Archived Forensic News June 2014
Financial/Accounting Fraud
Port Authority Faces SEC Probe Following Bridge Scandal
The Port Authority of New York & New Jersey, the agency at the center of a scandal involving lane closings last year at the George Washington Bridge, faces a U.S. Securities and Exchange Commission investigation. The SEC is investigating whether the authority improperly used tax-exempt debt to finance the $1 billion renovation of the Pulaski Skyway, an 82-year-old roadway that connects Newark and Kearny to Jersey City, according to a person with knowledge of the probe who asked not to be identified without authorization to speak publicly. The Port Authority, which runs the New York area's three major airports, four bridges, a bus terminal, commuter rail, two tunnels, ports and the World Trade Center in Lower Manhattan, for decades has been a source of patronage and perks. Its dealings have drawn intense scrutiny since New Jersey Governor Chris Christie was ensnared by accusations that his allies engineered September traffic jams at the George Washington Bridge as retribution for a mayor who didn't support his reelection. The revelations triggered investigations and the resignations of three Port Authority officials. Reports of conflict of interest, political abuse and interstate rivalry have also spawned efforts by agency commissioners and the governors of the two states to restructure the agency. In April, New Jersey state Senator Raymond Lesniak, a Democrat, wrote to the SEC asking for an investigation into the Port Authority's use of tax-exempt bonds to fund projects that aren't in its jurisdiction. "The Port Authority appears to have misused the securities marketplace, made misrepresentation and misstatements of material facts in disclosure documents and falsely asserted a tax exemption-for an unauthorized and therefore unlawful project," Lesniak wrote in the April 3 letter. The SEC has been stepping up enforcement of fraud cases involving state and local bond sales. In recent years, it settled cases with New Jersey, Illinois and Harrisburg, Pennsylvania, for making misleading or inadequate disclosures. This month, the SEC sued a Chicago charter-school operator for inadequately disclosing contracts with companies owned by an executive's brothers, which the agency said threatened bond investors. The operator settled without a penalty by appointing an independent monitor.
Fraud costs UK small firms £22bn a year
Research by Sage Page has found that small firms are losing £22bn every year to fraudulent transactions. More than 40pc of the 1,124 UK business owners surveyed by the payment service provider experienced fraudulent activity in the past year, losing an average of £4,515 each. According to the Federation of Small Businesses, there are 4.9m small-to-medium-sized enterprises (SMEs) in the UK, bringing the total cost of small business fraud to £22bn. 17pc of the business owners polled have lost between £1 and £1,000 in the last 12 months, 10pc have lost up to £5,000, 4pc are down between £5,001 and £10,000 and 3pc are out of pocket more than £10,000. Despite their losses, more than one third (39pc) of SMEs don't spend any money on fraud prevention, while 21pc of businesses don't know what, if any, fraud prevention tools they have in place. While the £22bn figure may seem alarmingly high, Simon Black, CEO at Sage Pay, has said that a little fraud can be good for business. "This study shows that fraud levels are spiraling out of control and more must be done to reduce the amount of money lost each year," he commented. "But companies need to be pragmatic - eradicating fraud completely could be damaging for a business. "Experiencing no fraud may mean controls are too tight and legitimate transactions are being rejected. Many businesses simply void the transaction immediately if they suspect fraud, rather than undertake further checks. In doing so, they're likely to be turning away genuine customers who have simply entered their details incorrectly. "Although it can be tempting to tighten security controls in the face of fraud, it is worth keeping in mind that for every extra action a consumer is asked to make, you are prolonging the customer journey and therefore increasing the risk that the customer will drop out of the buying process."
Senator to SEC: Stop granting waivers to law-breaking companies
A lawmaker pressed Securities and Exchange Commission Chair Mary Jo White for answers about why her agency continues granting regulatory waivers to companies that break the law, and urged the agency to stop the practice. In a letter to White, Ohio Democratic Senator Sherrod Brown said he wants her to explain what steps, if any, she has taken to examine the SEC's policies for granting regulatory waivers and whether she plans to make changes. "Removing privileges enjoyed by large firms will promote better behavior, increase accountability, and demonstrate to the financial markets that certain firms do not enjoy special treatment by virtue of their size," wrote Brown. Brown is a member of the Senate Banking Committee and was the panel's lone lawmaker to vote against bringing White's confirmation to the Senate floor. Brown is at least the third federal lawmaker now to weigh in on a growing debate over the SEC's policy on granting certain waivers. The main waiver at issue involves "well-known seasoned issuer," or WKSI, waivers to companies. A WKSI waiver is a coveted tag that lets companies raise money immediately through securities offerings without waiting for SEC approval. Companies convicted of crimes or found liable for fraud can lose the status, but the SEC can agree to provide the company a waiver so they retain the WKSI tag. In April, two SEC commissioners dissented over a waiver granted to the Royal Bank of Scotland Group Plc after one of its units struck a criminal plea deal over manipulation of the Libor benchmark interest rate. One of those commissioners, Democrat Kara Stein, released a scathing statement that questioned the SEC's practice of routinely granting such waivers and questioning whether it is leading to a policy of "too big to bar." That has since prompted other lawmakers to start speaking out, including Massachusetts Democratic Senator Elizabeth Warren and California Democratic Congresswoman Maxine Waters. Waters tried to include a provision in a broader piece of draft legislation that would prohibit the SEC from granting WKSI waivers to companies convicted of crimes or found liable for fraud in the past three years. The Republican-controlled House Financial Services Committee, however, rejected her request to include her proposal in the bill. White has not discussed her views much on the subject, just saying the agency applies the WKSI waiver policy "faithfully and vigorously." Shortly before Stein publicly criticized the Royal Bank of Scotland waiver, the SEC also slightly toughened its policy on how waivers are doled out by requiring companies convicted of crimes to show "good cause" why they should retain their WKSI status. Afterwards, one of her fellow commissioners, Republican Dan Gallagher, also issued a statement disagreeing with the change in policy.
