Archived Forensic News October 2014

Financial/Accounting Fraud

Tesco’s 250-million-pound black hole: Who was minding the shop?

“Things are always unnoticed, until they’re noticed,” Tesco Chairman Richard Broadbent said when asked how Britain’s biggest retailer had failed to spot a 250 million pound ($410 million) sized hole in its first-half profits. It was an oversight that led to a 4 billion pound drop in Tesco’s (TSCO.L (http://www.reuters.com/finance/stocks/overview?symbol=TSCO.L)) market value and the suspension of four senior executives. The newly installed CEO called in forensic accountants and lawyers to find out what went wrong. Whether conspiracy or cock-up, the scandal raises doubts over the management and financial oversight at Britain’s largest private sector employer, now in the midst of the gravest crisis in its 95-year history. “That whole finance organization must be in a world of hurt given what has gone on. The rigor and analysis and the focus seems to have fallen away a little bit,” one former UK Tesco director told Reuters on condition of anonymity due to the sensitivity of the subject. Tesco had once appeared unstoppable, boasting two decades of uninterrupted earnings growth as it bulldozed its way to dominance. Things began to go wrong in 2011. It has now issued three profit warnings in two months with the latest causing the most alarm – the overstatement of its half-year profit forecast by 250 million pounds due to the early recognition of payments by suppliers and the pushing back of costs. Investors, analysts and some former employees are questioning whether an aggressive culture influenced the way the company handled its finances – especially when trading slowed – and perhaps prevented staff from coming forward to warn that the numbers no longer stacked up. Tesco has declined to comment on what may have happened until a review has been completed but chairman Broadbent has described it as “something completely out of the ordinary”. The revelation has also sparked scrutiny of the upper echelons of the company. The senior executives who ran Tesco during its glory years of the 1990s and 2000s have all left and the board lacks retail experience. “The chairman has been the leader of this organization that seems to have failed at every turn,” said David Herro of large Tesco investor Harris Associates. Four former senior Tesco executives have told Reuters that during the 2011–2014 CEO tenure of Phil Clarke, he repeatedly clashed with directors, who found him reluctant to take advice. During that time four of the company’s most senior executives quit, taking a combined 109 years of experience with them. Clarke has declined to comment on his management style but defenders of his record point out that he was battling the most difficult market conditions in decades. The company’s head of digital told a conference this week Tesco was too big and complex to be run by “one general”.

Click here for full article.

Vietnamese tycoon held on suspicion of fraud: sources

Police in Vietnam have detained one of the country’s biggest tycoons, the founder and chairman of conglomerate Ocean Group, on suspicion of financial irregularities, banking sources and state media said. Vietnam’s central bank said it had suspended Ha Van Tham from his role as chairman of the group’s unlisted subsidiary, Ocean Commercial Joint Stock Bank, for “serious violations”, but made no mention of his arrest, or what the breaches were. Two banking and finance sources with direct knowledge of the case told Reuters Tham had been detained, but asked not to be identified because the issue was “sensitive”. Company officials, reached by telephone and asked to clarify market rumors about the detention, said they would issue a statement, but have not yet done so. Ocean Group’s rapid growth as one of Vietnam’s most promising conglomerates has earned the United States-educated Tham numerous awards for entrepreneurship and he is widely regarded as one of Vietnam’s richest men. The firm has chartered capital of 3 trillion dong ($141.6 million) and has interests in real estate, banking, securities, retail, media and hotels. Several state-run newspapers, citing unnamed police sources, said Tham would be held for at least four months pending further investigation into alleged lending violations. Officials of the Hanoi police and Vietnam’s police anti-fraud unit were not available for comment when contacted by Reuters. The central bank said Tham was personally involved in violating laws and was barred from any activities at the bank. “Through investigation, the State Bank of Vietnam has found some serious violations of the law by Mr. Ha Van Tham himself,” it said in a statement. If confirmed, the detention and police investigation would be the latest in a series of scandals involving Vietnamese bankers, collectively worth hundreds of millions of dollars. A slew of embezzlement cases is now being probed and several bankers have been jailed, with one even sentenced to death after having being found to have caused losses to the state. Vietnam’s communist government says it is in the midst of a shake-up to strengthen beleaguered banking and financial systems to stamp out fraud that went undetected during boom growth of 2003–2007, when the sector saw seemingly unrestrained expansion, but lax oversight.

Click here for full article.

