound business reason’ to allocate the FIC foreclosure funds to short-term interest-bearing vehicles, there is nothing in the [offering memorandum]
to suggest the choice of vehicle would be inter-company loans to other FIC Group companies,” the panel ruled. The panel has asked for written submissions before making a decision on penalties in the case. Mr. Lathigee participated in a Globe and Mail stock
picking competition in 2006, placing third in a field of eight competitors. The contest was won by a Wilfrid Laurier University student, who competed against seven professional investors, including Mr. Lathigee, in a contest to pick a favorite stock for the
year. Italy’s tax police said they had seized 98 million euros ($132 million) from the British subsidiary of Japan’s Nomura Holdings for alleged fraud against the Sicily region in relation to past financial deals. Police said in a statement
Sicily’s finances had suffered a damage estimated at around 175 million euros due to a deal involving the securitization of healthcare bills managed by Nomura and three derivatives contracts signed with the Japanese group to restructure the region’s debt.
Nomura said in a separate note it was aware of the action taken by prosecutors in Sicily, which it said related to trades it had entered with the region between 2000 and 2006. “We are reviewing the situation fully and will cooperate with the prosecutor in
this matter,” the bank said. Several local governments in Italy have taken to court their disputes with international banks over complex derivatives deals that turned sour. In a landmark case, a Milan appeals court in March acquitted four international banks,
including JP Morgan and UBS, overturning an earlier verdict which had found them guilty of mis-selling derivatives to the city of Milan. Police said they were investigating seven people – four Nomura bankers and three local consultants – and had seized assets
from them worth around 6.5 million euros. ($1 = 0.7442 Euros) Citi has $280 mln in loans in China ports at center of metals probe
Citigroup Inc has about $280 million in loans tied to commodities in two Chinese ports which are at the center of a probe into possible fraud, a senior executive said, becoming the first U.S. bank to disclose its potential exposure.
The total is a large portion of the bank’s roughly $400 million worth of so-called repo commodity financing deals in China. Short for repurchasing agreements, repo deals give customers access to short-term credit in exchange for goods. “At this stage we believe
the activities are isolated and just specific to those very specific locations,” Chief Financial Officer John Gerspach said in a conference call with analysts. The loans are to clients that are non-Chinese subsidiaries of large multi-national corporations
and the contracts are guaranteed by the parent companies, he said. Citi is the latest bank to disclose the size of its financing business in Qingdao, China’s seventh largest port, and nearby Penglai where authorities have been investigating suspected metals
financing fraud since May. The probe centers on a private metals trading firm, Decheng Mining, and its related companies, which are alleged to have used fake warehouse receipts at the ports to obtain multiple loans secured against a single cargo of metal.
As the fall-out of the scandal that has engulfed the base metals market continues, other foreign banks including Standard Bank Group and trading and investment firms, such as Citic Resources Holdings Ltd, face hundreds of millions of dollars of losses. A U.S. district court ordered
BNP Paribas SA (BNP) to pay $80 million for submitting false claims for payment in a federal grain export program. The fine marks the second U.S. penalty levied against the biggest French bank in less than a month. On June 30, BNP Paribas agreed to pay
$8.97 billion for violating U.S. sanctions against Sudan, Iran and Cuba, in a case that reached the highest levels of French and American diplomacy. The U.S. Justice Department said in a statement that the ruling resolves allegations the bank was part of a
“sustained scheme” from 1998 to 2005 to defraud the program, which involved commodity-pay guarantees provided by the
U.S. Department of Agriculture. “We will not tolerate the misuse of taxpayer-funded programs designed to help American businesses,” Stuart F. Delery, assistant attorney general for the
Justice Department‘s civil division, said in the statement. “Companies that abuse these programs will be held accountable.” Julia Boyce, a spokeswoman at BNP Paribas in Paris, declined to comment when reached by phone. BNP Paribas sought to guarantee payments
to U.S. exporters even if it knew they were ineligible for the program, the DOJ said. BNP Paribas submitted claims to the USDA as early as April 2005 for losses from Mexican buyers who had defaulted on purchases of the grain, the DOJ said. “In some cases,
the underlying transactions were shams and did not involve any real shipment of grain,” the department said in its statement. The case dating to October 2011 revolves around a former trade finance manager, Jovenal “Jerry” Cruz, who worked in BNP Paribas’s
Houston office. He pleaded guilty in 2012 to conspiracy to commit fraud and money-laundering, the DOJ said. Spanish wireless networks provider Gowex filed for bankruptcy a week after an accounting fraud at the firm was revealed, while the High Court said its founder could face a jail sentence of more than 10 years. Law firm Velez & Urbina