Ex-BDO partner gets 3 months in prison for tax shelter scheme
A former partner at accounting firm BDO Seidman was sentenced to three months in prison after admitting to participating in a massive tax shelter scheme that defrauded the U.S. government. Robert Greisman, 63, was the third one-time BDO partner to be sentenced by U.S. District Judge William Pauley in Manhattan for a tax shelter conspiracy involving their firm and the law firm Jenkens & Gilchrist. Greisman pleaded guilty to conspiracy, tax evasion and Internal Revenue Service obstruction charges in 2009. Four other BDO partners or employees had also pleaded guilty in the case. BDO USA, as the accounting firm is now known, agreed in June 2012 to pay $50 million to resolve related government claims through a deferred prosecution agreement. Greisman had sought probation after agreeing to cooperate with authorities, an argument also used by Charles Bee and Adrian Dicker, two former BDO vice chairmen. But Pauley said jail was required in light of the "breathtaking" fraud, which caused the United States to lose $1.5 billion in tax revenue. He issued prison terms of 1-1/3 years for Bee and 10 months for Dicker. Greisman's jail term will be followed by three years of probation, including six months of home confinement. He was also ordered, together with other co-conspirators, to make more than $69 million in restitution to the Internal Revenue Service. Prosecutors said Greisman, who worked in BDO's Chicago office from 1998 to 2004, had designed, marketed and implemented fraudulent tax shelters with Jenkens & Gilchrist. The government said he was the primary contact at BDO for two Jenkens partners, Paul Daugerdas and Donna Guerin, as well as David Parse, then a Deutsche Bank AG broker who prosecutors said participated in the scheme. Greisman testified in 2011 in a trial against Daugerdas, Guerin and Parse as well as Denis Field, BDO's former chief executive officer, and another Deutsche broker, Raymond Brubaker. Brubaker was acquitted, while the other four were convicted. Parse was sentenced in 2013 to 3-1/2 years in prison, while Daugerdas, Guerin and Field won a retrial. Guerin pleaded guilty to conspiracy and tax evasion charges ahead of the second trial and was sentenced last year to eight years in prison. At the retrial, a jury acquitted Field in October while convicting Daugerdas on seven of 16 counts he faced, including conspiracy, tax evasion and mail fraud. In a court filing, his lawyers argued against a 20-year prison sentenced recommended by the court's probation department, asking Pauley to instead impose no more than 2-1/2 years in jail.
UK anti-fraud agency 'examining data' in currency fixing probe
Britain's anti-fraud agency is examining information from a global investigation into the possible manipulation of currency markets, in the first sign it might follow the United States in launching a criminal investigation. Britain is keen to be at the forefront of a global inquiry into the $5 trillion-a-day foreign exchange market, partly because about 40 percent of it is based in London. Britain's finance industry watchdog, the Financial Conduct Authority (FCA), began its own probe into currency markets last year. "The SFO (Serious Fraud Office) is receiving and examining complex data on this topic. If and when we open a criminal investigation, that decision will be announced in the usual way," David Green, SFO head said in a statement. The U.S. Department of Justice launched its own criminal inquiry last October. But the SFO tends to be late to the party when it comes to global investigations, partly because of a tight annual budget. This forces it to ask its government paymasters for specific funds to pursue complex inquiries. Nevertheless, in a parallel global inquiry into whether traders manipulated Libor benchmark interest rates, the agency has now charged 12 individuals - more than the eight charged in the United States - and is the only prosecutor to have brought defendants to court. The fact that material linked to the currency investigation has landed on the SFO's desk could mean the FCA watchdog has now found possible evidence of criminal wrongdoing during its own examinations and passed this on, some lawyers said, although agencies might also just be keeping each other abreast of more general developments. "This happens when the regulators believe three things - the matter is really serious, there is sufficient public interest or political pressure to justify major budgetary commitment and there seems to be enough evidence to convince a jury to the high 'beyond reasonable doubt' test rather than the lower 'more likely than not' standard that a regulator is allowed to use," Simon Morris of law firm CMS Cameron McKenna, said. "As well as overseas regulators, we are working very closely with the relevant UK agencies, including with the Serious Fraud Office. If we find evidence of criminal misconduct falling outside of our powers we will pass that evidence on to the Serious Fraud Office for them to consider investigating," an FCA spokesman said. Its head of enforcement and financial crime Tracey McDermott told Reuters just over a month ago she had yet to conclude there had been any misconduct in the foreign exchange market, despite trawling through reams of data. The worldwide investigations into currency markets and benchmark interest rates show banks are still struggling to control some trader behaviour despite tighter regulatory scrutiny in the wake of the 2008-2009 financial crisis. Banks have already been fined around $6.0 billion by U.S. and European regulators to settle allegations of Libor rate fixing. Some are now quick to try to draw a line under any suspicions of misconduct. 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.