Whistleblower who got $6 million still on lookout for fraud

The Tucson woman who earned nearly $6 million as the whistleblower who uncovered overbilling at the Carondelet Health Network is launching her own effort to prevent health-care fraud. The whistleblower lawsuit Bloink filed under the federal False Claims Act accused Carondelet of knowingly engaging in fraudulent billing and concealing its obligation to pay money back. The U.S. Attorney’s Office, which investigated the case, announced the settlement in August and said the alleged fraud occurred for nearly seven years between 2004 and 2011. Carondelet settled the case for $35 million — the largest payout under the federal False Claims Act in Arizona history. Bloink, a 53-year-old certified medical reimbursement specialist, worked for Tucson-based Carondelet as a corporate responsibility coordinator for one year, between 2010 and 2011. During that time, court documents show she found billing discrepancies involving patients enrolled in Medicare, Medicaid and the Federal Employees Health Benefit Program. “Many ‘whistleblowers’ go underground after their ordeal is over,” Bloink wrote in a recent open letter to the community titled “Healthcare fraud in our backyard.” “I intend to use my newly obtained silver hair to try and help our healthcare system by being open about fraud and discussing ways to prevent it.” Bloink’s legal action, filed under seal in 2011, cited insufficient documentation to support billings for inpatient rehabilitation services at Carondelet St. Joseph’s and St. Mary’s hospitals in Tucson between April 2004 and December 2011. Carondelet said that in 2011, the network put new protocols and processes in place to correct the documentation issues, and that prior to the settlement, it voluntarily repaid about $24 million to Medicare and Medicaid in 2012. Billing for services that aren’t provided is a common and lucrative form of billing abuse known as “upcoding” that Patrick Burns, co-director of the Washington, D.C.-based Taxpayers Against Fraud Education Fund, compares to “providing chicken and billing for steak.” Burns’ organization says the federal False Claims Act is the most effective tool U.S. taxpayers have to recover the billions of dollars stolen through fraud every year. Five hundred false claims suits were filed by private citizens last year concerning the U.S. Department of Health and Human Services, according to the U.S. Department of Justice. Fewer than 150 suits were settled, Burns said. “Whistleblowers are force multipliers for the government in catching fraud,” he said. “They understand the company, how the billing schemes work. They can see things the public can’t see. “The system itself is so complicated that you really can’t understand it unless you have whistleblowers. They are guides to secret knowledge.” He believes there’s lots more health-care-spending abuse than what the case data reflects. Whistleblower cases are difficult to win and usually are successful only when the money involved is more than $10 million, he said. Also, many people are too afraid to blow the whistle on their employer.

Click here for full article.

Citigroup Mexican Unit Said to Have Committed Decade-Long Fraud

A unit of the United States Government, the United States Patent and Trademark Office, is under scrutiny both by Congress and the news media for alleged fraud perpetrated by employees “teleworking” from home. Roughly 3,800 of the USPTO’s 8,300 patent examiners work from home full-time. Another 2,700 telecommute part-time. Investigators have been looking into reports that some of these teleworkers did little or no work but got paid their full salaries. And, the allegations claim supervisors not only knew about it, but also, acted to cover up the situation. While there have been comments for years within the patent community about these irregularities, a formal probe was launched in 2012 by Commerce Department Inspector General Todd Zinser. His investigation started with the complaints of four internal “whistleblowers” [people who report misconduct]. He then audited various units of the USPTO for possible fraud. Within the USPTO’s Patent and Trial Appeal Board. 19 new “Paralegal Specialists” were hired in 2009 despite a reported lack of work for them. Zinser’s report says management knew about this, but instructed the paralegals to put down hours watching TV and other personal activities as “other time” so they would get full pay. According to a story published in August in Government Executive (http://cdn.govexec.com/interstitial.html?v=2.1.1&rf=http%3A%2F%2Fwww.govexec.com%2Fmanagement%2F2014%2F09%2Fpatent-office-confirms-concerns-over-telework-fraud%2F94142%2F), Zinser’s report said “One senior manager described the billing code as the ‘I don’t have work but I’m going to get paid’ code.” “Our investigation uncovered substantial, pervasive waste at the PTAB that endured for more than four years, and resulted in the misuse of federal resources totaling at least $5.09 million,” the report said. The USPTO fraud story has, in recent months, been the subject of investigative reporting by the Washington Post newspaper. And, the story has also caught the eye of U.S. Congressman Darryl Issa (R-CA), the Chairman of the House of Representatives’ Oversight and Government Reform Committee. In August, Issa’s committee held hearings on the USPTO and the teleworking fraud. On August 19, the committee sent Commerce Secretary Penny Pritzker a formal letter citing the newspaper’s reports, and requesting documents on points raised in those stories. “According to the Post patent examiners ‘repeatedly lied about the hours they were putting in, and many were receiving bonuses for work they didn’t do.’ In one instance, an examiner received full pay despite missing 304 hours of work,” the letter said. “The employee was caught twice for cheating but not fired. Another employee racked up $12,533 in salary while showing no evidence of working.” “According to one manager, an examiner used a ‘mouse-mover’ program to create the appearance that he was working,” the letter said. “While the manger reported the incident to a top official, no disciplinary action was taken.” Even more damaging was the contention in the committee’s letter that the report from the USPTO to Inspector General Zinser was substantially altered from its original form.

Click here for full article.

