Archived Forensic News August 2014
Financial/Accounting
Fraud
Alibaba film unit says found possible accounting irregularities;
halts shares
A media firm Alibaba Group Holding Ltd recently
bought said a review of its finances revealed possible accounting
irregularities, casting doubts on the Chinese e-commerce giant’s due diligence
as it prepares for a U.S. initial public offering. The announcement by Alibaba
Pictures Group Ltd comes less than two months after Alibaba Group completed its
$804 million purchase of a 60 percent stake in the film and TV
production company once known as ChinaVision Media Group Ltd. The deal was
among the $10 billion or so Alibaba Group and its affiliates have spent
since the beginning of last year on acquisitions which ventured beyond its
traditional e-commerce roots to fend off competition from rivals like Tencent
Holdings Ltd, Baidu Inc and JD.com. But the speed at which the group has
conducted some of its purchases has raised investor concerns. In June, Alibaba
bought China’s most successful football club, the Guangzhou Evergrande, for $192 million
in a deal which was hatched over a few drinks. “They’re under a lot of
competition pressure, which led them to make some of these deals, but
I don’t think a lot of them are actually well thought out,” said
Tony Chu, a Hong Kong-based portfolio manager at RS Investments.
“When you see the extent of the deals, there are so many of them recently
announced, that raises the question as to how much due diligence the company
has made on some of these deals,” he told Reuters. Alibaba Group, whose platforms
handle more goods than EBay Inc and Amazon.com Inc combined, is gearing up for
a U.S. IPO this year that bankers and investors expect to surpass the
$16 billion raised by Facebook Inc when it listed in 2012. In a statement,
Alibaba Group said it supported the review into Alibaba Pictures’ finances.
“The new management team has a firm commitment to transparency, good corporate
governance, and investor protection,” it said. Deloitte Touche Tohmatsu was
listed as the auditor of ChinaVision since 2011, according to the company’s
2013 annual report. Days after completing the deal, Alibaba Group
appointed a new board of directors for Alibaba Pictures and named Polo Shao,
Alibaba’s chief risk officer, as chairman. Liu Chunning, a former Tencent
executive who heads Alibaba’s digital entertainment business, was also
appointed acting CEO. Goldman Sachs advised Alibaba on the investment in
Alibaba Pictures, while REORIENT Financial Markets Ltd advised the target
company.
Click here for full article.
Whistleblower alerted L-3 to accounting misconduct
An employee complaint exposed accounting
misconduct at L-3 Communications Holdings Inc., prompting the aerospace and
defense supplier to fire four people, revise two years of earnings statements
and cut its earnings forecast. L-3’s shares plunged as much as 17 percent
– their biggest intraday percentage drop ever – after the company said it would
take a pretax charge of $84 million for misconduct and accounting errors,
including cost overruns and overstated sales figures from 2013 and 2014. The
surprise announcement prompted some analysts to cut ratings on the company, and
raised concern about a broader problem at L-3, which also suffered an ethics
scandal in 2010. The sources said the latest misconduct stemmed from a single
fixed-price contract for maintenance and logistics support with the U.S.
military that began in December 2010 and runs through January 2015. The
Pentagon has not barred L-3 from bidding on other contacts as a result of the
misconduct, the sources added. The pretax charge includes adjustments for
accounting errors L-3 found as it scrubbed its books during the review, said
the sources. “The profit L-3 expected in the contract just wasn’t there,” said
one of the sources. The sources declined to say which branch of the military
had the contract, or precisely which part of L-3 was involved, other than that
it was in its aerospace unit. They also would not say how recently the employee
lodged the complaint. However, they said the New York-based company
quickly fired four employees and hired law firm Simpson Thatcher to
conduct the investigation and consulting firm AlixPartners to perform forensic
accounting. Another employee resigned in connection with the review. The
whistleblower is still with the company, and the review is continuing, but not
expected to turn up significant additional charges, the sources said. L-3,
founded in 1997 and built through mergers and acquisitions of smaller
companies, supplies a wide range of military and civil electronics equipment
and services, including aircraft “black boxes,” communications transponders and
cockpit display panels. The accounting errors surprised investors, but they
stopped short of triggering a “restatement” of L-3’s accounting. Instead, the
financial statements are being “revised” to reflect what are considered
non-material adjustments, and the statements can still be relied on by
investors, the sources said. Analysts peppered Strianese and CFO
Ralph D’Ambrosio with questions on the conference call about whether other
misconduct could appear elsewhere. “We have no reason to believe that this
issue occurred at any other segment of the company,” Strianese said. Accounting
irregularities tend to unnerve investors and bring further scrutiny of
company’s operations, analyst said. The incident raised memories of a 2010
event in which an L-3 unit was suspended from doing contract work for the
U.S. Air Force for allegedly using a government computer to gather
business information for its own use. Strianese said that case found no
evidence that anyone at L-3“did anything wrong” and “actually proved that we
did not have any bad actors.” Still, “situations involving accounting
misconduct with government contractors do not end quickly and generally are
expanded in scope,” said CRT Capital analyst Brian Ruttenbur, who cut his
rating on L-3 stock to “sell” from “fair value.” D’Ambrosio said the contract
involved in the review had average annual sales of about $150 million.
“It’s a low-margin contract and with these adjustments, it is now in a loss
position,” he said. L-3 said about $50 million of the $84 million
charge related to periods prior to 2014 and about $30 million related to
the second quarter of 2014.
Click here for full article.
SEC charges Kansas for not telling investors of pension problem
The U.S. Securities and Exchange Commission has
charged Kansas with fraud for not properly disclosing funding problems with its
public pension when it held bond offerings in 2009 and 2010. It marks the third
time the federal regulator has taken action against a state for violating
municipal bond disclosure rules. Kansas, which was under investigation for four
years, has already implemented reforms in how it discloses its pension
liabilities and has agreed to settle the charges for its prior incomplete
disclosures, without admitting or denying the charges, the SEC said. According
to the SEC, the Kansas pension system was so poorly funded that it created a
repayment risk for investors holding the state’s bonds, but in bond offering
documents the state did not explain the existence of “the significant unfunded
liability.” Kansas also should have described how the state legislature could
have to appropriate funds to cover the pension liability, thereby making less
money available for spending in other areas, including debt service payments,
the SEC said. “Kansas failed to adequately disclose its multi-billion-dollar
pension liability in bond offering documents, leaving investors with an
incomplete picture of the state’s finances and its ability to repay the bonds amid
competing strains on the state budget,” said LeeAnn Ghazil Gaunt,
chief of the enforcement unit on municipal securities and public pensions. The
SEC charged New Jersey in 2010 and Illinois last year for not informing bond
buyers of pension problems. Because federal regulators have limited power over
states, the SEC in recent years has asserted a stronger influence on public
retirement finances by citing states and cities for violating municipal bond
disclosure rules. Since the 2007–09 recession laid bare some pensions’ shaky
finances, political pressure has mounted for greater federal monitoring. Around
the time of the New Jersey charges, the commission said it began looking into
the bond offerings that Kansas made in 2009 and 2010, totaling $273 million,
adding that at one point the state’s pension was considered the second-worst
funded in the nation. The SEC did not detail the size of the state’s pension
shortfall at that time. Governor Sam Brownback, who took office in 2010,
pointed to reforms passed in 2012 to boost contributions from both employers
and employees, and enroll new workers in a plan resembling 401(k) accounts in
the private sector. As of December 31, 2012, the Kansas Public Employees
Retirement System, or KPERS, had a shortfall of $10.3 billion, according
to its annual report. The unfunded liability shrank to $9.77 billion in
2013, mostly on investment gains, it said last December. The funded ratio was
56 percent in 2012, meaning KPERS had enough money to cover roughly half
the amount promised to workers, according to the presentation. In 2013 the
ratio improved to 59.9 percent.