New Evidence Shows Insider Trading Is 'Pervasive' and Rarely Punished
Three in a trillion--those are the odds average investors face in randomly buying a stock option that perfectly-and therefore profitably-coincides with an unannounced corporate merger or acquisition. Yet those types of transaction are far more common-"pervasive," even, according to a new study, which suggests, "Informed trading is more pervasive than would be expected based on the actual number of prosecuted cases." Informed trading is more commonly known as insider trading, which is trading based on knowledge not available to the general public. Stock options are contracts, purchased by investors, that give them the right to buy or sell a stock at an agreed upon price in an agreed upon timeframe. The study, by two professors from New York University'sStern School of Business and another from McGill's Desautels Faculty of Management, examined stock option activity in the context of major mergers and acquisitions. The authors chose to investigate insider trading from this perspective because it gave them an "attractive laboratory for the testing of hypotheses." In particular, the trading around unannounced mergers and acquisitions provided a meaningfully contrasting sample for the authors to test against random stock option activity. There is also a wealth of stock option data available for analysis. The study covered more than 1,800 deals from January 1996 through the end of 2012. Most strikingly, it found evidence of insider trading in 25 percent of cases examined. The study also found that insider trading is more likely "in cases of target firms receiving cash offers," the thinking behind this likely being that a cash offer is more of sure thing than a stock offer. The authors also looked at what was being done to punish inside traders. They found that the Securities and Exchange Commission brought suit in only a very small percentage of what they considered to be obvious cases of informed trading. And they didn't hold back their criticism. "Overall, we find that the number of civil litigations initiated by the SEC because of illicit option trading ahead of M&As seems small in light of the pervasiveness of unusual option trading that we have documented."
Foreign Corrupt Practices Act (FCPA)
U.S. Export-Import Bank officials investigated over gifts
The U.S. Export-Import Bank has suspended or removed four officials as investigators look into allegations of improper gifts and kickbacks as well as efforts to direct contracts to favored businesses, the Wall Street Journal reported. The Ex-Im Bank, which helps finance exports of U.S. goods and services, issued a statement declining comment on "personnel matters" and saying it has "a comprehensive system of internal controls." The Journal, citing unidentified sources familiar with the matter, reported that Johnny Gutierrez, an official in the Ex-Im Bank's short-term trade finance division, allegedly took cash payments in exchange for attempting to assist a Florida company in getting federal financing to export construction equipment to Latin America. The newspaper quoted Douglas McNabb, Gutierrez's lawyer, as confirming that Gutierrez was placed on leave after an investigation by the agency's inspector general, but said he declined to comment on details of the probe. Two of the other officials were being investigated over allegations of improperly awarding contracts while the third was being investigated over accusations of "accepting gifts on behalf of a company seeking financing," the newspaper reported. The report comes at a time of heightened scrutiny of the Ex-Im Bank as U.S. lawmakers debate whether to reauthorize the 80-year-old agency. The newly elected No. 2 Republican in the House of Representatives said he opposed renewing its charter. "The Export-Import Bank has zero tolerance for waste, fraud and abuse. Due to provisions of the Privacy Act, we are prohibited from commenting on any specific personnel matters," Ex-Im Bank spokesman Matt Bevens said in a statement. "That said, the Export-Import Bank takes extremely seriously its commitment to taxpayers and its mission to support U.S. jobs. The Bank takes thorough and immediate action when any hint of misconduct or fraud is detected by the safeguards we have in place, including working closely with our Inspector General," Bevens said. The Ex-Im Bank statement said it operates a confidential fraud, waste and abuse hot line to allow anonymous reporting and that its management "acts quickly to enforce and prosecute wrongdoing." Representative Kevin McCarthy, the incoming House majority leader, said the bank's role should be taken over by the private sector. Asked if he would allow the bank's charter to expire at the end of September, McCarthy said: "Yes, because it's something that the private sector can be able to do." The chairman of the House Financial Services Committee, Jeb Hensarling, previously called on fellow Republicans to oppose renewing the charter. He said the bank helps some companies at the expense of others. Hensarling's spokesman, David Popp, issued a statement saying Fred Hochberg, chairman and president of the Export-Import Bank, "should come fully prepared to discuss all details surrounding these troubling accusations" during a hearing before the committee. Scrapping the bank would be a blow to Boeing Co, Caterpillar Inc, General Electric Co and other U.S. companies that rely on Ex-Im financing to make sales in export markets where commercial lending is scarce.
Ex-Innospec directors found guilty over bribes to sell toxic fuel additives
A former chief executive and regional sales director of U.S.-listed chemicals group Innospec were convicted in London of bribing Indonesian officials to boost sales of toxic fuel additives banned in Europe and the United States. The unanimous guilty verdicts for Dennis Kerrison, 69, and Miltiades Papachristos, 51, bring to an end a drawn-out transatlantic investigation into how Innospec supplied Indonesia with products such as Tetraethyl Lead (TEL), which is banned in cars in western countries on health and environmental grounds. Innospec pleaded guilty in 2010 to bribing Indonesian government officials employed by Pertamina, a state-owned refinery, and was fined $12.7 million as part of a global settlement. Since then, former directors David Turner and Paul Jennings also pleaded guilty to corruption charges. Britain's Serious Fraud Office (SFO), which worked closely with U.S. agencies, UK police and authorities in Indonesia, Switzerland and Singapore to help bring Innospec and its former staff to book, said the four men would be sentenced on July 25. Innospec appointed and paid agents almost $12 million between 2002 and 2008 to act on its behalf to win or maintain Indonesian contracts to sell TEL, which has been outlawed in some countries because it has been linked to brain and kidney damage and even violent crime. Although the Indonesian government was keen to eliminate the use of leaded fuel, Innospec agents used the commissions in part to bribe Pertamina staff and other public officials. They acted under Innospec's instructions and commission fees were authorised by the company, according to the SFO. Innospec cooperated fully with the investigation first launched by the U.S. Department of Justice (DoJ) in the wake of United Nations Independent Inquiry Committee report into the Oil for Food Programme in 2005. The DoJ referred the inquiry to the SFO in 2007 and the British agency formally accepted it for investigation early the following year. "While other defendants took the decision to plead guilty at an early stage, the SFO case team has had to resist a sustained and extensive campaign designed to prevent these defendants facing trial. That they have now done so is testament to the skills, professionalism and tenacity of those involved."