New Afghan Leader, Putting Focus on Graft, Revives Bank Fraud Inquiry

Signaling his intent to improve the Afghan government’s poor reputation on corruption, President Ashraf Ghani ordered a new examination of the stagnant Kabul Bank fraud prosecutions. The bank, likened to a roughly $800 million Ponzi scheme after powerful insiders pillaged it through fraudulent loans, has come to symbolize the legal impunity enjoyed by Afghanistan’s elite. And the case has become a major sticking point for donor nations and the International Monetary Fund, which at one point made prosecution of those responsible for the bank’s collapse a condition of any new loans to the government. Just three days into Mr. Ghani’s presidency, his decree about the bank was clearly meant to reassure Western partners that aid to the country would not be a bad investment. The day before, as Afghanistan signed long-term security deals with the United States and NATO, Mr. Ghani had emphasized the importance of international aid in tackling “shared challenges.” In the Kabul Bank case, although 21 defendants were convicted (http://www.nytimes.com/2013/03/06/world/asia/afghanistan-convicts-21-in-kabul-bank-scandal.html?pagewanted=all&_r=0) on various charges in March 2013, the case has languished on appeal for more than a year as the court deliberated whether to uphold sentences that many argued were light to begin with. Only a few flagrant offenders have seen jail time. In his aggressively worded decree, Mr. Ghani ordered the detention of the convicted and a review of the case by the Afghan Supreme Court with the possibility of expanding charges. It was unclear, however, whether the judiciary could expand the list of defendants beyond the scope of the original prosecution. The order issued tight timelines for action, including three days to detain those whose appeals are pending, a month and a half for the Supreme Court to produce its findings and 10 days to work out cooperation agreements with countries where the stolen money may have been sent. It also explicitly directed the Attorney General’s office, which some Afghan and Western officials have accused of shielding people who benefited from the fraud, to cooperate with the investigation. The Monitoring and Evaluation Committee, which conducted a public inquiry into the scandal in 2012, will release its report, “Unfinished Business,” which names every beneficiary of the Kabul Bank scandal, the amount of money each received, and how much each did—or did not—repay. Mr. Kos said the report listed 19 companies and individuals, from a private airline to Mahmood Karzai, with debts totaling $880 million. It also lists assets purchased with the fraudulent loans, including 11 villas in Dubai, a complex of 108 shops and 34 apartments in Kabul, seven planes for the airline and an oil storage complex with 50 vehicles. In a reflection of the difficulty of the work, the anticorruption group delayed its publication until after President Karzai had stepped down because “we were sure that the previous president would do nothing,” Mr. Kos said. The Afghan vice president’s office had already pressured a tribunal not to pursue some of the main beneficiaries of the fraud, including Mr. Karzai’s brother, according to Mr. Kos. Other Afghan officials said Mr. Karzai also interfered with the tribunal. The crisis centered on a web of fraudulent insider loans, which went mostly to bank shareholders, who often had powerful political connections. Mahmood Karzai, for instance, borrowed $22 million, while Haseen Fahim borrowed $78 million. The bank had more than a million depositors, many of whom were public service employees. When the bank collapsed, the Afghan government assumed losses of more than $800 million — a bill ultimately absorbed by Western donors who had been bankrolling the Afghan economy since 2001.

Click here for full article.

If short you must, look for fraud

If you want to cash in as a short-seller, better to do some forensic accounting rather than looking for silly valuations. Short selling, the tactic of selling a borrowed security in the hopes it can be bought back later at a lower price to repay the loan, falls broadly into two categories. In one the short seller suspects or alleges a fraud or misrepresentation, while in the other the trade is based on the belief that the stock is over-valued and will fall. Jim Chanos’ highly lucrative short of the Byzantine fraud at Enron in 2000 and 2001 is perhaps the archetype of the first school, a speculation with a more than satisfactory ending for him as the stock tumbled from the high double digits into bankruptcy protection as accounting chicanery came to light. The dotcom bubble offers many examples of the valuation type of shorting opportunity, companies that were as honest as the day is long but possessed of suicidal business plans and ultimately dependent on the discovery of a series of greater fools to supply the needed capital to fund the burn rate. Those short sales of mortgage-backed securities during the last financial crisis might be considered a hybrid, combining as they did a certain amount of fraud in the mortgage process with an unhealthy dose of silly valuations of real estate and derived securities. Wall Street wisdom on these two schools is that identifying fraud pays better than bubble-pricking stocks with crazy valuations, a belief pithily expressed in April by famed short-seller David Einhorn of Greenlight Capital. “We have repeatedly noted that it is dangerous to short stocks that have disconnected from traditional valuation methods,” Einhorn said while discussing a basket of shorts of unnamed momentum stocks he’d undertaken.

Click here for full article.

Vodafone Starts Audit Into Possible Tax Fraud at Ono Unit

Vodafone Group Plc (VOD) (http://www.bloomberg.com/quote/VOD:LN) began an internal probe into possible tax fraud (http://tinyurl.com/llg565g) the probe. Deloitte LLP is leading the investigation. The alleged fraud occurred at Ono resellers who sold international call minutes in Spain and failed to declare value-added taxes, said three people familiar with the matter, who asked not to be identified because the details are private. Ono didn’t receive financial benefits and the probe doesn’t pose a threat to the acquisition, one of the people said. A representative for Deloitte declined to comment. PricewaterhouseCoopers LLP, which said (http://www.pwc.es/es/sala-prensa/notas-prensa/2014/pwc-gana-auditoria-vodafone.jhtml) in April it was appointed as Vodafone’s auditor in Spain (http://topics.bloomberg.com/spain/) and has worked with Ono, had no immediate comment. A spokesman for Spain’s tax authority declined to comment on Ono’s taxes or whether any investigation exists. Vodafone, the world’s second-largest wireless carrier by customers, agreed to buy Ono in March as part of a plan to add Internet and TV services across Europe (http://topics.bloomberg.com/europe/). The purchase, completed in July, would help Vodafone turn around its Spanish business, which has been chipped away by price wars and a sluggish economy causing revenue declines for the last four fiscal years. Service revenue fell 13 percent in Spain in the year ended in March. Vodafone is spending 19 billion pounds ($31 billion) on a network improvement program through March 2016, putting funds into faster mobile and broadband networks and expanding into more services. Vodafone bought Kabel Deutschland Holding AG for 10.5 billion euros last year to bulk up its network in Germany (http://topics.bloomberg.com/germany/). Vodafone will withhold bonuses for three Ono managers tied to the acquisition, according to a report in online publication El Confidencial. According to El Pais, the Ono division generates revenue of more than 200 million euros from international calling minutes.