said Gowex had decided to file for bankruptcy because it was in a state of “imminent insolvency” and faced a “financial standstill” after a high number of contracts were ended and new projects were cancelled. Former Chief Executive and Chairman Jenaro Garcia Martin
said on July 6 that he had misrepresented the financial accounts for at least the last four years. Last week he was charged with false accounting, distortion of economic and financial information, and insider trading. Following his testimony before the High
Court, Garcia Martin was given 15 days to pay a 600,000-euro ($818,400) bail or face jail. High Court examining judge Santiago Pedraz said the ruling was justified because Garcia Martin might attempt to flee as he faced a jail sentence of more than 10 years
and had at least 3 million euros in a Luxembourg-based bank account. Pedraz did not rule out taking further measures against Garcia Martin but decided not to seize his passport, ban him from leaving Spain or require him to report to a court every week, as
requested by the public prosecutor. He said Garcia Martin was collaborating with judicial authorities. Gowex started insolvency proceedings last week and had a maximum of four months to reach a deal with creditors or enter into administration – a formal bankruptcy
process in which a judge takes over the company and appoints who should run it, often leading to it being wound up or radically restructured. A judge now has to rule on whether Gowex was correct to file for bankruptcy. The financial and management situation
at the company remains unclear. Gowex said earlier this month that it had hired PricewaterhouseCoopers (PwC) to carry out a forensic audit of its accounts. However, PwC said that it could not carry out the audit because it could not find authorized representatives
of Gowex and get access to the information it needed. The Securities and Exchange Commission charged Smith & Wesson Holding Corporation with violating the Foreign Corrupt Practices Act (FCPA) when employees and representatives of the U.S.-based parent company authorized and made improper
payments to foreign officials while trying to win contracts to supply firearm products to military and law enforcement overseas. Smith & Wesson, which profited by more than $100,000 from the one contract that was completed before the unlawful activity was
identified, has agreed to pay $2 million to settle the SEC’s charges. The company must report to the SEC on its FCPA compliance efforts for a period of two years. According to the SEC’s order instituting a settled administrative proceeding, the Springfield,
Mass.-based firearms manufacturer sought to break into new markets overseas starting in 2007 and continuing into early 2010. During that period, Smith & Wesson’s international sales staff engaged in a pervasive effort to attract new business by offering, authorizing,
or making illegal payments or providing gifts meant for government officials in Pakistan, Indonesia, and other foreign countries. “This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international
sales,” said Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit. “When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.” According to the SEC’s
order, Smith & Wesson retained a third-party agent in Pakistan in 2008 to help the company obtain a deal to sell firearms to a Pakistani police department. Smith & Wesson officials authorized the agent to provide more than $11,000 worth of guns to Pakistani
police officials as gifts, and then make additional cash payments. Smith & Wesson ultimately won a contract to sell 548 pistols to the Pakistani police for a profit of $107,852. The SEC’s order finds that Smith & Wesson employees made or authorized improper
payments related to multiple other pending or contemplated international sales contracts. For example, in 2009, Smith & Wesson attempted to win a contract to sell firearms to an Indonesian police department by making improper payments to its third-party agent
in Indonesia. The agent indicated he would provide a portion of that money to Indonesian officials under the guise of legitimate firearm lab testing costs. He said Indonesian police officials expected to be paid additional amounts above the actual cost of
testing the guns. Smith & Wesson officials authorized and made the inflated payment, but a deal was never consummated. The SEC’s order finds that Smith & Wesson also authorized improper payments to third-party agents who indicated that portions would be provided
to foreign officials in Turkey, Nepal, and Bangladesh. The attempts to secure sales contracts in those countries were ultimately unsuccessful. Britain’s leading fraud prosecutor charged a British subsidiary of French engineering group Alstom with three offences of corruption and three offences of conspiracy to corrupt after a five-year investigation. The charges by the
Serious Fraud Office (SFO) come just weeks after the French parent agreed a 12.4 billion euro ($16.7 billion) sale of most of its power business to U.S. conglomerate General Electric (GE). The first court hearing will take place on Sept. 9. The charges against
Alstom Network UK relate to large transport projects in India, Poland and Tunisia carried out between June 2000 and November 2006, the agency said. The SFO said it had begun its investigation after information provided by the Office of the Attorney General
in Switzerland that concerned the Alstom Group, in particular Alstom Network UK. The GE deal, which sparked a two-month tug-of-war with the French government, is expected to be submitted to shareholder approval by the end of this year and to close by mid-2015. Ex-New Orleans Mayor Ray Nagin gets 10 years in prison