UK Serious Fraud Office pursues investigation of Alstom
Britain's Serious Fraud Office (SFO) is pursuing its investigation of alleged corruption at Alstom ( ALSO.PA) as a major transatlantic takeover battle for the French engineering conglomerate reaches a climax, the Financial Times reported. The paper said Britain's Attorney General - the government's chief legal adviser - has given permission for the SFO to prosecute the company and former employees for alleged overseas bribery if considered appropriate. The paper also said the SFO has notified seven individuals that they are under investigation. The SFO declined to comment and no comment was immediately available from the Attorney General's office. The FT said the SFO, which opened its probe into the company over four years ago, has invited the company for discussions which could pre-empt any decision to file charges. The reported moves come at a sensitive time for Alstom, which is expected soon to receive a joint offer from Germany's Siemens (SIEGn.DE) and Japan's Mitsubishi Heavy Industries (7011.T) for its turbine businesses. That approach would counter an existing $17 billion offer from U.S. conglomerate General Electric ( GE.N) for Alstom's power arm. An Alstom spokeswoman in Paris declined to comment on the specifics of the FT story but said: "Alstom continues to work constructively with the authorities to address any allegations of past misconduct." Alstom is also co-operating with the U.S. Justice Department over allegations of bribery in Asia. According to court filings seen by Reuters, the Justice Department has evidence that a former Alstom executive tried to bribe officials to secure power projects in Indonesia, India and China. Two executives of Alstom's U.S. subsidiary in Connecticut have already pleaded guilty and admitted to paying bribes on behalf of the company in connection with a project on the Indonesian island of Sumatra. The long-running investigation could result in penalties of several hundred millions of dollars, legal experts say.
Former mayor of Charlotte, North Carolina, admits to bribery scheme
The former mayor of Charlotte pleaded guilty to a federal public corruption charge that brought his arrest and resignation after a brief stint as the elected leader of North Carolina's largest city. Patrick Cannon, a Democrat who served on the Charlotte City Council before being elected mayor in November, admitted to accepting at least $50,000 in bribes in exchange for using his official positions to help several people seeking to do business in the city. Two of those businessmen were federal agents posing as real estate developers and investors. A sting that began in August 2010 led to Cannon's arrest in March on charges that he accepted cash, paid travel to Las Vegas and use of a luxury apartment from the undercover agents. A court document unsealed also accused Cannon, 47, of taking bribes from the owner of an adult entertainment club and using his influence to help the business stay open despite being in the path of the city's new light-rail line. The former mayor, who resigned when he was arrested, asked for forgiveness in a statement he read outside the federal courthouse in Charlotte. "Much has been given to me in the way of the public's trust," Cannon said. "I regret having acted in ways that broke that trust. For that, I am deeply sorry." Cannon was not immediately sentenced but could face up to 20 years in prison and a $250,000 fine for one count of honest services wire fraud. The charge holds that he deprived the city of his "honest and faithful services" by carrying out the bribery scheme dating back to December 2009. He has agreed to pay restitution that will be determined by a federal judge at sentencing and help in the ongoing federal investigation, attorneys said. Anne Tompkins, U.S. attorney for the Western District of North Carolina, said the probe reaches beyond the former mayor's criminal actions, which she said brought "undeserved shame and embarrassment" to Charlotte. "We have the duty to discover the depth and breadth of the fraud ... and whether it extends beyond the mayor's office," she told reporters after Cannon's guilty plea.
Litigation Matters
Bain sues EY over $60 mln loss in India kids clothing company
Global private equity firm Bain Capital Partners LLC is suing EY in a United States court, claiming that the auditing firm cost it roughly $60 million by advising it to invest in Lilliput Kidswear, a children's clothing company in India. Bain alleges that it invested around $60 million in Lilliput in May 2010 for a non-controlling 30.99 percent stake, based on false financial statements that EY, previously known as Ernst & Young, had audited and certified, according to a copy of the lawsuit seen by Reuters. Bain and 10 other subsidiaries of the global private equity firm have sued Ernst & Young Global Limited and Ernst & Young LLP in a Massachusetts court, claiming that the investment is now "rendered worthless", according to the suit. "These allegations of wrongdoing are baseless and EY will vigorously defend this matter," EY said in a statement. Bain invested in Lilliput in 2010 and planned to expand the company before taking it to an initial public offering. Reuters reported in 2012 that Bain was alerted to problems with the accounts at Lilliput via a call from a whistleblower, soon after an initial public offering for the company was approved. ( link.reuters.com/tas99v) Bain halted the Lilliput IPO process after investigating the whistleblower's claims and finding inflated sales at the company, according to the suit. The suit alleges that Bain, which has a longstanding global relationship with EY, was specifically targeted by EY to invest in Lilliput because the Boston-based firm had the resources to pay a higher investment price and the prestige and knowledge to take the company to an initial public offering. The suit also alleges that Bain invested in Lilliput because it relied on false financial statements and EY's false audit opinions, and that EY continued to certify Lilliput financial statements "even as Lilliput's fraud grew with EY's active assistance", according to a copy of the complaint filed with the Suffolk County Court, obtained by Reuters. Bain is bringing the action against EY for "fraud, aiding and abetting fraud, negligent misrepresentation, and unfair and deceptive trade practices based on EY's involvement in the scheme to defraud Bain."