Click here for full article.

Foreign Corrupt Practices Act (FCPA)

Former BayernLB CEO gets suspended sentence for bribery

A German court handed former BayernLB Chief Executive Werner Schmidt a suspended prison sentence of 18 months for bribing an Austrian politician when acquiring Hypo Alpe Adria (HGAA). The sentence is one of only a few cases where a German bank manager has faced punishment for actions that led to the near-failure of a business during the financial crisis. Munich-based public-sector bank BayernLB bought Hypo in 2007. In 2009, Austria had to take over the loss-making lender to avoid a collapse that would have sent shock waves through eastern Europe, and BayernLB lost a total of 3.7 billion euros ($4.7 billion) on its investment. Schmidt, who stepped down in 2008, has admitted to bribing the now-deceased head of government of Austria’s Carinthia state, Joerg Haider, during negotiations to buy the bank. Public prosecutors had argued that Schmidt and seven of his former board colleagues should be found guilty of embezzling money by overpaying heavily for Hypo. Proceedings against most of the other defendants have been dismissed, though some of them had to pay several thousand euros to end the cases against them. The hit that BayernLB took from the Hypo acquisition is still the subject of discussions in other courtrooms. Earlier this month, BayernLB sued Austria for passing a law that forces some creditors to share the costs of winding down Hypo. In another case against German bankers, a court in July acquitted ex-managers of bailed-out German lender HSH Nordbank of charges including accounting fraud in a high-profile case stemming from the financial crisis. A criminal case against former managers of bailed-out LBBW for accounting fraud in April ended with a settlement in which the court ordered them to make payments to charities.

Click here for full article.

SEC Charges Texas-Based Layne Christensen Company With FCPA Violations

The Securities and Exchange Commission charged a global water management, construction, and drilling company headquartered in Texas with violating the Foreign Corrupt Practices Act (FCPA) by making improper payments to foreign officials in several African countries in order to obtain beneficial treatment and reduce its tax liability. After Layne Christensen Company self-reported its misconduct, an SEC investigation determined that the company received approximately $3.9 million in unlawful benefits during a five-year period as a result of bribes typically paid through its subsidiaries in Africa and Australia. Some payments were funded through cash transfers from Layne’s U.S. bank accounts. In addition to self-reporting the misconduct, Layne cooperated with the SEC’s investigation by providing real-time reports of its investigative findings, producing English language translations of documents, and making foreign witnesses available. The company also undertook an extensive remediation effort. Layne agreed to pay more than $5 million to settle the SEC’s charges. “Layne’s lack of internal controls allowed improper payments to government officials in multiple countries to continue unabated for five years,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit. “However, Layne self-reported its violations, cooperated fully with our investigation, and revamped its FCPA compliance program. Those measures were credited in determining the appropriate remedy.” According to the SEC’s order instituting settled administrative proceedings, Layne’s misconduct occurred from 2005 to 2010. In addition to favorable tax treatment, the improper payments helped the company obtain customs clearance, work permits, and relief from inspections by immigration and labor officials in various African countries.

Click here for full article.

UK fraud prosecutor seeks more cash for big cases

Britain’s Serious Fraud Office (SFO) has asked the government for an extra 26.5 million pounds ($42.4 million) to help fund complex inquiries such as financial benchmark manipulation and top corruption cases. The request announced tops the extra 24 million pounds sought last financial year and is one of the biggest cash injections asked for by the agency, which investigates and prosecutes high-profile cases with a meagre annual budget set this year at 35.2 million pounds. Its biggest and costliest cases remain the investigation into the manipulation of Libor (London interbank offered rate) interest rates, an inquiry into circumstances surrounding Barclays’ 8 billion pound recapitalisation in 2008 and bribery allegations linked to Rolls Royce divisions. The funding request for the financial year to March 2015 also includes a 4.5 million pound payment to the property baron brothers Robert and Vincent Tchenguiz to settle a 300 million pound damages claim over a botched investigation, a SFO spokesman confirmed. Extra legal costs have yet to be announced. The SFO, which can request “blockbuster funding” if the cost of cases exceeds a percentage of its budget, had been expected to seek extra cash this year to meet the demands of what its head, David Green, calls its most demanding case load ever. Green, who has often pointed to the size of London’s vibrant white collar crime legal sector as a sign of how much work the agency faces, highlighted the recent successes of the SFO, which has had a chequered history in nailing top fraudsters. These include its first conviction for fraud-related offences linked to Libor, a benchmark against which about $450 trillion of financial contracts are pegged. News of the guilty plea coincided with speculation that the government was reviving plans to roll the SFO into the country’s broader crime-busting force, the National Crime Agency. Green said he was not surprised the government was again reviewing coordination and the effectiveness of law enforcement agencies in tackling bribery and corruption. But he stressed such a move would thwart the agency’s ability to tackle high-level fraud as a demonstrably independent agency – particularly when dealing with iconic British companies – undermine staff morale and encourage less cooperative suspects “just as the SFO is making real headway”. Emily Thornberry, the opposition Labour party’s spokeswoman on judicial affairs, urged the government to examine the SFO’s funding or risk curbing its capacity to take on new cases.