Former New Orleans Mayor Ray Nagin was sentenced to 10 years in prison in a bribery scandal that rocked the city, the U.S. Justice Department said. U.S. District Judge Helen G. Berrigan also ordered that Nagin pay $84,264 in restitution
to the Internal Revenue Service. In February, a
jury found him guilty of taking hundreds of thousands of dollars in bribes and other favors from businessmen looking for a break from his administration. Of the 21 counts against him, he was convicted of 20. Prosecutors argued that Nagin was at the center
of a kickback scheme in which he received checks, cash, wire transfers, personal services and free travel from businessmen seeking contracts and favorable treatment from the city. A January 2013 indictment detailed more than $200,000 in bribes to the mayor,
and his family members allegedly received a vacation in Hawaii; first-class airfare to Jamaica; private jet travel and a limousine for New York City; and cellular phone service. In exchange, businesses that coughed up for Nagin and his family won more than
$5 million in city contracts, according to the indictment. The former president and chief executive officer of BizJet International Sales and Support Inc., a U.S.-based subsidiary of Lufthansa Technik AG with headquarters in Tulsa, Oklahoma, that provides aircraft maintenance, repair and
overhaul services, pleaded guilty for his participation in a scheme to pay bribes to foreign government officials. “The former CEO of BizJet, Bernd Kowalewski, has become the third and most senior Bizjet executive to plead guilty to bribing officials in Mexico
and Panama to get contracts for aircraft services,” said Assistant Attorney General Caldwell. “While Kowalewski and his fellow executives referred to the corrupt payments as ‘commissions’ and ‘incentives,’ they were bribes, plain and simple. Though he was
living abroad when the charges were unsealed, the reach of the law extends beyond U.S. borders, resulting in Kowalewski’s arrest in Amsterdam and his appearance in court in the United States. The “guilty plea is an example of our continued determination to
hold corporate executives responsible for criminal wrongdoing whenever the evidence allows.” “I commend the investigators and prosecutors who worked together across borders and jurisdictions to vigorously enforce the Foreign Corrupt Practices Act,” said U.S.
Attorney Williams. “Partnership is a necessity in all investigations. By forging and strengthening international partnerships to combat bribery, the Department of Justice is advancing its efforts to prevent crime and to protect citizens.” Bernd Kowalewski, 57,
the former President and CEO of BizJet, pleaded guilty in federal court in Tulsa, Oklahoma, to conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and a substantive violation of the FCPA in connection with a scheme to pay bribes to officials in
Mexico and Panama in exchange for those officials’ assistance in securing contracts for BizJet to perform aircraft maintenance, repair and overhaul services. Kowalewski was arrested on a provisional arrest warrant by authorities in Amsterdam on March 13, 2014,
and waived extradition on June 20, 2014. Kowalewski is the third BizJet executive to plead guilty in this case. Peter DuBois, the former Vice President of Sales and Marketing, pleaded guilty on January 5, 2012, to conspiracy to violate the FCPA and a substantive
violation of the FCPA and Neal Uhl, the former Vice President of Finance, pleaded guilty on January 5, 2012, to conspiracy to violate the FCPA. Jald Jensen, the former sales manager at BizJet, has been indicted for conspiracy as well as substantive FCPA violations
and money laundering and is believed to be living abroad. Charges were unsealed against the four defendants on April 5, 2013. The Securities and Exchange Commission charged three Morgan Stanley entities with misleading investors in a pair of residential mortgage-backed securities (RMBS) securitizations that the firms underwrote, sponsored, and issued.
Morgan Stanley agreed to settle the charges by paying $275 million to be returned to harmed investors. In an asset-backed securities offering, federal regulations under the securities laws require the disclosure of delinquency information for the mortgage
loans serving as collateral. An SEC investigation found that Morgan Stanley misrepresented the current or historical delinquency status of mortgage loans underlying two subprime RMBS securitizations that came against a backdrop of rising borrower delinquencies
and unprecedented distress in the subprime market. “The delinquency status of mortgage loans in an RMBS securitization is vital information to investors because those loans are the primary source of funds by which they potentially can recover and profit from
their investments,” said Michael Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “Morgan Stanley understated the number of delinquent loans behind these securitizations during a critical juncture of the financial crisis
and denied investors the full extent of the facts necessary to make informed investment decisions.” According to the SEC’s order instituting a settled administrative proceeding against Morgan Stanley & Co. LLC, Morgan Stanley ABS Capital I Inc., and Morgan
Stanley Mortgage Capital Holdings LLC, these securitizations were collateralized by mortgage loans with an aggregate principal value balance of more than $2.5 billion. They were the last subprime RMBS that Morgan Stanley sponsored, issued, and underwrote.