U.S. top court adds limit to securities class actions
The U.S. Supreme Court made it harder for investors to band together to pursue securities fraud lawsuits against publicly traded companies, but stopped short of issuing a decision that could have effectively ended such litigation. In a majority decision by Chief Justice John Roberts, the court agreed with Halliburton Co HAL.N that companies accused of misleading investors deserved a chance, before a class action is certified, to show that any alleged misrepresentation had no impact on the stock price. Companies were previously allowed to make such showings after class certification, an event that often leads to settlements because the risk of large damage awards is greater. But the court refused to overturn a landmark 1988 precedent, Basic v. Levinson, that gave rise to the modern securities class action industry, and by a 6-3 vote left that precedent intact. Supporters and critics said the middle-of-the-road decision imposes a new hurdle for securities fraud plaintiffs and their lawyers, but one they will often be able to overcome. Justice Ruth Bader Ginsburg, in a concurring opinion, said this "should impose no heavy toll on securities-fraud plaintiffs with tenable claims." Aaron Streett, a lawyer for Halliburton who argued for broader limits, in an interview said: "It's a significant win for defendants in restoring balance." David Boies, a lawyer for the Erica P. John Fund Inc, whose 2002 lawsuit prompted the case, said in a separate interview: "This could turn out to be a 'be careful what you ask for' ruling for defendants."
BofA FDIC Suit for $1.7 Billion Investor Losses Revived
Bank of America Corp. 's lawsuit against the Federal Deposit Insurance Corp. for $1.7 billion in client losses was revived after the agency said that a bank at the center of the Taylor Bean scandal may have enough assets to pay the claims. U.S. District Judge Barbara Rothstein vacated her August 26 order dismissing Bank of America's claim against the FDIC, which it made as trustee for Ocala Funding LLC, a mortgage financing vehicle Taylor Bean controlled. The case stems from a mortgage-fraud scheme at failed lender Taylor Bean & Whitaker Mortgage Corp. From 2002 through August 2009,Lee Farkas, while he was chairman of Taylor Bean, sold more than $1.5 billion in fake mortgage loans to Colonial Bank with the collusion of its employees and diverted more than $1.5 billion from Ocala Funding. Rothstein's ruling followed the FDIC's notice , published in the June 10 Federal Register, withdrawing its finding that there aren't enough assets in the receivership of Colonial Bank, of Montgomery, Alabama, to make payments to general unsecured creditors. Colonial Bank's purchase of fake mortgages from Ocala Funding led to its collapse. "The receivership's theoretically possible recoveries have been revised upwards as a result of changed circumstances and could possibly exceed the previously calculated $1.698 billion deficit, which in turn could possibly result in payment on non-deposit claims under the most favorable circumstances," the FDIC said in the notice. The notice offered no indication of the amount of potential payments. "Although highly unlikely, it is theoretically possible that non-deposit claims made upon the Colonial receivership could be paid," Andrew Gray, an FDIC spokesman, said in an e-mailed statement. Bill Halldin, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment on Rothstein's ruling.
Federal Government and State Attorneys General Reach Nearly $1 Billion Agreement with SunTrust to Address Mortgage Loan Origination as Well as Servicing and Foreclosure Abuses
The Justice Department, Department of Housing and Urban Development (HUD), and the Consumer Financial Protection Bureau (CFPB), along with 49 state attorneys general and the District of Columbia's attorney general have reached a $968 million agreement with SunTrust Mortgage Inc. (SunTrust) to address mortgage origination, servicing, and foreclosure abuses. The joint agreement is the result of extensive investigations by federal agencies, including the Department of Justice, HUD and the HUD Office of the Inspector General (HUD-OIG), CFPB and state attorneys general across the country, and includes recoveries for both improper mortgage origination and servicing practices. "SunTrust's conduct is a prime example of the widespread underwriting failures that helped bring about the financial crisis," Attorney General Eric Holder said. "From mortgage origination to servicing to securitization, the Department of Justice is attacking every facet of conduct that led to the Great Recession. We will continue to hold accountable financial institutions that, in the pursuit of their own financial interests, misuse public funds and cause harm to hardworking Americans. We expect that there will be more cases like this to come." "This agreement, which totals nearly $1 billion, not only holds SunTrust accountable for years of abusive practices mortgage origination practices; it also provides for restoration," said Associate Attorney General Tony West. "By the terms of this resolution, SunTrust is required to provide $500 million in consumer relief for homeowners as well as abide by terms that will help to prevent the abuses of the past from being repeated. It's a result attained thanks to the close coordination among our enforcement agency partners throughout the government." As part of the settlement, SunTrust has agreed to pay $418 million to resolve its potential liability under the federal False Claims Act for originating and underwriting loans that violated its obligations as a participant in the Federal Housing Administration (FHA) insurance program. As a participant in that program, SunTrust had the authority to originate, underwrite and certify mortgages for FHA insurance.