Click here for full article.

First Person in Alstom U.K. Bribery Case to Face Charges

The first individual to face charges in the U.K. bribery probe into French engineering company Alstom SA (ALO) (http://www.bloomberg.com/quote/ALO:FP) is scheduled to appear at a London court next month. Robert Hallett was ordered to appear in court on Nov. 3 to face two charges of having “corruptly agreed to give a gift or consideration as an inducement or reward” for favorable treatment, according to Nicola Scott, an officer at the Westminster Magistrates’ Court who handles hearings listings. British prosecutors at the Serious Fraud Office (http://topics.bloomberg.com/serious-fraud-office/) charged Alstom’s U.K. unit in July over bribes that allegedly occurred in relation to large transport projects in India (http://topics.bloomberg.com/india/), Poland and Tunisia (http://topics.bloomberg.com/tunisia/) between 2000 and 2006. About five more individuals are expected to face charges in connection with the case, people with knowledge of the matter have said. The Levallois-Perret, France-based company is scheduled to appear in court to enter a plea at the end of January.

Click here for full article.

Litigation Matters

Texas investor Sam Wyly files for bankruptcy after losing SEC fraud case

Texas tycoon Sam Wyly has filed for bankruptcy, saying he does not have the assets to pay the nearly $300 million that U.S. regulators are demanding for his role in a fraudulent offshore scheme. In documents filed with a U.S. bankruptcy court in Dallas, Wyly said he had between $100 million and $500 million of both assets and liabilities and cited the “massive costs” of fighting civil claims from the U.S. Securities and Exchange Commission (SEC) as the reason for seeking Chapter 11 protection. Last month, U.S. District Judge Shira Scheindlin in New York ordered Wyly and the estate of his late brother Charles to pay damages of $187.7 million plus interest to the SEC, after a jury found them liable for fraud in May. The SEC has since said the total, including interest, should be $299.4 million, which is one of the largest awards ever sought from individual defendants in a U.S. court. Wyly, 80, appeared on Forbes’ list of the 400 richest Americans in 2010, with a net worth of $1 billion. In the filing, Wyly said he had spent $100 million in legal fees responding to probes from the SEC and the Internal Revenue Service. Robert Gemmill, a spokesman for Wyly, said he would not comment beyond the bankruptcy filing. An SEC spokesman declined to comment. The SEC accused the brothers of constructing a complex system of trusts in the Isle of Man that netted them $553 million in untaxed profits through more than a decade of hidden trades in four companies they controlled. Those companies included Sterling Software Inc, Michaels Stores Inc [MSII.UL], Sterling Commerce Inc and Scottish Annuity & Life Holdings Ltd, now Scottish Re Group Ltd. Charles Wyly died in a 2011 car crash, and his estate was substituted as a defendant. The SEC and the Wylys have been fighting over whether the securities regulator may collect money still held in the offshore trusts. Lawyers for the Wylys have argued that those assets, worth about $380 million, are controlled by the trusts’ beneficiaries, including the Wylys’ children. In a court filing, the SEC said the trusts’ assets are the property of Sam and Charles Wyly. “The SEC continues to believe that Sam and the estate of Charles Wyly have sufficient global assets to pay any judgment,” the filing said. A lawyer for Sam Wyly, Steven Shepard, warned Scheindlin in August that a massive judgment would bankrupt his client. It was not immediately clear whether the bankruptcy filing could allow Wyly to reduce his debt to the SEC. Debts incurred through fraud are typically not eligible for reduction in bankruptcy proceedings, said Jonathan Lipson, a Temple University law professor with expertise in bankruptcy law. It is theoretically possible, though, for Chapter 11 debtors to reduce such debts with a judge’s approval, Lipson said.

Click here for full article.