The offerings themselves were called Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 and Morgan Capital I Inc. Trust 2007-HE7. Victims of the Ponzi schemes of Bernard Madoff and Allen Stanford, two of the largest in U.S. history, suffered setbacks as the U.S. Supreme Court refused to hear appeals in two cases seeking to recoup more money for them. In the
Madoff case, the court rejected a request by Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities LLC, to review the dismissal of his claims against banks he accused of enabling Madoff’s fraud. Separately, the court rejected a request
by Ralph Janvey, a receiver unwinding Stanford’s businesses, to review a ruling that blocked him from pursuing claims against Stanford employees on behalf of the receivership’s creditors, not the businesses themselves. In both cases, lower courts concluded
that Picard and Janvey lacked standing to bring their respective claims. The Supreme Court did not give reasons for its decisions, which leave intact a June 2013 ruling in the Madoff case by the federal appeals court in New York, and an August 2013 ruling
in the Stanford case by the federal appeals court in New Orleans. Representatives for Picard and Janvey were not immediately available to comment. Picard has recovered about $9.82 billion for former Madoff customers, who he has estimated lost $17.5 billion
of principal in a decades-long fraud uncovered in December 2008. A Ponzi scheme is one in which the early investors are usually paid high returns using money from later investors. Picard had sued banks including JPMorgan Chase & Co, Britain’s HSBC Holdings
Plc, Italy’s UniCredit SpA and Switzerland’s UBS AG over their dealings with Madoff. JPMorgan, which was Madoff’s main bank, was dropped from the case after reaching a $325 million settlement with Picard in January, part of a $2.6 billion global resolution
of federal and private Madoff claims. Stanford’s estimated $7.2 billion fraud was based on the sale of bogus certificates of deposit issued by Antigua-based Stanford International Bank to customers who thought the CDs were safe. The Ponzi scheme was uncovered
in February 2009. Janvey won court approval for an initial $55 million distribution to CD investors in April 2013. Madoff, 76, is serving a 150-year prison term after pleading guilty in March 2009. Stanford, 64, is serving a 110-year term following his jury
conviction in March 2012. The former chief operating officer of Philip Falcone’s hedge fund Harbinger Capital Partners has agreed to pay $200,000 to resolve charges he aided a scheme to misappropriate fund assets, the U.S. Securities and Exchange Commission
said. The SEC said Peter Jenson also agreed to admit wrongdoing as part of the accord, which would resolve a lawsuit the SEC launched in 2012 against him, Falcone and Harbinger. The deal follows an $18 million settlement in August 2013 with Harbinger and Falcone,
who agreed to a five-year ban from the financial industry and admitted wrongdoing as part of the pact. Filed in 2012, the lawsuit accused Jenson of aiding and abetting Harbinger and Falcone in a scheme to misappropriate $113.2 million in order to pay the hedge
fund manager’s personal taxes. “Jenson assisted a fraudulent scheme that allowed Falcone to put his own interests ahead of investors by engaging in a related party loan on favorable terms,” said Julie Riewe, co-chief of the SEC enforcement division’s asset
management unit. As part of the deal, Jenson also agreed to be barred for at least two years from working in the securities industry and from working as an accountant for a publicly traded company. The settlement requires the approval of U.S. District Judge
Paul Crotty in Manhattan. Robert Pommer, a lawyer for Jenson at Kirkland & Ellis, did not immediately respond to requests for comment. Harbinger Capital once oversaw $26 billion of assets, but that sum had fallen to less than $2 billion by the end of 2013,
according to documents filed with the SEC. The SEC’s settlement with Falcone last year allowed him to remain chief executive of his publicly traded company, Harbinger Group Inc. Bank of America agreed to pay American International Group Inc $650 million to settle long-running legal disputes over defective mortgage-backed securities sold in the run-up to the financial crisis. The deal ends securities fraud
litigation that the insurer brought against Bank of America. It also removes the biggest obstacle to the bank’s $8.5 billion settlement with investors in mortgage securities issued by Countrywide Financial, the subprime lender Bank of America acquired in 2008.