Click here for full article.
GM unit gets subpoena over subprime auto loans
The U.S. government is investigating General
Motors Co’s auto financing arm over subprime auto loans it made and securitized
since 2007. General Motors Financial Co Inc said it was served with a subpoena
from the Department of Justice directing it to turn over documents related to
underwriting criteria. The subpoena, which the company said was in connection
with an investigation into possible violations of the civil fraud law FIRREA,
also asked for information on the representations GM made about the criteria
when the loans were pooled into securities. Financial services firms have paid
billions of dollars to resolve investigations under FIRREA into questionable
mortgages pooled into securities in the run-up to the financial crisis. The new
subpoena could be one of the first public acknowledgements that investigators
are also looking at the securitization of subprime auto loans. FIRREA, the
Financial Institutions Reform, Recovery and Enforcement Act, allows the Justice
Department to sue over fraud affecting a federally insured financial
institution. GM Financial was known as AmeriCredit Corp until the carmaker
acquired it in October 2010. It issued $2.15 billion in securities backed
by subprime auto loans in the first six months of 2014, making it the
second-largest issuer of such securities for the period. The disclosure of the
subpoena accompanies increased regulatory scrutiny of subprime auto loans. The
Office of the Comptroller of the Currency, which regulates national banks, warned
in a June report that “signs of risk in auto lending are beginning to emerge.”
Its assessment was based on lenders’ willingness to lengthen terms, chase
borrowers with lower credit scores, and offer loans to buy cars that exceeded
the value of the vehicle. The disclosure also comes as the auto industry
increasingly relies on subprime auto loans for growth. New auto loans to
borrowers with the lowest credit scores were up 51 percent in the first
quarter compared to the same period in 2013, according to Experian Automotive.
Meanwhile, new auto loans to borrowers with the highest credit scores were down
7 percent over the same time frame.
Click here for full article.
Barclays Seen Facing $2 Billion in Misconduct Costs
Barclays Plc (BARC) faces costs of as much as
1.2 billion pounds ($2 billion) for its alleged rigging of currency markets,
lying to clients about its U.S. dark pool and mis-selling interest-rate swaps,
Sanford C. Bernstein Ltd. said. The U.K.’s second-largest lender may
incur a 700 million-pound charge to settle a foreign-exchange probe with
regulators and a further 200 million pounds relating to a U.S.
investigation into its private-trading venue, Chirantan Barua, an analyst
at Bernstein in London,
said in a note. The bank could reach settlements by the end of 2014, he said.
Barclays is part of a group of banks in talks with the U.K.’s Financial Conduct
Authority to reach a settlement in the currency-rigging probe, while fighting a
U.S. lawsuit accusing it of falsifying marketing materials to hide the presence
of high-frequency traders in its dark pool. The scandals are undermining Chief
Executive Officer Antony Jenkins’ attempts to reform the culture of a
bank after it was fined 290 million pounds in 2012 for rigging the Libor
benchmark interest rate. London-based Barclays may also set aside
300 million pounds in the second-half to compensate customers improperly
sold interest-rate hedging products, Barua estimates. The bank didn’t make
further provisions for redress in the first half. Other British lenders are
also struggling with rising provisions for misconduct. Royal Bank of
Scotland Group Plc, Britain’s largest state-owned lender, may face as
much as 1 billion pounds in charges to settle the allegations of currency
market manipulation, Barua wrote in an separate August 11 report. RBS
said on July 25 it made additional provisions of 150 million pounds
in the first half for improperly sold loan insurance and 100 million
pounds for interest-rate swaps. The government owns 80 percent of
the Edinburgh-based bank. Barclays took a 900 million-pound charge to
cover the costs for improperly sold loan insurance compared with
1.35 billion pounds a year ago, it said July 30. That brings total
payment-protection insurance provisions to 4.85 billion pounds. Britain’s
FCA is preparing to reach a deal with a group of banks on currency rigging this
year, according to people with knowledge of the situation. The regulator is in
negotiations with banks including Barclays, Citigroup Inc., JPMorgan Chase
& Co. and UBS AG, said the people. RBS and HSBC Holdings Plc may also be
part of the group settlement, one of the people said.
Click here for full article.
Ernst & Young Role in Gowex Fraud Questioned by Exchange
As Spanish regulators sift through the remains of
Let’s Gowex SA, the Wi-Fi hotspot provider that collapsed last month after
years of falsifying earnings, investors and the Madrid exchange are asking just
who was verifying its financial statements. Auditor Jose Diaz, of M&A Auditores,
has been named as a suspect and jailed after failing to post bail. A review of
the rules for MAB, the exchange where Gowex traded, also raises questions of
whether its registered adviser, Ernst & Young Servicios Corporativos S.L.,
should have caught on to the fraud earlier. Registered advisers “work with
companies to ensure they fulfill the duties and responsibilities they assume
with a public listing,” according to guidelines from MAB, an alternative bourse for small
businesses. They also assess whether “the company’s structure, organization,
business plan and other aspects make it fit to be listed.” The Spanish firm,
part of the EY LLP global network, has been Gowex’s registered adviser since
the company’s market debut in 2010. MAB said it’s asked the Madrid-based
accountant for any related documents for the exchange’s own investigation into
Gowex’s collapse and declined further comment. Gowex founder Jenaro Garcia
told Madrid Judge Santiago Pedraz that he faked Gowex’s accounts since at
least 2005, five years before its initial public offering, according to a
July 14 court statement. He admitted to inflating the value of contracts and
inventing customers, and his maid has told Pedraz that she got
300 euros ($400) to sign paperwork to create at least one such
phantom client. EY did not make anyone who worked with Gowex available and
declined to comment on statements by other registered advisers and investors.
Judge Pedraz said the auditor, Diaz, didn’t follow proper procedures in
vetting Gowex and gave him until August 5 to post a 200,000-euro bail.
Diaz didn’t respond to multiple calls to his mobile phone. “There can be cases
where a registered adviser isn’t comfortable with the auditor,” said
Jose Antonio Barrena, a partner at Norgestion, which works as a
registered adviser on MAB. “An adviser has to be on top of the company.” While EY
and MAB haven’t been named as suspects since the criminal investigation began,
Pedraz asked MAB to turn over all documents related to Gowex. An exchange
spokesman said the bourse did everything legally required in reviewing the
financial reports and bears no responsibility for investor losses. In cases
such as Gowex, auditors and registered advisers should be held responsible for
their involvement, said Prem Sikka, an accounting professor at the
University of Essex.
Click here for full article.