TD Bank to pay $850K in multi-state settlement over 2012 breach

TD Bank, N.A. agreed to pay $850,000 and reform its practices to resolve a nine-state probe of a 2012 data breach, New York Attorney General Eric Schneiderman. Personal information for 260,000 TD Bank customers nationwide was exposed when the bank lost unencrypted bank up tapes in Massachusetts, Schneiderman said in a statement. The settlement requires the bank to ensure that no backup tapes are moved unless they are encrypted and take other steps to better protect personal information, Schneiderman said. “This agreement highlights our efforts to evolve our security controls to further benefit our customers,” TD Bank spokeswoman Rebecca Acevedo said in an e-mail. The bank has not detected any unusual incidents of fraud related to the breach, nor have customers reported them, although monitoring continues, she added. State attorneys general have launched probes of data breaches, often banding together, as cyber-security problems have been disclosed at businesses from banks to home improvement stores. This year, states began investigations of breaches at JPMorgan Chase & Co, Home Depot Inc, Ebay Inc, and retailer Target Corp . The nine states that investigated the TD Bank breach are Connecticut, Florida, Maine, Maryland, New Jersey, North Carolina, Pennsylvania and Vermont, according to Schneiderman’s office.

Click here for full article.

U.K. Wins First Guilty Plea From Banker on Libor-Rigging

A senior banker from a leading British bank pleaded guilty to conspiring to manipulate London (http://topics.bloomberg.com/london/) interbank offered rates in a U.K. The individual, who can’t be identified by order of the judge, is the first to plead guilty in the U.K. Serious Fraud Office’s interest-rate rigging investigation. Twelve have been charged in connection to the U.K. case. The SFO released a statement confirming the plea and saying it couldn’t comment further on the matter for legal reasons. Authorities around the world have been investigating the rigging of interbank offered rates, benchmarks used to calculate more than $300 trillion of securities, including mortgages, credit cards, student loans (http://topics.bloomberg.com/student-loans/) and other consumer lending products. Two individuals have pleaded guilty this year to Libor-manipulation charges in the U.S. The first trial for an individual trader in the global probes is set to take place in London next year. The banker who pleaded guilty in the U.K. will be sentenced later. The plea marks the first success in what SFO Director David Green (http://topics.bloomberg.com/david-green/) said last week is a “watershed” moment for the agency as the first cases initiated under his watch come to trial. The prosecutor has faced criticism after a number of cases taken on by his predecessor failed. The SFO is still fighting critics for its survival, after some government ministers tried to combine it with other agencies in 2011. A new government report – part of a review into British policing of bribery and white-collar crime–assessing the various U.K. prosecution bodies is expected to be published in the coming months. The SFO said there’s no indication splitting it up “would be more effective.” The guilty plea “is a good result for the SFO but it underlines the recklessness of ministers speculating once again about its survival at a time when it is undertaking some of its most important work in years,” Emily Thornberry, the spokeswoman for legal matters for the U.K. opposition Labour Party (http://topics.bloomberg.com/labour-party/), said in an e-mailed statement. “Morale at the SFO has only just recovered from the last bout of open speculation about its future.”

Click here for full article.

SEC approves securities arbitration fraud intervention rule

The Securities and Exchange Commission has approved a rule that will let securities arbitrators immediately report frauds that may threaten the investing public if they learn about them in the middle of a case. The agency’s approval, published in the Federal Register, ends years of controversy about the proposal, which was sparked by multibillion-dollar Ponzi schemes orchestrated by Bernard Madoff and R. Allen Stanford. Wall Street’s industry-funded watchdog, the Financial Industry Regulatory Authority (FINRA), had been pushing to put the so-called “mid-case referral rule” in place since 2010. Allowing securities arbitrators to voice serious concerns in the middle of a case about possible frauds that could harm investors is a procedure that provides “a necessary means” of alerting FINRA staff to such threats, the SEC wrote in a notice. Arbitrators must currently wait until the end of a case to alert FINRA staff. FINRA runs its own securities arbitration system in which investors must resolve their legal disputes with brokerages. The SEC must review all changes to FINRA rules. Lawyers for brokerages and investors worried how FINRA would handle arbitrators who report suspicious behavior. Arbitrators who continue in a case after referring concerns to FINRA, the lawyers have said, may show bias against certain parties because they already may have come to conclusions before hearing all the evidence. That could make it easier for one party to later challenge a ruling. Getting a replacement arbitrator up to speed also might prolong a case and increase legal costs. In January, FINRA withdrew an initial version to tweak it in response to the lawyers’ concerns. It refiled the plan with the SEC in February. FINRA has acknowledged that the rule may cause delays and increase costs in some cases. Nonetheless, “the rule is designed in a way that should make its invocation rare,” the SEC wrote. For example, arbitrators must believe that the conduct involved poses a serious threat that is “likely to harm investors unless immediate action is taken,” the SEC wrote. The SEC and FINRA plan to monitor mid-case proceedings in response to concerns. FINRA has agreed to collect statistics on the number of cases in which arbitrators make mid-case referrals for one year after the rule becomes effective, the SEC wrote. The watchdog will then report those figures to the SEC.

Click here for full article.