AIG will file notices dismissing its litigation accusing the bank of causing billions of dollars in losses by selling it shoddy mortgage securities. The litigation is pending in New York and California. For the past three years, AIG led opponents in holding
up court approval of a settlement Bank of America reached in June 2011 with institutional investors to pay $8.5 billion to resolve claims over $174 billion worth of mortgage-backed securities issued by Countrywide Financial before the housing crisis. The investors
said Countrywide had misrepresented the quality of the underlying home mortgages, which went sour in the crisis. Twenty-two institutional investors, including BlackRock Inc, Allianz SE’s Pimco and Metlife Inc., and Bank of New York Mellon Corp, the trustee
for the securities, agreed to the settlement. AIG claimed there was no evidence that the deal provided adequate compensation for losses. Justice Barbara Kapnick in New York state court gave the go-ahead for the bulk of the settlement in January, withholding
her approval only from settlement of claims involving certain loans that had been modified. But AIG appealed Kapnick’s decision. As part of the agreement, AIG agreed to withdraw its objection. In a release, the insurer said it would receive its pro rata share
of whatever is ultimately paid out to investors in connection with that settlement. A group of funds known as the Triaxx entities and the Chicago Police pension fund remain as objectors. The $650 million settlement was covered by litigation reserves as of
June 30, Bank of America said. As part of the deal, Bank of America said it was settling three actions it brought to collect mortgage insurance proceeds due from AIG`s United Guaranty mortgage insurance subsidiaries on loans it had originated and serviced. Funds totaling several billion yuan, meant for the construction of China’s public housing, was misappropriated last year as thousands of homes were allocated to undeserving families, according to a state audit. Corruption in public
housing is a sensitive issue as state-subsidized homes are intended to ease the difficulties of millions of consumers, for whom home ownership is out of reach given record property prices. The National Audit Office found that 9.3 billion yuan ($1.5 billion)
of funding set aside for public homes was misused for unrelated projects through sometimes fraudulent means. Nearly 8 billion yuan of that sum was used to finance other projects such as the construction of industrial parks and public infrastructure, it said.
The remaining 1.3 billion yuan was misappropriated by agencies or individuals who fraudulently obtained funds intended for refurbishing shantytowns by submitting false applications. It was also found that 45,800 public homes and 50.4 million yuan worth of
cash were either awarded, sold or rented to families that were not eligible for public housing. Chinese consumers have complained about public homes that are badly constructed or subject to corruption, with government officials keeping better-quality apartments
for themselves. The audit, the latest of a series conducted on government ministries and agencies, covered 33,500 public departments and 272,500 households. Britain’s fraud office is working with authorities in China in a first for such Anglo-Chinese cooperation as it carries out its own investigation into alleged corruption at drugmaker GlaxoSmithKline (GSK.L). “Certainly, so far as
I am aware it is the first time we have had cooperation with the Chinese on an SFO case,” David Green, the head of the Serious Fraud Office (SFO), said in an interview with Reuters. Green, who said he had visited China earlier this year, said the Chinese government
had a clear interest in rooting out bribery and corruption although it might have “slightly different perspectives” than the SFO. The SFO launched a formal criminal investigation into Britain’s biggest drugmaker in May, posing a new challenge to the company,
which has been accused by Chinese police of funneling up to 3 billion yuan ($480 million) in bribes to encourage doctors to use its medicines. The SFO action came less than two weeks after Chinese police announced on May 14 that they had charged the former
British boss of GSK’s China business and other colleagues with corruption. The U.S. Department of Justice is also investigating GSK for possible breaches of the Foreign Corrupt Practices Act, which prohibits payments to government officials, including state-employed
doctors, to obtain business overseas. Britain’s relatively new Bribery Act also prohibits such overseas bribes. Since the case in China blew up in July last year, allegations of GSK bribery have surfaced in other countries and GSK is now investigating claims
that bribes were also paid to doctors in Poland, Iraq, Jordan and Lebanon. Green said the SFO was looking into GSK’s behavior in a number of jurisdictions, including Europe and the Middle East. In many cases, the facts behind the allegations have still to