Petrobras-Linked Money Laundering Probe Spreads to Banks
A $4.4 billion money-laundering probe linked
to state-run Petroleo Brasileiro SA is spreading to financial institutions
as prosecutors investigate whether they met compliance requirements. Court
documents cite units of banks including New York-based Citigroup
Inc. (C), Madrid-based Banco Santander SA (SAN) and London-based HSBC Holdings
Plc (HSBA), as well as Sao Paulo-based Itau Unibanco
Holding SA (ITUB4) and Osasco, Brazil-based Banco Bradesco
SA (BBDC4) as holding accounts or executing operations linked to the
alleged laundering of 10 billion reais. The refining division at Petrobras, as the biggest producer in
ultra-deep waters is known, is already under investigation by a congressional
committee for runaway spending including alleged inflated contracts to
suppliers, and is cited as one of the possible sources of cash being laundered
in the case dubbed “Car Wash” by police. Banks including units of Citigroup,
Santander, HSBC, Bradesco and Itau, as well as brokerages, either created
accounts, transferred money or both for alleged front companies cited in the
investigation, according to court documents that compile the results of a
police investigation, banking records, wire taps and initial conclusions from
the prosecutors assigned to the case. The documents cite specific branches in Brazil and
abroad, and specific account numbers. The prosecution is “facing some
difficulties” gaining cooperation from banks, Lima said. “They are not
providing the data with the required speed and detail.” The court has lifted
privacy protections for banking information related to the case and the
prosecution has repeatedly sought cooperation from banks and brokerages, he
said. The $4.4 billion of alleged laundering includes cash from Brazilians
seeking to evade tax authorities, revenue from drug trafficking and money
allegedly embezzled from Petrobras (PETR4) contracts, according to police press
releases and court documents. Informal foreign exchange traders known as
doleiros normally receive money from clients in Brazil and then make deposits
abroad from seemingly unrelated accounts for a fee, allowing clients to export
cash without alerting the tax authorities. In the Car Wash scheme, doleiros or
their associates allegedly set up front import and export companies to move
larger volumes of cash, according to court documents.
Click here for full article.
Foreign Corrupt Practices Act (FCPA)
Billionaire Found in Middle of Bribery Case Avoids
U.S. Probe
In January, a unit of Alcoa Inc., the
biggest U.S. aluminum producer, pleaded guilty to foreign bribery charges
brought by the U.S. Justice Department. Alcoa also settled claims by the
Securities and Exchange Commission and agreed to pay a $384 million fine –
the fifth-largest such penalty ever. The Alcoa subsidiary admitted to paying
bribes to government officials in Bahrain for more than a decade to win
contracts to sell alumina, a compound essential in making aluminum, to the
Persian Gulf state’s processing plant. Not named and not charged in the case
was the person who made those payments, whom the Justice Department identified
in court only as “Consultant A.” In the thriving business of global bribery –
which the World Bank says amounts to $1 trillion in illicit payments
annually – guilty pleas like the one by Alcoa’s unit are rare. Most of the
time, these brokers aren’t even named. The Alcoa guilty plea – together with related cases in the U.K. and Norway –
provides an unusual window into the modus operandi of the middlemen who shuttle
between companies and governments striking deals. Before the U.S. announced the
fine against Alcoa,
U.K. prosecutors in October 2011 charged Victor Dahdaleh, a London-based businessman, with
laundering money and making improper payments to officials in Bahrain related
to Alcoa contracts. His lawyers argued in a London court last year that the
payments Dahdaleh, 70, made to government officials in Bahrain were sanctioned,
akin to taxes in the country, and therefore were not illegal. Dahdaleh was
acquitted in December after the prosecution dropped its case, saying that two
U.S. lawyers who were set to be witnesses had refused to testify and that
testimony by Bruce Hall, the plant’s former chief executive
officer, differed from earlier statements. An Alcoa Australian unit sold the
alumina to Consultant A’s companies, which in turn sold it to Aluminium
Bahrain BSC, known as Alba, according to the U.S. case. Alba is one of the
world’s largest aluminum smelters. Norway, which fined a shipping
company $5 million in May for bribing foreign officials to win the
delivery agreements to move the Alcoa alumina from Australia to Bahrain, cited
Dahdaleh by name as the person who made those payoffs. Norwegian authorities
didn’t charge Dahdaleh. Dahdaleh’s U.K. trial had been slated to begin in
April 2013. It was postponed until November after he and his lawyers
allegedly met with a key prosecution witness, Mahmood Hashim Al Kooheji, the current
chairman of Alba. Judge Nicholas Loraine-Smith revoked Dahdaleh’s bail for
failing to steer clear of witnesses before the trial, as he’d been ordered to
do. He sent Dahdaleh to jail for a month. For decades, multinational
corporations have used little-noticed middlemen to make payments for contracts
in murky Middle Eastern deals, says Norman Bishara,
associate professor of business law and ethics at the University of Michigan’s
Ross School of Business.
Click here for full article.
Former Calpers board member charged with bribery in corruption
case
A federal grand jury indicted a former Calpers
board member on charges of bribing a chief executive of the California public
pension fund and faking documents to gain million of dollars in investments
fees. U.S. Attorney Melinda Haag announced that
Alfred J. Villalobos, a former member of the board of the California
Public Employee Retirement System who later worked as a placement agent,
engaged in a conspiracy to commit corruption, defraud the United States,
conceal materials, and conspire to commit mail and wire fraud. Villalobos was a
member of Calpers board from 1993 to 1995 and later founded a placement agency
called ARVCO Capital Research LLC that solicited investments by public pension
funds in private equity funds, according to court documents. The indictment was
a revision from one originally filed in March 2013, when Villalobos was
charged, along with former Calpers Chief Executive Fred Buenrostro, in
connection with a scheme involving a $3 billion Calpers investment in
funds managed by Apollo Global Management, a New York-based private equity
firm. Villalobos was the placement agent who orchestrated the transaction
between Apollo and Calpers, according to a statement released by the U.S.
attorney for the Northern District of California. Prosecutors allege that in
2007, Villalobos and Buenrostro created a series of fraudulent investor
disclosure letters, for which Villalobos’s firm earned $14 million in
fees. Villalobos and Buenrostro then proceeded to misrepresent and conceal
information from the U.S. Securities and Exchange Commission, the U.S. Postal
Inspection Service and the Federal Bureau of Investigation, the documents said.
In July, Buenrostro pleaded guilty to a single count of conspiracy and agreed
to cooperate in future investigations. In his plea, Buenrostro admitted he had
accepted gifts, travel and other benefits from Villalobos in exchange for using
Calpers investments, including cash bribes that eventually totaled approximately
$200,000 and were delivered to him at a downtown Sacramento hotel in paper bags
and a shoe box. Villalobos hosted Buenrostro’s wedding at his home in Nevada,
flew the Calpers chief to Dubai, Hong Kong and Macau, and provided
valuable casino chips to now-former Calpers board members, Buenrostro stated in
the plea agreement.
Click here for full article.
Cobalt Reports SEC Angola Corruption Case Moving Forward
Cobalt International Energy Inc. (CIE) fell more than
10 percent after it reported a government corruption investigation into
its Angola
operations may lead to an enforcement action against the global oil producer.