China Market

Four months on, fallout from Chinese scandal drives up nickel stocks

A commodity fraud at China’s Qingdao port has hit bank financing of metal deals, sparking a surprise jump in nickel exports and pushing back expectations of a global supply shortage of the metal used mainly in stainless steel. The Chinese exports have helped global stockpiles hit record highs, confounding expectations of a deficit as soon as next year that drove a spike in nickel prices after Indonesia enforced a ban on ore exports in January. That was part of Indonesia’s ambition to retain more of its mineral wealth by building a processing industry. Investors bet that Chinese stainless steel mills would run out of feed before Indonesia’s industry reached full swing, putting a rocket under prices. “The market got quite bullish. The reason they got bullish is still there. But now they are looking at all this metal coming out of financing deals,” said analyst Lachlan Shaw of Commonwealth Bank of Australia in Melbourne. “It doesn’t change the reasons for the deficit next year – essentially the ferronickel sector in China not being able to access the ore because of Indonesia’s export ban,” he said. China is the world’s biggest consumer of nickel. Its stainless steel mills relied on Indonesian ore to make nickel pig iron (NPI), a cheaper substitute for refined nickel, and the result of the export ban was a 50 percent jump in nickel prices by May. But expectations of a global deficit by next year have been upended by the funding scandal at Qingdao port, after it emerged in June that companies had used fake receipts to obtain multiple loans secured against single cargoes of metal. Four months later the shock waves from the fraudulent commodity financing are still being felt in the markets. Western and Chinese banks responded by clamping down on lending in China and traders are still having a hard time getting letters of credit (L/Cs) to finance nickel stocks because of the perceived risk with poorly regulated warehouses. “We’ve shipped some nickel out of China. There’s no demand now because it’s too tough to get L/Cs after Qingdao,” said a Singapore-based trader. Chinese nickel exports jumped to more than 50,000 tonnes over June to August, almost double its exports in the first five months of the year, helping drive LME stocks up by about a quarter since mid-June to a record 359,166 tonnes. Meanwhile, premiums to get nickel in Malaysia have slumped to around $10–15 for full plate cathode from $60–$70 in mid-August, traders said.

Click here for full article.

Tianhe Chemical Slumps After Resuming Trade in Hong Kong

Tianhe Chemicals Group Ltd. (1619) (http://www.bloomberg.com/quote/1619:HK) lost more than $3 billion in market value as it resumed trading after denying fraud allegations by a stock-research group connected to the Anonymous online-hacking collective. The stock plunged (http://www.bloomberg.com/quote/1619:HK) as much as 47 percent after the Jinzhou, Liaoning-province-based chemical maker denied allegations that it had two sets of accounts. It also filed audited financial statements with regulators. Tianhe has made at least four statements rejecting the report Anonymous issued on September 2 with a strong sell rating on the stock. Tianhe is the latest in a series of Chinese companies that have faced allegations of fraud from short-sellers in the past three years, increasing the scrutiny of investors. Calls by Anonymous to sell shares in companies it writes about haven’t always been heeded, with some, including Qihoo 360 Technology Co., trading higher since the recommendations. “Some investors might not be taking a view on whether these allegations are true or not, but just no longer want to be involved,” Morgan Stanley analysts Andy Meng and Daisy Li said in a report on Tianhe. Anonymous “twisted facts and intertwined fiction, including a combination of falsified information, forged signature of the company’s chairman and blatantly untrue statements,” Tianhe said in yesterday’s statement. Anonymous has said it didn’t use fabricated or forged documents. The allegations by Anonymous and the six week trading suspension “are bound to have created some doubt,” Morgan Stanley said in the report. “Although we think the company has addressed the allegations surrounding the income statement and taxation, the market is likely to be looking for more disclosure on sales channels and whether or not there are related parties involved. This may prove difficult for Tianhe as it involves disclosing information about companies other than its own,” the report said.

Click here for full article.

Healthcare Industry

U.S. sues NYC, Computer Sciences over Medicaid reimbursements

The United States joined a lawsuit accusing New York City and Computer Sciences Corp of defrauding Medicaid into making millions of dollars of improper reimbursements by exploiting a computerized billing system that the company designed. According to the complaint filed in U.S. District Court in Manhattan, the defendants took advantage of the system’s automatic defaulting capabilities, enabling the city to boost the amount and speed of reimbursements for services provided to infants and toddlers with developmental delays. The U.S. attorney for Manhattan, Preet Bharara, said the fraud led to the city and Computer Sciences’ submitting tens of thousands of false claims to Medicaid from 2008 to 2012. Originally filed by a whistleblower, Vincent Forcier, the lawsuit seeks restitution, civil penalties and triple damages for violations of the federal False Claims Act. That law allows whistleblowers to sue on the government’s behalf and share in recoveries. The government is not required to get involved in False Claims Act lawsuits, but sometimes intervenes in cases it considers stronger. “We are in the process of reviewing the complaint,” said Richard Adamonis, a spokesman for Computer Sciences, which is based in Falls Church, Virginia. Nick Paolucci, a spokesman for New York City, had no immediate comment. New York state plans to bring a related case against Computer Sciences, court records show. A spokeswoman for New York Attorney General Eric Schneiderman declined to comment. The lawsuit concerns early intervention program services, which are provided to children under 3 years old who have developmental delays, or medical conditions such as autism and low birth weight that are associated with such delays. According to the government, the city and Computer Sciences engaged in three fraud schemes. In two, the defendants allegedly circumvented Medicaid’s “secondary payor” requirement that they exhaust private insurance coverage before submitting claims. The third scheme allegedly involved the defendants’ changing diagnostic codes that were used by medical providers to a generic code that they knew would result in payment by Medicaid.

Click here for full article.