be established – and his office has asked for assistance from whistleblowers. “Suffice to say we have a number of sources of information,” Green said. GSK Chief Executive Andrew Witty has described the allegations in China as “shameful”. Standard Chartered PLC is suing Chen Jihong, the Chinese businessman at the center of a suspected fraud at China’s Qingdao port, joining a list of firms that have taken legal action to reclaim their losses. Standard Chartered is
the fourth company to say it has started legal action to recoup losses since Chinese authorities launched an investigation into whether a private metals trading firm, Decheng Mining and its related companies, used fake warehouse receipts at Qingdao Port to
obtain multiple loans secured against a single cargo of metal. Valerie Tay, a spokeswoman for the bank, confirmed that the bank has started legal proceedings against Chen. The bank is suing for $35.6 million plus costs and interest, according to the court
documents. The amount is significantly smaller than its previous announcement last month that its total commodity-related exposure around China’s Qingdao port was about $250 million. Other firms that have launched legal proceedings include Standard Bank Plc,
Citic Resources Holdings Ltd and China’s Shanxi Coal International Energy Group. Standard Bank said its total exposure to metals at Qingdao port was about $170 million and it also has an exposure of $40 million worth of aluminum at other bonded warehouse facilities
in Shandong province. A native of southern China’s Guangdong province who has since taken Singaporean citizenship, Chen is chairman of Qingdao-based Dezheng Resources Holding Co Ltd, which is the parent company of Decheng. Western banks such as Standard Chartered,
HSBC and BNP Paribas, which face restrictions in the domestic loan market in China, are active in the metals financing business where they give companies ready access to short-term credit in exchange for goods. GlaxoSmithKline (GSK.L) faces
new allegations of corruption, this time in Syria, where the drugmaker and its distributor have been accused of paying bribes to secure business, according to a whistleblower’s e-mail reviewed by Reuters. Britain’s biggest drugmaker said it was investigating
the latest claims dating back to 2010, which were laid out in the e-mail received by the company on July 18. The allegations relate to its former consumer healthcare operations in Syria, which were closed down in 2012 due to the worsening civil war in the
country. “We have zero tolerance for any kind of unethical behavior. We will thoroughly investigate all the claims made in this e-mail,” GSK said in a statement. GSK has been rocked by corruption allegations since last July, when Chinese authorities accused
it of funneling up to 3 billion yuan ($480 million) to doctors and officials to encourage them to use its medicines. The former British boss of the drugmaker’s China business was accused in May of being behind those bribes. Since then, smaller-scale bribery
claims have surfaced in other countries and GSK is now investigating possible staff misconduct in Poland, Iraq, Jordan and Lebanon. Syria is the sixth country to be added to the list. The allegations there center on the company’s consumer business, including
its popular painkiller Panadol and oral care products. Although rules governing the promotion of non-prescription products are not as strict as for prescription medicines, the e-mail from a person familiar with GSK’s Syrian operations said alleged bribes in
the form of cash, speakers’ fees, trips and free samples were in breach of corruption laws. The detailed 5,000-word document, addressed to Chief Executive Andrew Witty and Judy Lewent, chair of GSK’s audit committee, said incentives were paid to doctors, dentists,
pharmacists and government officials to win tenders and to obtain improper business advantages. “GSK has been engaging in multiple corrupt and illegal practices in Syria and its internal controls for its Syrian operation are virtually non-existent,” the e-mail
said. In addition, the e-mail said GSK had engaged in apparent Syrian export control violations, including an alleged smuggling scheme to ship the drug component pseudoephedrine to Iran from Syria via Iraq. Pseudoephedrine is regulated as a precursor for making
methamphetamine. GSK said it would investigate this matter along with the bribery claims. “We welcome people speaking up if they have concerns about alleged misconduct,” the company said. “On July 18, 2014, we received an e-mail making claims regarding GSK’s
former consumer operations and related distributors in Syria. Our compliance and legal departments were immediately notified and, as is our standard procedure, we immediately responded to the sender to confirm receipt and ask for more information.” The whistleblower’s
e-mail said GSK used its own employees and Syrian distributor Maatouk Group to make illicit payments. A federal jury in Miami convicted a physician assistant and a certified nursing assistant, both South Florida residents, for their participation in a Medicare fraud scheme involving approximately $200 million in fraudulent billings
by American Therapeutic Corporation (ATC), a mental health care company headquartered in Miami. Roger Bergman, 65, a physician assistant licensed in Florida, and Rodolfo Santaya, 55, a certified nursing assistant licensed in Florida, were each charged in an