Cobalt, based in Houston, received a Wells Notice from the U.S. Securities and
Exchange Commission alleging violations of certain securities laws, the company
said in a filing.
The notice is part of an investigation dating back to 2011 examining whether
Cobalt may have violated the Foreign Corrupt Practices Act in Angola, one of
its biggest regions for investment and exploration. The company said it’s
cooperating with the SEC and believes its activities in Angola have complied
with all laws. The notice “is a reminder that, although this potential issue
has been around for years, it isn’t going away anytime soon,” according to a
Deutsche Bank AG. Cobalt Chairman and Chief Executive Officer
Joseph Bryant declined to give specifics about the SEC’s allegations
during a conference call with analysts, while saying they were directed at the
company, not individuals. Cobalt has operations in several offshore blocks in
Angola, including in its Cameia prospect, where the company said it is
finishing an appraisal well. In two of those blocks, the company was assigned
to partner with Angolan contractor Nazaki Oil and Gaz SA. Cobalt learned in
2010 of allegations that senior Angolan government officials were connected
with Nazaki, the company said in prior SEC filings. In March 2011, the SEC
began an investigation into the allegations, which led to the Wells Notice.
Separately, Global Witness, a non-governmental organization
campaigning against corruption, said Angola’s use of payments by BP and its
partners including Cobalt for a project in the country shows the need to
improve transparency in resource industries. BP and partners agreed to
contribute $350 million, in installments, to be used for a research and
technology center, Global Witness said in a statement, citing a Securities and
Exchange Commission filing. The non-governmental organization said in a
statement on its web site that it was unable to gain information from BP,
Cobalt or Angolan state oil company Sonangol EP confirming that the research
center exists.
Click here for full article.
Litigation Matters
Bond insurer claims fraud in Detroit pension debt lawsuit
A bond insurance company fired back at Detroit’s
attempt to invalidate $1.45 billion of pension debt, claiming in a court
filing that it was “fraudulently” led to guarantee payments on the debt.
Financial Guaranty Insurance Co, which insures more than $1 billion of the
city’s pension certificates of participation (COPs), filed a counterclaim
against Detroit asking the U.S. Bankruptcy Court to dismiss the city’s lawsuit
seeking to void the debt. If the city prevails in its lawsuit, FGIC, one of
Detroit’s biggest hold-out creditors, asked the court for restitution and
damages from the city or its pension funds that would be determined at a trial.
Detroit, which is working its way through the biggest municipal bankruptcy in
U.S. history, filed the lawsuit in January, claiming the sale of the COPs in
2005 and 2006 violated borrowing limits imposed on the city under Michigan
law. The COPs were issued during the term of former Mayor
Kwame Kilpatrick, now in prison on federal corruption charges. At a court
hearing on the COPs, Robert Hertzberg, an attorney representing Detroit,
said the city will probably seek to dismiss FGIC’s counterclaims. FGIC said it
agreed to issue insurance policies that earned the COPs triple-A ratings based
on representations from the city and its lawyers that the debt was a legal
vehicle for Detroit to raise money for its constitutionally mandated obligation
to fund its two employee retirement systems. “The city now alleges in its
complaint that the many representations and statements it made in connection
with pension funding transactions were false,” FGIC’s filing stated. “The city
intended for its fraudulent statements to induce FGIC’s issuance of the
policies.” FGIC also filed counterclaims against the city for misrepresentation
and unjust enrichment, noting that “it would be inequitable for the city to
retain the benefits it received” in the event the debt was invalidated. Shortly
before filing for bankruptcy in July 2013, the city defaulted on the COPs,
leaving FGIC and another insurer, Syncora Guarantee Inc, to make debt service
payments to bondholders. Syncora, which has a $400 million exposure, and
FGIC have emerged as Detroit’s biggest hold-out creditors after the city
entered settlements with other major creditors, including its pension funds and
various labor unions. In its latest version of the plan, Detroit indicated that
the bankruptcy case could end before its COPs lawsuit is resolved. If the COPs
are voided, a litigation trust created in the plan would allocate money the
city would have used to pay off the debt to retiree healthcare and to certain
general obligation bondholders and creditors. Detroit hedged interest rate risk
on some of the COPs with swaps that ultimately proved costly to the city when
rates fell and the city’s credit ratings dropped.
Click here for full article.
S&P Accuses US of Withholding Documents in Fraud Lawsuit
The U.S. is withholding documents that might show
the government sued Standard & Poor’s in retaliation for downgrading the
country’s debt, the ratings company said, asking a court to compel the records’
production. A federal judge in April ruled that S&P could seek
potential evidence from the Justice Department to mount a retaliation defense
to U.S. claims that it gave fraudulent ratings to mortgage-backed securities.
Since then the government has turned over documents with redactions ranging
from the omission of a single word on a page to multiple pages, S&P said in
court papers. “For the many reasons that unilateral redactions are disfavored,
the government’s redactions for non-responsiveness should be disallowed here,”
S&P lawyers wrote. S&P is the only credit rating company sued by the
Justice Department over the claim that it gave fraudulent ratings to
mortgage-backed securities. The company has said it was singled out after it
downgraded the U.S. debt in August 2011. The Justice Department and
ex-U.S. Treasury Secretary Timothy Geithner denied there’s a connection
between the downgrade and the suit. The U.S. may seek as much as
$5 billion in civil penalties from S&P. U.S. District Judge David
Carter in Santa Ana, California, in May denied Geithner’s request to disallow
S&P’s subpoena, ruling that the company provided sufficient evidence of an
“improper purpose” at that point in the litigation to support its request. Even
in redacted form, the documents turned over so far by the government indicate
there are “scores” of other documents related to the downgrade and the decision
to sue, S&P said. Its 24-page filing is also heavily redacted. According to
S&P, the government said some documents are protected as work product or
are irrelevant to the request. Geithner redacted as non-responsive parts of
documents “immediately adjacent to detailed discussions (and excoriations)
of S&P,” it said. “It’s hard to think of information more likely to be
potentially relevant to an evaluation of motives and actions with respect to
S&P’s downgrade,” the company said. “The resolution of ‘relevance’ in admittedly
responsive documents cannot be left to Mr. Geithner.”S&P requested
unabridged versions of documents from both the government and Geithner, who is
now president of Warburg Pincus LLC, a private equity firm in New York.
Click here for full article.
BofA said to be near $16 billion deal with U.S. over
mortgage bonds
Bank of America Corp. is close to a deal with the
U.S. Department of Justice to pay more than $16.5 billion to end
investigations into mortgage securities that the bank and companies it bought
sold in the run-up to the financial crisis. A settlement would likely cap more
than four years of work by Brian Moynihan, the bank’s chief executive, to
rid Bank of America of nearly all of the massive mortgage liabilities it took
on through the acquisitions of Countrywide Financial Corp and Merrill Lynch
& Co by his predecessor, Kenneth Lewis. The bank has agreed to pay about
$9 billion in cash and the rest in assistance to struggling homeowners,
said the person, who was not authorized to speak publicly about the matter. A
$16.5 billion payout would be the largest in a series of soaring penalties
against banks for a range of misconduct, including violating
U.S. sanctions and inappropriately marketing mortgages. JPMorgan Chase
& Co. paid $13 billion last year to resolve similar civil fraud claims
that it misled mortgage bond investors, and Citigroup, Inc. agreed to pay $7 billion
over similar charges last month. Those two settlements and the one expected
with Bank of America are the product of a task force President
Barack Obama directed the Justice Department to convene in 2012 to examine
fraud in mortgage securities that helped fuel the financial collapse. The
announcement came after his administration faced criticism that it was not
sufficiently holding accountable those who contributed to the crisis. While a
jury last October found the second-largest U.S. bank liable for the conduct,
it was not clear how large a penalty the bank might face. Bank of America had
argued it should have owed nothing because Countrywide lost money on the loans.