China Market
After port fraud, China's vast warehouse sector under scrutiny
Shaken by a fraud investigation into metal financing in the world's seventh-busiest port, banks and trading houses have been made painfully aware of the risks they face storing commodities in China's sprawling warehouse sector. The probe at Qingdao port centers around a private metals trading firm suspected of duplicating warehouse certificates in order to use a metal cargo multiple times to raise financing. Some banks have asked clients to shift metal, used as collateral for loans, to more regulated London Metal Exchange (LME) warehouses outside China or those owned and operated by a single warehouse firm to limit their exposure. "The banks still haven't looked under the hood," said an executive at a bank involved in commodity financing in China, referring to China's warehousing sector. At the heart of the issue is China's roaring commodity financing business, which has helped drive up stockpiles of commodities at ports to record levels, stored in warehouses not always regulated to the same extent as elsewhere. Though many global firms are involved in the warehouse industry in China, there has been outsourcing to local firms to cut overheads and avoid dealing with complex local regulations. Using commodities as collateral in financing in China is common practice and not illegal, but issuing receipts to repeatedly mortgage an asset is fraud and could leave more than one creditor holding claims to the same collateral. Illustrating how difficult it may be to unravel competing claims, China's CITIC Resources Holding Ltd said that a court had been unable to secure more than 100,000 tonnes of alumina stored at Qingdao port. Traders said there was a risk the metal could have been already claimed before part of Qingdao Port was sealed off, adding that at least two trading houses had moved metal out as soon as news of the scandal broke. CITIC Resources said it would conduct its own investigation and was considering further legal action. In Qingdao, sources with knowledge of the probe said authorities were looking at whether the firm under focus, Decheng Mining, had secured multiple warehouse receipts because an affiliate managed logistics at the port's Dagang bonded zone. "Warehouse receipts are not title documents, they are documents of entitlement. But they are being used as title documents for sales and purchase and transfer of ownership," said a person at a warehouse company with operations in Qingdao. "Everywhere else outside of China, a warehouse receipt is cut for one party." A source at a Western bank with direct knowledge of Qingdao said warehouse firms should bear the brunt of responsibility, while a senior official at a warehouse firm at the Port Said responsibility "remains very much up in the air." A lawyer, who has previously been involved in litigation over fraudulent warehouse receipts, said banks primary recourse would be against whoever had forged receipts. "But if the fraudster is gone, the bank may decide that it wants to go against the warehouse," said the lawyer, who did not want to be named because of the sensitivity of the issue. A warehouse operator and a banker said agreements with clients meant there could be limited liability for a cargo, capping a payment at around $100,000, depending on specific terms and conditions. For example, a shipment of 10,000 tonnes of copper would be worth about $68 million at current prices. Even if banks or their customers have insurance for the metal, some warehouse sources said they might struggle to get paid if fraud is uncovered or their agents are implicated.
INSIGHT-China port fraud probe prompted by corruption inquiry
The trail that led investigators to a suspected metal financing scam at China's Qingdao port which has spooked Western banks and hit global metals prices began with a Communist Party corruption probe 1,000 miles away in the old Silk Road city of Xining. The Central Commission for Discipline Inspection (CCDI) said in late April that it was investigating the city's Party secretary, Mao Xiaobing, for suspected "serious discipline violations" - a term generally used to denote graft. What was not made public at the time was that the authorities were also investigating Mao's business associate Chen Jihong, a veteran aluminium and alumina trader and chairman of Qingdao-based Dezheng Resources Holding Co. Ltd. Dezheng's trading unit, Decheng Mining, is now at the centre of a separate probe into the alleged duplication of warehouse receipts to obtain multiple loans secured against a single cargo of metal, according to police sources with direct knowledge of the matter. The use of commodities as collateral to raise finance is common practice in China and is not illegal. But duplicating receipts to repeatedly mortgage the full value of an asset is fraud and could leave more than one creditor holding claims to the same collateral. Industrial metals prices have fallen since authorities at Qingdao, the world's seventh largest port, announced the probe, amid concerns it could prompt Western banks to tighten controls over commodity financing. It has also played on Western investors' fears that lifting the lid on even a seemingly isolated case of fraud may uncover more landmines lurking within China's opaque "shadow" financial system, and sent global banks and trading houses scrambling to check their exposure. "Like anything, the more you dig, the deeper you get," said Jeremy Goldwyn, a director in charge of Asia business at commodity broker Sucden. "They have uncovered something unwittingly and to some extent it fuels the argument, held by some, that 'who knows what other problems are out there, it's all going to end in tears'... I don't think there's any evidence of that at all."