indictment on January 28, 2014. Bergman was found guilty of conspiracy to commit health care fraud and wire fraud and conspiracy to make false statements relating to health care matters. Santaya was found guilty of conspiracy to commit health care fraud and
wire fraud, conspiracy to pay and receive bribes and kickbacks, and two counts of receiving bribes and kickbacks in connection with a federal health care benefit program. ATC, Medlink Professional Management Group Inc. – a management company associated with
ATC – and multiple individuals, including ATC’s owners, have all previously pleaded guilty or have been convicted at trial in connection with the fraud scheme. ATC operated purported partial hospitalization programs (PHPs) in seven locations throughout Orlando
and south Florida. A PHP is a form of intensive treatment for severe mental illness. According to evidence presented at trial, Bergman, Santaya and their co-conspirators caused the submission of fraudulent claims to Medicare through ATC seeking reimbursement
for mental health services that were not provided or were provided to patients who were not eligible to receive the services. Bergman, who worked at ATC’s Miami and Homestead, Florida, offices, created, falsified and signed fraudulent medical documentation
to make it appear to Medicare that ATC’s patients qualified for, and received, PHP services, even though they did not. Santaya received hundreds of thousands of dollars in illegal kickback payments in exchange for delivering ineligible Medicare beneficiaries
to ATC’s Homestead office. Mobile, Alabama-based Infirmary Health System Inc. (IHS), two IHS-affiliated clinics and Diagnostic Physicians Group P.C. (DPG) have agreed to pay the United States $24.5 million to resolve a lawsuit alleging that they violated
the False Claims Act by paying or receiving financial inducements in connection with claims to the Medicare program. The government’s suit alleged that two IHS affiliated clinics – IMC-Diagnostic and Medical Clinic, in Mobile, and IMC-Northside Clinic, in
Saraland, Alabama – had agreements with DPG to pay the group a percentage of Medicare payments for tests and procedures referred by DPG physicians, in violation of the Physician Self-Referral Law (commonly known as the Stark Law) and the Anti-Kickback Statute.
Also named in the lawsuit was Infirmary Medical Clinics P.C. (IMC), an affiliate of IHS that directly owns and operates approximately 30 clinics in the Mobile area, including the two clinics involved in this lawsuit. The Anti-Kickback Statute and the Stark
Law are intended to ensure that a physician’s medical judgment is not compromised by improper financial incentives. The Anti-Kickback Statute prohibits offering, paying, soliciting or receiving remuneration to induce referrals of items or services covered
by federal health care programs, including Medicare. The Stark Law forbids a hospital or clinic from billing Medicare for certain services referred by physicians who have a financial relationship with the entity. Texas tycoon Sam Wyly and the estate of his late brother Charles should pay damages totaling $1.41 billion for their role in a scheme that hid trades in companies they controlled using offshore trusts, the U.S. Securities and Exchange
Commission said. In a court filing, the SEC said the amount was justified by the finding of a New York federal court jury that the Wylys had engaged in a fraud that over 13 years earned them $553 million in profits that were not disclosed to investors in the
companies. “It is time to hold the Wylys accountable,” the SEC wrote. “It is time to strip away the immense profits that flowed from their misconduct. It is time to impose the maximum penalty allowable under the securities laws.” Lawyers for the Wylys said
in a court filing that “there would be nothing equitable about imposing such a massive judgment.” The SEC’s call for the huge sum comes ahead of an August 4 non-jury trial before U.S. District Judge Shira Scheindlin to assess damages following the verdict
in May in what was the SEC’s largest case to reach trial in recent years. Scheindlin will consider the SEC recommendation at the trial. Earlier this month, she found the Wylys not liable for insider trading in what was a small part of the overall case. The
SEC said the Wylys used a complicated system of trusts in the Isle of Man to conceal trading from 1992 to 2004 in four companies on whose boards they sat – Sterling Software Inc, Michaels Stores Inc, Sterling Commerce Inc and Scottish Annuity & Life Holdings
Ltd now called Scottish Re Group Ltd (SKRUF.PK). The
SEC said Sam Wyly, 79, should have to disgorge $371.1 million in trading profits plus $528 million in interest, pay a $72.3 million penalty and be subject to an injunction. Sam Wyly last appeared on Forbes’ list of the 400 richest Americans in 2010 with a
net worth of $1 billion. The SEC also sought disgorgement of $182 million in profits and $260.6 million in interest from the estate of Charles Wyly, who died in a car crash in 2011. An executor for his estate was substituted as a defendant after his death.