The separate Justice Department negotiations were driven by allegations about
securities sold by Merrill, which the bank also agreed to acquire in 2008,
people familiar with the matter have said. Analysts have said the purchases of
Countrywide and Merrill have already cost Bank of America well over
$50 billion through litigation, loan buybacks and other mortgage relief.
According to a regulatory filing, about $245 billion, or just over
one-fourth, of the $965 billion of mortgage-backed securities and loans
issued between 2004 and 2008, and sold to private investors – and now
attributed to Bank of America – are either in default or severely delinquent.
Countrywide accounted for $187 billion, or 76 percent, of the
problematic securities, while Bank of America accounted for just
$10 billion, or 4 percent. The rest came from Merrill and the former
First Franklin Financial Corp, which Merrill bought in 2006. The consumer help
portion of the settlement is expected to mirror past deals, which included
cutting loan balances for underwater borrowers, refinancing mortgages, and
other types of help to struggling homeowners. The news of the deal comes just
after Bank of America said the Federal Reserve approved its plan to raise its
quarterly dividend for the first time since the financial crisis.
Click here for full article.
Hewlett-Packard to sue former Autonomy CFO
Hewlett-Packard Co said it would sue former
Autonomy Chief Financial Officer Sushovan Hussain after he sought to block
HP’s settlement of three shareholder lawsuits over its troubled purchase of the
British software company. In the settlement, reached on June 30,
shareholders had agreed to end efforts to force current and former HP
officials, including Chief Executive Officer Meg Whitman, to pay damages
to the Palo Alto, California-based company over its Autonomy purchase. Instead,
the shareholders agreed to help HP pursue claims against former Autonomy
officials such as Hussain and former CEO Michael Lynch, who have denied
wrongdoing. “The notion that (Hussain) should be permitted to intervene
and challenge the substance of a settlement designed to protect the interests
of the company he defrauded is ludicrous,” HP said in a court filing. Last
month, Hussain said in a court filing that the “collusive and unfair”
settlement, if approved by a federal judge, would let HP “forever bury from
disclosure the real reason for its 2012 write-down of Autonomy: HP’s own
destruction of Autonomy’s success after the acquisition.” HP, which bought
Autonomy for in 2011 for $11.1 billion only to write down its value by
$8.8 billion a year later, has accused Autonomy officials of accounting
fraud.
Click here for full article.
Cohen, Point72 must face SAC insider trading lawsuit-judge
A federal judge rejected billionaire investor
Steven A. Cohen’s bid to dismiss lawsuits by Elan Corp and Wyeth
shareholders who claimed they lost money because his firm SAC Capital Advisors
LP conducted insider trading in the drugmakers’ stocks.In a decision made
public, U.S. District Judge Victor Marrero in Manhattan allowed the entire
case against Cohen and SAC to go forward, apart from claims that investors
agreed should be dismissed because they were brought too late. He also rejected
dismissal requests by defendants Mathew Martoma, a former portfolio
manager at SAC’s CR Intrinsic unit found guilty in February of insider trading,
and Sidney Gilman, a University of Michigan medical professor. SAC is now
called Point72 Asset Management, and invests Cohen’s fortune from its Stamford,
Connecticut offices. A spokesman, Jonathan Gasthalter, declined to
comment. Ethan Wohl, a lawyer for the investors, declined to comment. The
lawsuit stemmed from U.S. charges that Martoma generated $275 million
of illegal gains for SAC by trading on Gilman’s confidential tips about an
Alzheimer’s drug trial before results were released on July 29, 2008.
Investors claimed to suffer damages by trading in Elan and Wyeth stock and
options at the same time as SAC, but without the benefit of inside information.
Elan is now part of Perrigo Co, and Wyeth is now part of Pfizer Inc. SAC was
also implicated in other insider trading, eventually pleading guilty to fraud
and paying $1.8 billion in settlements with U.S. authorities. Cohen
has not been criminally charged. In seeking to dismiss the investor lawsuit,
SAC said “contemporaneous traders are not harmed by insider trading,” and that
it had already given up illegal gains in its $602 million settlement with
the U.S. Securities and Exchange Commission. But Marrero, who delayed
approving that pact because it did not require SAC to admit or deny wrongdoing,
said the settlement did not establish to a “scientific truth” what SAC should
owe. He also said it was too soon to dismiss damages claims over a plunge in
Elan’s stock price, two days after the Alzheimer’s drug trial results were
released, over problems with its multiple sclerosis drug Tysabri. Even if SAC
didn’t know about the problems, Marrero said it was unclear whether the
investors had sufficient time after the results were released to avoid more
losses by selling shares.A lawyer for Martoma could not immediately be reached
for comment. Marc Mukasey, a lawyer for Gilman, said: “We will continue to
press forward and defend the civil suit.” Martoma faces a September 8
sentencing. Prosecutors said he deserves more than eight years in prison.
Gilman was not criminally charged.
Click here for full article.
Trafigura unit starts legal action against Mercuria, Citi
Commodities trading house Trafigura’s warehouse
business Impala has become the latest company to initiate legal action in
connection with suspected metals financing fraud at two of China’s ports,
according to a legal document. Trafigura has started legal proceedings in
London against two units of U.S. bank Citi and trade house Mercuria Energy
Trading, according to the document written by Citi’s lawyers that outlines the
bank’s argument in separate, but related, litigation against Mercuria. Chinese
authorities launched an investigation in May into whether private metals
trading firm Decheng Mining and its related companies used fake warehouse
receipts at Qingdao Port and nearby Penglai to obtain multiple loans secured
against a single cargo of metal. The Citi document does not say what action
Impala is taking or why, and it does not implicate Impala, Citi or Mercuria in
the alleged fraud. But it shows that Impala has joined other trading houses and
global banks, including Mercuria, Citi, Standard Bank and Standard Chartered
Bank, in initiating lawsuits and counter-suits over an estimated
$1 billion exposure to the suspected fraud in China. The dispute between
Citi and Mercuria pivots on contract obligations and the ownership of metal
worth more than $250 million held in warehouses in Penglai and Qingdao.
Impala is one of the warehouse operators in those locations. The Chinese
authorities imposed a lockdown on parts of the two ports where the metal is
held, preventing anyone, including Citi, Mercuria and the warehouse operators,
from accessing the material, according to Citi’s document. It says there is a
range of steps which the party with responsibility for the metal will need to
take. “The parties will need to know what steps to take against the warehouse
operators,” Citi’s lawyer Daniel Toledano says in the document. “In
particular, proceedings have already been commenced against Mercuria and Citi
by one of the warehouse operators, Impala, and the parties need to be able to
consider how their interests are affected by those proceedings and take a view
as to whether, and how, to contest them.”