China metals probe likely a short-term problem
The brouhaha over suspected metal financing fraud at China's Qingdao port is likely to cause short-term angst, but longer-term gains. Banks and authorities are probing allegations of whether a private Chinese metals trading firm was duplicating warehouse certificates in order to use a cargo several times to raise financing. The immediate impact is likely to be a sharp tightening of lending practices to China-based metals traders, thereby limiting their ability to participate in the market. Longer-term, it's likely that China's massive warehousing sector will come under further scrutiny and may eventually be forced to adopt tighter rules, such as those at facilities regulated by the London Metal Exchange (LME). While the issue has so far been limited to Qingdao port and to deals involving copper and aluminum, there are concerns the issue may be more widespread and linked to more commodities, such as iron ore and soybeans. While the potential ramifications from the Qingdao warehousing issues are significant, the impact on market pricing hasn't been so clear as yet. Benchmark spot iron ore .IO62-CNI=SI dropped in the days after the Qingdao news first surfaced, hitting a 21-month low of $89 a tonne on June 16. It has since recovered slightly to close at $92.10 on June 20. Iron ore has been on a weakening trend since December amid rising supply from global miners and concern over the pace of economic growth in China, which buys about two-thirds of seaborne cargoes. Chinese traders are already being starved of credit as banks increase the scrutiny of financing deals linked to iron ore imports. This may result in short-term selling of distressed inventory as smaller trading companies scramble for cash to pay off loans. With Chinese port inventories at a record 113.4 million tonnes on June 20, up 0.8 percent from a week earlier, the likelihood of downward pressure on iron ore prices increases. But it's not necessarily a one-way street for iron ore prices, as inventories of the raw material at steel mills are believed to be low, meaning they will be tempted to snap up supplies, especially given recent price weakness. Demand for iron ore from the steel sector is also positive, with global output rising at an annual 2.2 percent in May as output in China reached record levels and mills in North America and Europe boosted production. While rising steel output is putting downward pressure on prices of the finished metal, it will serve to boost appetite for iron ore, suggesting that China may be able to chew its way through its excess inventories without causing prices to decline much further. Certainly, iron ore futures on the Dalian Commodity Exchange are suggesting prices are more than likely going to stabilise around current levels.
Healthcare Industry
Novartis Offices Searched in Italy Flu Vaccine Probe
Novartis AG (NOVN) 's offices in Italy were searched by authorities seeking information on the pricing of two influenza vaccines, adding to the Swiss drug maker's woes in the country. Italian police searched two of the company's sites as part of a probe into possible fraud related to the purchase of the vaccines by the Health Ministry, one for a pandemic in 2009, according to an e-mailed statement from the police. The police allege Novartis inflated the cost of an additive to the vaccines, known as MF59, by six-fold. The case stems from a tax agency review into intergroup transfer pricing, the police said. The damages to the country could be more than 16 million euros ($22 million), they said. Novartis, Europe's biggest drug maker, confirmed a visit by authorities to its sites in Siena and Origgio and said it's cooperating fully with the investigation. "Novartis is committed to high standards of ethical business conduct and regulatory compliance in all aspects of its work," the Basel-based company said in an e-mailed response to questions. Novartis is also being probed for failure to oversee employees' actions, according to the police. The company last month denied allegations that it engaged in anti-competitive practices with Roche Holding AG, also based in Basel, related to the companies' eye treatment Lucentis. Italian authorities are seeking 1.2 billion euros in damages from the two companies after the health ministry said they agreed to limit competition on eye-drug sales.
IPC The Hospitalist Sued by U.S. for Overcharging on Fees
IPC The Hospitalist Co. (IPCM) , which employs doctors and health-care service providers in 28 states, has overcharged U.S. health-care programs by "millions of dollars," according to a federal lawsuit. "IPC physicians sought payment for higher and more expensive levels of medical service than were actually performed-- a practice commonly referred to as 'upcoding,'" Chicago U.S. Attorney Zachary T. Fardon said in a statement. The U.S. is intervening in a whistle-blower complaint filed under seal in 2009 against the North Hollywood, California-based business by a doctor who worked for the company in San Antonio from 2003 to 2008. It was ordered unsealed by U.S. District Judge Ruben Castillo in December. The Justice Department has recovered more than $17 billion through federal False Claims Act cases since January 2009, with more than $12.2 billion recovered in cases involving fraud against federal health programs, according to Fardon's statement. Hospitalists are acute-care specialists who focus on the care of patients from the time they're admitted to a hospital until they're discharged, according to IPC's Web site. Its workforce includes about 2,500 such providers at 400 acute-care hospitals and 1,100 post-care facilities. More than half the of the company's revenue has come from government insurers, including Medicare and Medicaid, Fardon said, further alleging the company pressured its physicians to upcode. "IPC has, and continues to, fully cooperate and work toward a resolution with the Department of Justice," said Elaine Murphy, a company spokeswoman with Scott Public Relations in Canoga Park, California. The U.S. is seeking money damages which would be tripled under the False Claims Act, together with civil penalties of as much as $11,000 for each false claim the company is found to have submitted. "IPC's upcoding scheme has, and still continues, to cause Medicare, Medicaid and other federal payors to overpay millions of dollars to IPC," according to the government's complaint, which didn't claim a specific amount of loss.
Chicago Accuses Drug Companies of Pushing Opioids
Chicago, the third-biggest U.S. city, sued Johnson & Johnson (JNJ) and four other drug companies for allegedly pushing consumer use of opioid painkillers, creating addicts and driving up its costs. "Since 2007, the city has paid for nearly 400,000 claims for opioid prescription fills, costing nearly $9,500,000, and suffered additional damages for the costs of providing and using opiates long-term to treat chronic non-cancer pain," lawyers for the municipality claimed in a state court complaint filed in Chicago. Lawyers for the city of 2.7 million accused the drug companies of deceiving the public about the risks associated with the use of painkillers including Duragesic, made by Johnson & Johnson's Janssen Pharmaceuticals unit, while overstating their benefits. In May, two California counties made similar accusations in a lawsuit against the same drug makers. More than 12 million people in the U.S. abuse prescription painkillers annually, according to a study published March 3 in JAMA Internal Medicine. Misuse of those drugs in 2008 killed more people than heroin and cocaine combined,according to the U.S. Centers for Disease Control and Prevention. Greg Panico, a spokesman for Johnson & Johnson's Janssen unit, said in an e-mail that the company is reviewing the city's complaint.