In their court filing, lawyers for the Wylys said the SEC had failed to demonstrate their clients’ actions had caused any harm to investors. “The facts and circumstances demonstrate that the amounts of any monetary profits resulting from or causally connected
to the defendants’ violations are far, far smaller than what the SEC claims,” the lawyers wrote. U.S. government lawyers asked federal regulators to overturn a judge’s ruling dismissing their case against two former State Street Corp executives accused of misleading investors in a fund exposed to subprime mortgages. In oral
arguments, the Securities and Exchange Commission’s enforcement division told SEC commissioners it had convincing evidence the two men misled investors. “The federal securities laws do not permit individuals to lie about what is in a portfolio,” SEC enforcement
attorney Kathleen Shields said. “When they choose to speak about it, they have to make accurate representations.” In October 2011, SEC Chief Administrative Law Judge Brenda Murray dismissed fraud claims against State Street’s former chief investment officer,
John Flannery, and the bank’s former product engineer, James Hopkins, saying she felt they exhibited “candor” and that the division’s case lacked evidence. The decision was a blow for the SEC, which has fought to defend its record of targeting some bank officials
for alleged wrongdoing during the 2007–2009 financial crisis. The appeal also comes amid increasing scrutiny of the agency’s track record in trials. Although the SEC has had some big wins, it has also suffered from a string of recent losses, primarily in insider-trading
cases. In the case against Flannery and Hopkins, the SEC alleges each had a key role in marketing the bank’s Limited Duration Bond fund, which was supposed to serve as an alternative to a money market fund, generally considered a safe investment. The SEC,
however, said the fund in 2007 was almost entirely invested in subprime mortgage-backed securities. Such assets, made up of loans to those with poor credit and other high-risk borrowers, are often blamed for triggering the financial crisis. Flannery and Hopkins
were involved in drafting letters and other communications to investors that failed to disclose the full picture of the fund’s subprime concentration. Lawyers for the two men disputed those accusations and urged the SEC to uphold Murray’s 2011 decision. The
SEC’s commissioners did not give any hints on how they may rule in the matter. In several instances, SEC Chair Mary Jo White and Democratic Commissioner Kara Stein asked an attorney for Flannery questions about his client’s role in drafting some of the letters
and whether their contents were deceptive. The SEC’s five commissioners must now issue a ruling in the case. If the losing party disagrees with the decision, it can still be appealed to a federal appeals court. The Securities and Exchange Commission charged Ernst & Young LLP with violations of auditor independence rules that require firms to maintain their objectivity and impartiality with clients. Ernst & Young agreed to pay more than
$4 million to settle the charges. The SEC’s order instituting a settled administrative proceeding finds that an Ernst & Young subsidiary lobbied congressional staff on behalf of two audit clients. Such lobbying activities were impermissible under the SEC’s
auditor independence rules because they put the firm in the position of being an advocate for those audit clients. Despite providing the prohibited legislative advisory services on behalf of the clients, Ernst & Young repeatedly represented that it was “independent”
in audit reports issued on the clients’ financial statements. “Auditor independence is critical to the integrity of the financial reporting process. When an auditor acts as an advocate for its audit client, that independence is compromised,” said Scott W.
Friestad, associate director in the SEC’s Division of Enforcement. “Ernst & Young engaged in lobbying activities that constituted improper advocacy and clearly violated the rules.”Italy tax police seize $132 mln from Nomura in alleged fraud case
BNP Fined $80 Million in U.S. Grain Exports to Mexico
Spain’s Gowex files for bankruptcy, ex-CEO could face 10 years in jail
Foreign Corrupt Practices Act (FCPA)
SEC Charges Smith & Wesson With FCPA Violations
Britain files criminal charges against Alstom UK unit
Former Chief Executive Officer of Lufthansa Subsidiary BizJet Pleads Guilty to Foreign Bribery Charges
Litigation Matters
Morgan Stanley to Pay $275 Million for Misleading Investors in Subprime RMBS Offerings
Madoff, Stanford fraud victims refused appeals by U.S. top court
Ex-Harbinger COO settles SEC claims he aided fraud
BofA pays AIG $650 million to settle mortgage disputes
China Market
China auditor uncovers fraud, graft in public housing
UK fraud office liaising with China on GSK bribery case
Standard Chartered sues businessman connected to Qingdao port
Healthcare Industry
Allegations of GSK corruption spread to Syria
Physician Assistant and Certified Nursing Assistant Convicted in $200 Million Medicare Fraud Scheme
Alabama Hospital System and Physician Group Agree to Pay $24.5 Million to Settle Lawsuit Alleging False Claims for Illegal Medicare Referrals
SEC Regulatory Actions
SEC seeks $1.4 billion from Texas Wyly brothers after fraud verdict
SEC appeals crisis-era case against ex-bank executives
SEC Charges Ernst & Young With Violating Auditor Independence Rules in Lobbying Activities
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