Click here for full article.
China
Market
Standard Chartered Provisions $175 Million in China Fraud
Standard
Chartered Plc said it made provisions of about $175 million related to
a fraud in China,
where the government is investigating a lending scandal involving metal
stockpiles in the port city of Qingdao. The bank’s so-called other impairments
jumped by $174 million to $185 million in the first six months of the
year, compared with just $11 million in the same period in 2013, the
London-based lender said as it reported earnings. The amount of that total
related to the Qingdao scandal was about $175 million, according to
Shaun Gamble, a bank spokesman. Standard Chartered had previously sued
Chen Jihong, the Singaporean owner of a metal-trading company that’s under
investigation in China for allegedly pledging metals multiple times as
collateral for loans. Standard Chartered says it’s owed $35.6 million
under a loan agreement with Decheng Mining, one of Chen’s companies, according
to a Hong Kong
lawsuit last month. “Our exposure in the warehouses around Qingdao was about
$250 million in total,” Chief Executive Officer Peter Sandssaid
on a conference call with journalists. “In the provisioning we have taken, we
have taken a very conservative approach.” HSBC Holdings Plc and ABN Amro Bank
NV have also sued Chen, who has been detained in China, according to
Singapore’s foreign ministry. Banks are examining lending linked to metals at
Qingdao Port amid concern fraudulent activity is more widespread throughout the
country, where commodities like gold and copper are used as collateral to get
funding. Standard Chartered’s operating profit for corporate and institutional
clients in greater China, which includes Hong Kong, Taiwan and Macau, fell to
$728 million in the first half from $745 million a year earlier, the bank
said as it reported a 20 percent drop in earnings. It also said it’s
facing more U.S. fines over failings in systems that monitor potential money laundering.
Click here for full article.
Wilmar says China’s palm oil imports under pressure in short
term
Singapore’s Wilmar International, the world’s
largest palm oil processor, expects China’s palm oil imports will be affected
in the short term as a crackdown on the commodity financing trade curbs
speculative imports. Kuok Khoon Hong, Wilmar’s chairman and chief executive
officer, said he estimates that more than half of China’s palm oil imports were
for financing purposes. “Some of the palm oil sellers to China will tell you
many of their buyers are having trouble getting credit, or delays in getting
credit,” Kuok told reporters and analysts at a briefing the day after the
company reported a sharp drop in second-quarter net profit. In the latest phase
of China’s crackdown, authorities are investigating alleged metal financing
fraud at the port of Qingdao, which has prompted global banks and trading
houses to fire off a series of law suits. China, the world’s No.2 buyer of
the vegetable oil, imported 2.9 million tonnes of palm oil in the first
half of 2014, nearly flat from a year earlier, official trade data showed. Palm
oil imports grew 8 percent on the year for the first half of 2013. Kuok
said China has a palm oil inventory of about 1 million tonnes, which is
expected to decline as the trade normalises. The executive also said that
Wilmar is not interested in buying the palm oil assets of trading company Noble
Group Ltd, after a plan by the two firms to jointly develop oil palm
plantations stalled last year. “Oil prices will be depressed for a year or two,
and it’s not a good time to buy (palm oil plantations) right now,” said
Kuok. The benchmark palm oil futures contract on the Bursa Malaysia Derivatives
Exchange slipped to a one-year low of 2,234 ringgit ($696) per tonne,
as expectations of higher output weighed.
Click here for full article.
After China port fraud probe, messy legal fight chills metal
trade
As global banks and trading houses fire off
lawsuits over their estimated $900 million exposure to a suspected metal
financing fraud in China, the tangled legal battle to recoup losses is set to
drag on for years and hinder a swift recovery in metal trade. HSBC is the
latest bank to launch legal action since Chinese authorities started a probe
into whether the firm at the center of the allegations, Decheng Mining, used
fake warehouse receipts to obtain multiple loans. Several banks had already
ditched their commodity trading divisions due to low returns. The scandal,
centered on the eastern port of Qingdao, means those remaining in the commodity
financing business will have to consider their future, or at least bring in new
controls on lending requirements. It has also acted as a warning over murky
business practices in China and highlighted the difficulties of navigating the
Chinese legal system for foreign companies, some of which have since frozen new
financing business. “In the next six to twelve months, the impact would likely
be reduced appetite for lending on metal collateral,” said Daniel Kang,
Asia head of basic materials equity research at JP Morgan. “Copper imports may
come under pressure in the second half, partly related to smaller traders going
bankrupt.” China’s imports of refined copper, the most widely used metal in
financing, fell 8 percent in June from a year earlier to hit a 13-month low
as banks reduced lending for metals imports following the Qingdao probe, which
was first reported at the start of that month. [MTL/CHINA1] Using
commodities as collateral to raise finance is common in China and 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. With multiple claimants, cross-country jurisdictions, involvement
of state-owned entities and a separate corruption probe into Chen Jihong,
the chairman of Decheng’s parent firm, the lawsuits stemming from the alleged
fraud are unlikely to be wrapped up soon.
Click here for full article.
Chinese rail official gets death sentence in corruption case
A Beijing court sentenced a former railway
official to death for corruption, but promised a reprieve after two years of
good behaviour, state media reported, in the latest graft case to hit China’s
sprawling rail network. Wen Qingliang was sacked as head of the rail
bureau in the southwestern city of Kunming in 2011 for “discipline” problems,
the usual euphemism for corruption in China. The Beijing court found that Wen took
more than 20 million yuan ($3.3 million) in bribes between 2005
and 2011 while working in the northern province of Shanxi “to provide favours
to companies bidding on railway projects”, the official Xinhua news agency
said. His death sentence will be commuted after two years, Xinhua added,
which generally means that after two years of good behaviour he will end up
with a life sentence. The reprieve was granted because authorities recovered
most of his ill-gotten gains, the report said. Wen’s mistress, Zhong Hua,
who is accused of colluding with him, will be given a separate trial, it added.
China’s railways have faced increased scrutiny from anti-corruption officials
and the public after a scandal in which former railways minister
Liu Zhijun was prosecuted for corruption and abuse of power. One of
several officials implicated in the scandal, Liu received a suspended death
sentence last summer. In China, that usually implies life in prison. The
country’s railways have confronted numerous problems in the past few years,
including heavy debts from funding new high-speed lines, waste and fraud. The
government has pledged to open the rail industry to private investment in a big
way.
Click here for full article.