SEC Regulatory Actions
SEC 'Drilling Down' on Compliance Programs
The Securities and Exchange Commission's Enforcement Director Andrew Ceresney said that the division's asset management unit and broker-dealer task force has been "drilling down" over the past year on firms' compliance programs as well as being "very focused" on investment advisory fraud and making sure advisors are fulfilling their fiduciary duties. During a question and answer session at the D.C. Bar in Washington, Ceresney also said that the case of Wedbush Securities Inc., in which the firm and two officials were charged with market access violations, is a "critical case." Wedbush's failure to preauthorize traders, thus opening its trading system to unknown users, "allowed for the potential of schemes by the traders," including high-frequency traders, Ceresney said. Ceresney also told attendees of the D.C. Bar luncheon that the agency has been using administrative proceedings more frequently in recent years, calling the process "sophisticated" and "more streamlined" than bringing a civil action to District Court (in an administrative proceeding, an administrative law judge hears the case and levies any penalties).
SEC Announces Charges Against Wedbush Securities and Two Officials for Market Access Violations
The Securities and Exchange Commission announced charges against a Los Angeles-based market access provider and two officials accused of violating the agency's market access rule that requires firms to have adequate risk controls in place before providing customers with access to the market. The SEC's Enforcement Division alleges that Wedbush Securities Inc., which has consistently ranked as one of the five largest firms by trading volume on NASDAQ, failed to maintain direct and exclusive control over settings in trading platforms used by its customers to send orders to the markets. Wedbush did not have the required pre-trade controls, failed to restrict trading access to people whom the firm preapproved and authorized, and did not conduct an adequate annual review of its market access risk management controls. The Enforcement Division alleges that the firm's violations of the market access rule were caused by Jeffrey Bell, the former executive vice president in charge of Wedbush's market access business, and Christina Fillhart, a senior vice president in the market access division. "Wedbush provided market access to overseas traders without preapproval and without ensuring that they complied with U.S. law," said Andrew J. Ceresney, director of the SEC Enforcement Division. "We will hold Wedbush accountable for reaping substantial profits while failing to protect U.S. markets from the risks posed by these traders." Daniel M. Hawke, chief of the SEC Enforcement Division's Market Abuse Unit, added, "The market access rule was adopted out of concerns that some broker-dealers did not have effective controls in place for their market access. This enforcement action against Wedbush is a cornerstone of our ongoing efforts to hold accountable any broker-dealers who fail to effectively implement market access controls and procedures." According to the SEC's order instituting administrative proceedings, the violations began in July 2011 and continued into 2013. Wedbush allowed the majority of its market access customers to send orders directly to U.S. trading venues by using trading platforms over which Wedbush did not have direct and exclusive control. Bell was aware of the requirements of the market access rule and should have known that the firm's risk management controls and supervisory procedures related to market access did not comply with the market access rule. Fillhart also had responsibility for overseeing Wedbush's market access business and received inquiries by exchanges about potential violations by Wedbush and its customers. Despite these red flags, Fillhart did not take adequate steps to prompt the firm to adopt reasonably designed risk management controls.
Chicago Schools Sued by SEC for Deal With Official's Brother
A Chicago charter school operator was sued by the U.S. Securities and Exchange Commission for inadequately disclosing contracts with companies owned by an executive's brothers, which the agency said threatened bond investors. The United Neighborhood Organization of Chicago, a nonprofit, and its charter school affiliate agreed to settle the civil lawsuit without penalty by appointing an independent monitor, the SEC said in a statement. No individuals were sued or alleged to have committed wrongdoing. UNO is among the nonprofits that raise money for projects like schools and hospitals through the $3.7 trillion municipal-bond market. The SEC said UNO put investors at risk by failing to adequately disclose an executive's family ties to contractors, a conflict that led the state to suspend grants to the organization. "UNO misled its bond investors," said Andrew J. Ceresney, director of the SEC's Division of Enforcement, said in a statement. "Investors had a right to know." The SEC has been stepping up enforcement of fraud cases involving state and local bond sales. In recent years, it settled cases with New Jersey, Illinois and Harrisburg, Pennsylvania, for making misleading or inadequate disclosures. Nonprofit organizations that issue munis are more likely to default than government borrowers. Charter schools are publicly funded but privately operated. UNO, a Hispanic community group in Chicago, operates 16 that serve more than 7,500 students, according to its Web site. In 2009, Illinois agreed to provide it with as much as $98 million to build schools. In 2011, it raised additional money by selling $37.5 million debt. The SEC said UNO failed to notify Illinois that two companies owned by an executive's brothers were awarded about $14 million to install windows and oversee construction. Illinois suspended grants to the organization last year. Had the state demanded that UNO repay prior grants, as it could have, the group might not have been able to pay its debts, the SEC said.
SEC Awards $875,000 to Two Whistleblowers Who Aided Agency Investigation
The Securities and Exchange Commission announced a whistleblower award of more than $875,000 to be split evenly between two individuals who provided tips and assistance to help the agency bring an enforcement action. The SEC's whistleblower program authorized by the Dodd-Frank Act rewards high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million. Whistleblower awards can range from 10 percent to 30 percent of the money collected in a case. By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower's identity. "These whistleblowers provided original information and assistance that enabled us to investigate and bring a successful enforcement action in a complex area of the securities market," said Sean McKessy, chief of the SEC's Office of the Whistleblower. "Whistleblowers who report their concerns to the SEC perform a great service to investors and help us combat fraud." A total of eight whistleblowers have been awarded through the SEC's whistleblower program since it began in late 2011.