Healthcare
Industry
California may have paid millions for fraudulent drug treatment
A California program that covers addiction
treatments for the poor may have paid $93.7 million in fraudulent claims,
a state audit showed. The report released by the California State Auditor showed
that the state’s Drug Medi-Cal program may have paid more than 300 claims
for patients who were actually dead, and found serious deficiencies in the
agency’s records for 30 drug treatment program providers. “It is a very
troubling audit,” said State Senator Ted Lieu, a Southern California
Democrat who requested the audit along with another lawmaker. “It shows that
there is significant fraud in California’s Drug Medi-Cal system, and that this
fraud has been ongoing for many years.” The audit was spurred by a 2013
investigation by The Center For Investigative Reporting and CNN, which found
questionable billing practices at drug-treatment clinics in Southern
California. The program is a division of the state’s healthcare program for the
poor, known as Medi-Cal. Norman Williams, a spokesman for the California
Department of Health Care Services, which administers the program, said
237 Drug Medi-Cal clinics were suspended following an investigation that
began last year. “We actually welcome and we appreciate this report,” Williams
said. The state has begun the process of re-certifying the roughly
650 clinics that participate in the program, requiring their owners to
undergo fingerprint and background checks, he said. The audit found that the
state did not follow proper certification processes for substance abuse
clinics, and only took corrective action following federal government
intervention. The audit’s review of the files of 30 program provider
applicants found that five files were completely missing, and identified
deficiencies in every one that was present, including 24 with inadequate
disclosure statements. The audit states that the files “demonstrated the
State’s certification process was woefully inadequate.” It recommends that the
California Department of Health Care Services coordinate with county
governments to recover inappropriate payments and more thoroughly screen
substance abuse care providers’ eligibility. Lieu, who is running to replace
Democrat Henry Waxman for Congress in a district that includes parts of
Los Angeles and Beverly Hills, said that the audit showed “a phenomenal
lack of leadership and training.”
Click here for full article.
GlaxoSmithKline faces fresh drug bribery claims in Syria
GlaxoSmithKline (GSK.L) faces new allegations
that it bribed Syrian doctors and officials to boost sales of its medicines,
following recent accusations of corruption in its non-prescription business in
the country. The latest charges are laid out in an anonymous e-mail sent to the
company’s top managers last week and seen by Reuters. GSK – one of the few big
firms still supplying drugs in Syria – said it would investigate the new claims
involving its own staff and local distributors. The company added it had
suspended relations with its Syrian distributors pending results of the probe.
The attack on the drugmaker’s ethical standards follows a series of similar
bribery claims against the company in China, Iraq, Jordan, Lebanon and Poland.
Reuters last month reported allegations of corruption in GSK’s Syrian consumer
business, which sells products including toothpaste and painkillers. The
consumer operation was closed in 2012 due to the worsening civil war in the
country. The Syrian prescription pharmaceuticals business remains operational,
however, and GSK said it was committed to supplying safe and effective drugs
and vaccines to patients in need. The new corruption claims involve alleged bribes
paid to boost sales of various medicines, including ones to treat cancer and to
prevent blood clots. “All the claims in this e-mail will be thoroughly
investigated using internal and external resources as part of our ongoing
investigation into operations in Syria,” said a spokesman for Britain’s biggest
drugmaker. “We are committed to taking any disciplinary actions resulting from
the findings. We have suspended our relationship with our distributors in the
country pending the outcome of our investigation.” The claims of corruption in
the country involve
relatively small sums of money, running into thousands of dollars rather than
the hundreds of millions that GSK is alleged to have funneled to doctors and
officials in China. GSK’s business in Syria is small, with sales of less than
6 million pounds ($10 million) a year, against a group turnover
of 26.5 billion pounds in 2013. Nonetheless, the persistent nature of the
allegations are damaging to the company’s reputation and also leave it open to
legal action and potential fines in Britain, where it is based, and in the
United States, where it has a stock market listing.
Click here for full article.
Novartis loses new bid to dismiss U.S. lawsuit over kickbacks
A Manhattan federal judge said the
U.S. Department of Justice may pursue most of its lawsuit accusing
Novartis AG of civil fraud for allegedly using kickbacks to boost sales of
drugs covered by Medicare and Medicaid. U.S. District Judge
Colleen McMahon allowed the government to continue its False Claims Act
case against the Swiss drugmaker over claims submitted to Medicare and some
state Medicaid programs for Myfortic, used by patients with kidney transplants,
and Exjade, for patients who get blood transfusions. She also dismissed a part
of the case covering claims submitted to state Medicaid programs other than
New York’s prior to March 23, 2010, when the Affordable Care Act, also
known as Obamacare, was enacted. Novartis, which has offices in East Hanover,
New Jersey, had objected to what it called the government’s “potentially
limitless” theory that any claims submitted by pharmacists who got kickbacks
were tainted. It said the government, to pursue its case, instead must show a
kickback scheme actually caused pharmacists to sell Myfortic or Exjade.
Julie Masow, a Novartis spokeswoman, did not immediately respond to
requests for comment. A spokeswoman for U.S. Attorney Preet Bharara
in Manhattan declined to comment. The government accused Novartis of providing
discounts and rebates from 2005 to 2013 to induce at least 20 pharmacies
to switch thousands of patients to Myfortic, an immunosuppressant. It also said
that from 2007 to 2012, Novartis offered patient referrals and rebates to
BioScrip Inc so that pharmacy would recommend refills of Exjade, which is meant
to reduce iron levels in patients. The government alleged that these activities
caused Medicare and Medicaid to pay tens of millions of dollars of improper
reimbursements, and violated a federal anti-kickback law. Eleven
U.S. states are co-plaintiffs. BioScrip settled for $11.7 million in
January. McMahon had on May 29 allowed the case to proceed, but said she
wanted to further review the legal issues. In her decision, she said Congress
“gave absolutely no indication” that it intended to limit the reach of the
False Claims Act where kickbacks were concerned. “Where a party falsely
certifies compliance with the (anti-kickback law) in connection with a
claim, the claim is ’false’ as a matter of law, and so is not eligible for
reimbursement,” she wrote. McMahon gave the government 21 days to again
plead claims she dismissed. The lawsuit stemmed from a whistleblower case by
David Kester, a former Novartis respiratory account manager from Raleigh,
North Carolina. He is also pursuing separate claims against Novartis and other
companies regarding other drugs.
Click here for full article.
McKesson Corp. to Pay $18 Million to Resolve False Claims
Allegations Related to Shipping Services Provided Under Centers for Disease
Control Vaccine Distribution Contract
McKesson Corporation has agreed to pay
$18 million to resolve allegations that it improperly set temperature
monitors used in shipping vaccines under its contract with the Centers for
Disease Control and Prevention (CDC), the Justice Department announced.
McKesson is a pharmaceutical distributor with corporate headquarters in
San Francisco. The government alleged that McKesson failed to comply with
the shipping and handling requirements of its vaccine distribution contract
with the CDC. Under the contract, McKesson provided distribution services,
receiving vaccines purchased by the government from manufacturers and then
distributing the vaccines to health care providers. The government alleged that
the contract required McKesson to ensure that during shipping, the vaccines
were maintained at proper temperatures by, among other things, including
electronic temperature monitors set to detect when the air temperature in the
box reached two degrees Celsius and below or eight degrees Celsius and above.
The government alleged that, from approximately April 2007 to
November 2007, McKesson failed to set the monitors to the appropriate
range, and as a result, knowingly submitted false claims to the CDC for
shipping and handling services that did not satisfy its contractual obligations.
Click here
for full article.
SEC
Regulatory Actions
SEC Cuts Wylys’ Damages Demand by Half to $750 Million
Samuel and the estate of Charles Wyly ought to pay
as much as $750 million for having used a web of offshore trusts to
illegally hide stock holdings and evade trading limits, a lawyer for the
U.S. Securities and Exchange Commission said. The commission cut the
demand for damages almost in half after U.S. District Judge
Shira Scheindlin had rejected an earlier request for $1.41 billion.
The brothers, founders of Michaels Stores Inc., perpetrated a fraud that earned
them at least $550 million in illegal profit over 13 years, jurors in
Manhattan
federal court found three months ago. A second trial began before Scheindlin in
which she will determine how much Samuel Wyly and the estate of his late
brother Charles, who died in a car accident three years ago, have to pay in
fines and disgorgement. “The defendants knew they were doing something wrong
and something quite risky,” Bridget Fitzpatrick, a lawyer for the SEC told
Scheindlin. “There was a decision to violate the law, your honor, and that
decision was made in part because Sam Wyly believed that it would be
profitable.” The Wylys concealed their transactions from 1992 to 2003,
Fitzpatrick said. “The evidence is very clear that Sam and Charles Wyly
continued to have the trusts buy whatever they wanted, they had access to
hundreds of millions of dollars,” she said. The Wylys received at least
$600 million in untaxed dollars, spending about $85 million on real
estate and $30 million on art and jewelry, Fitzpatrick said. The Wylys
took issue with those figures, arguing they should be “far smaller than what
the SEC claims” and urging the judge to “deny all of the SEC’s requested
relief.” Stephen Susman, a lawyer for Sam Wyly, told the judge he would deliver
his statement and call several witnesses after the SEC finished presenting its
case, according to a court transcript. Wylys’ lawyers had argued in court
papers that if the judge decides to impose a penalty, the Wylys shouldn’t have
to pay more than $1.38 million. Scheindlin ruled July 29 that
regulators didn’t offer any proof to show the trades by Isle of
Man trusts controlled by the brothers “were unlawful, manipulated the
market, distorted the price of the shares or constituted insider trading.”
Click here for full article.
SEC charges Linkbrokers in $18 mln securities fraud scheme
The U.S. Securities and Exchange Commission said
it charged brokerage Linkbrokers Derivatives LLC for taking profits of more
than $18 million from customers by secretly manipulating the cost of
securities trades processed by the firm. The New York-based firm, which
ceased acting as a broker-dealer in April 2013, has agreed to pay
$14 million to settle the charges, the SEC said in a statement. The
regulator had previously charged four brokers at the firm’s cash equities desk.
Three of them later agreed to settle those charges for about $4 million.
The SEC said that brokers at the firm defrauded customers by promising very low
commission fees, but charging fees that in some cases were more than
1,000 percent greater than represented, the SEC said. “These brokers hid
the true size of the fees they were collecting by misrepresenting the price at
which they had bought or sold securities on behalf of their customers,” the SEC
said. The scheme involved more than 36,000 transactions between 2005 and
February 2009, the SEC said. “Linkbrokers employees engaged in a devious and
abusive trading scheme orchestrated to steal from the firm’s unsuspecting
customers,” said Daniel Hawke, chief of the SEC Enforcement Division’s
market abuse unit. “(The) settlement strips Linkbrokers of its remaining
assets and allows those funds to be returned to harmed customers,” said Hawke.
Click here for full
article.
SEC Announces Oil-and-Gas Fraud Charges Against Houston-Based
Company and CEO
The Securities and Exchange Commission announced
charges against a Houston-based oil-and-gas exploration and production company
and its CEO for making fraudulent claims about the company’s oil reserves. An
SEC enforcement investigation found that Houston American Energy Corp. and
John F. Terwilliger fraudulently claimed that a Colombian exploration
concession in which Houston American only owned a fractional interest held
between 1 billion and 4 billion barrels of oil reserves, and that the
reserves were worth more than $100 per share to Houston American’s
investors. The estimates lacked any reasonable basis and were falsely
attributed to the concession’s operator, whose actual estimates were much
lower. “Terwilliger and Houston American misled investors by wildly
exaggerating the extent and nature of their oil and gas holdings,” said
Gerald H. Hodgkins, associate director of the SEC’s Enforcement
Division. “They used a cadre of third parties to publicize and bolster their
misleading claims.” The SEC’s order instituting administrative proceedings also
charges stock promoter Kevin T. McKnight and his firm Undiscovered
Equities Inc., who were paid by Houston American to disseminate its fraudulent
claims about the oil-and-gas concession project in Colombia. The SEC’s
Enforcement Division alleges that the fraudulent conduct by Terwilliger and
Houston American occurred during several months in late 2009 and early 2010.
During this time, Houston American raised approximately $13 million in a
public offering and saw its stock price increase from less than $5 per
share to more than $20 per share. Contrary to the lofty estimates made by
Terwilliger and Houston American, the company participated in drilling multiple
unsuccessful wells on the concession from 2010 to 2012, and withdrew from the
operation in early 2013 without recovering any oil. The company’s stock price
eventually cratered under the weight of the fraud. Houston American now trades
for approximately 40 cents per share, which represents a market
capitalization loss of $600 million since it peaked in April 2010.
Click here for full article.
U.S. jury gives SEC quick win in fraud case against Boston
adviser
A Boston federal jury took two hours to decide
that a local investment adviser had fraudulently lured his former brokerage
customers to his new firm, the U.S. Securities and Exchange Commission said.
The SEC’s 2010 civil lawsuit against Boston-based Sage Advisory Group LLC
and its owner, Benjamin Lee Grant, alleged they had engaged in
securities fraud by misleading Grant’s former customers at brokerage Wedbush
Morgan Securities Inc, to transfer their assets to Sage. The U.S. District
Court for the District of Massachusetts, where the case was decided, will
impose sanctions in the coming months. The SEC is seeking civil penalties and
other relief, as well as an order that Grant and Sage return profits they
received as a result of the fraud. SEC-registered advisers must act in client’s
best interests, or as fiduciaries. Grant violated that requirement, the SEC
said. Grant was a broker for Wedbush until he left in 2005 to launch Sage. His
customers’ accounts totaled about $100 million in assets, almost all of
which were managed by First Wilshire Securities Management, an investment
adviser in Pasadena, California. After leaving Wedbush, Grant falsely told
his former customers that it was First Wilshire’s idea to move their accounts
from Wedbush to a discount broker and that he had formed Sage to handle their
investments, the SEC said. Grant also told his customers that charges for their
accounts would change from a 1 percent management fee for First Wilshire
plus trading commissions for Wedbush to a 2 percent “wrap fee” at Sage. He
also falsely told customers that the new fee arrangement was historically less
expensive than the prior one. But Grant did not reveal to customers that trading
commissions at the discount brokerage were significantly less than at Wedbush,
the SEC said. The arrangement ensured that Grant, not his customers, would most
likely benefit from the new 2 percent fee. Grant also falsely told
customers that First Wilshire was no longer willing to manage their assets at
Wedbush and that they had to sign up with Sage to avoid a disruption of
services, the SEC said. The plan worked, the SEC said. Nearly all of Grant’s
Wedbush customers moved to Sage and his compensation doubled from less than
$500,000 while at Wedbush to more than $1 million at Sage.
Click here for full article.