Merck unit to pay $31 mln to settle fraud claims by U.S. states

A subsidiary of Merck & Co has agreed to pay U.S. states $31 million to settle claims that it overcharged their Medicaid programs for an antidepressant it had sold at a discount to pharmacy companies, attorney generals from three states said. The officials from Idaho, New York and Florida said Organon USA Inc offered the drug, Remeron, to nursing home pharmacies at a discount to encourage its use over competitors. At the same time, the company reported the full cost of the drug when seeking reimbursements from state Medicaid programs, the states claimed. New Jersey-based Organon, which did not admit any wrongdoing, also was accused of improperly promoting use of the drug by children and teens. The agreement, which includes Washington, D.C., and every state besides Arizona, settled whistleblower lawsuits filed in 2007 in federal courts in Massachusetts and Texas. Under the deal, New York will receive about $2.5 million, Idaho about $53,000, and Florida $483,000, the states’ attorney generals said in separate statements. “Preserving the integrity of our Medicaid program and weeding out those who seek to defraud it is a top priority for my office,” New York Attorney General Eric Schneiderman said.

Click here for full article.

DaVita to Pay $350 Million to Resolve Allegations of Illegal Kickbacks

DaVita Healthcare Partners, Inc., one of the leading providers of dialysis services in the United States, has agreed to pay $350 million to resolve claims that it violated the False Claims Act by paying kickbacks to induce the referral of patients to its dialysis clinics. DaVita is headquartered in Denver, Colorado and has dialysis clinics in 46 states and the District of Columbia. The settlement resolves allegations that, between March 1, 2005 and February 1, 2014, DaVita identified physicians or physician groups that had significant patient populations suffering renal disease and offered them lucrative opportunities to partner with DaVita by acquiring and/or selling an interest in dialysis clinics to which their patients would be referred for dialysis treatment. DaVita further ensured referrals of these patients to the clinics through a series of secondary agreements with the physicians, including entering into agreements in which the physician agreed not to compete with the DaVita clinic and non-disparagement agreements that would have prevented the physicians from referring their patients to other dialysis providers. The government alleged that DaVita used a three part joint venture business model to induce patient referrals. First, using information gathered from numerous sources, DaVita identified physicians or physician groups that had significant patient populations suffering renal disease within a specific geographic area. DaVita would then gather specific information about the physicians or physician group to determine if they would be a “winning practice.” In one transaction, a physician’s group was considered a “winning practice” because the physicians were “young and in debt.” Based on this careful vetting process, DaVita knew and expected that many, if not most, of the physicians’ patients would be referred to the joint venture dialysis clinics. Next, DaVita would offer the targeted physician or physician group a lucrative opportunity to enter into a joint venture involving DaVita’s acquisition of an interest in dialysis clinics owned by the physicians, and/or DaVita’s sale of an interest in its dialysis clinics to the physicians. To make the transaction financially attractive to potential physician partners, DaVita would manipulate the financial models used to value the transaction. For example, to decrease the apparent value of clinics it was selling, DaVita would employ an assumption it referred to as the “HIPPER compression,” which was based on a speculative and arbitrary projection that future payments for dialysis treatments by commercial insurance companies would be cut by as much as half in future years. These manipulations resulted in physicians paying less for their interest in the joint ventures and realizing returns on investment which were extraordinarily high, with pre-tax annual returns exceeding 100 percent in some instances. Last, DaVita ensured future patient referrals through a series of secondary agreements with their physician partners. These included paying the physicians to serve as medical directors of the joint venture clinics, and entering into agreements in which the physicians agreed not to compete with the clinic. The Government’s complaint identifies a joint venture with a physicians’ group in central Florida as one of several examples illustrating DaVita’s scheme to improperly induce patient referrals.

Click here for full article.

SEC Regulatory Actions

SEC Announces Enforcement Action Against Former Wells Fargo Advisors Compliance Officer for Altering Document

The Securities and Exchange Commission announced an enforcement action against a former Wells Fargo Advisors compliance officer who allegedly altered a document before it was provided to the SEC during an investigation. According to the SEC’s order instituting an administrative proceeding against Judy K. Wolf, she was responsible for identifying potentially suspicious trading by Wells Fargo personnel or the firm’s customers and clients and then analyzing whether the trades may have been based on material nonpublic information. Wolf created a document in September 2010 to summarize her review of a particular Wells Fargo broker’s trading, and she closed her review with no findings. The SEC Enforcement Division alleges that Wolf altered that document in December 2012 after the SEC charged the broker with insider trading (http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171484920). By altering the document, Wolf made it appear that she performed a more thorough review in 2010 than she actually had. After Wells Fargo provided the document to the SEC as part of its continuing investigation, SEC enforcement staff spotted the alteration and questioned Wolf specifically about the document. At first she unequivocally denied altering the document after September 2010, but in later testimony she testified that she had done so. The SEC previously charged Wells Fargo (http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543012047) in the case, and the firm agreed to pay $5 million to settle these and other violations of the securities laws. Prior to the enforcement action, Wells Fargo placed Wolf on administrative leave and ultimately terminated her employment. “We allege that Wolf intentionally altered a trading review document after she knew that the SEC had charged a Wells Fargo employee with insider trading based on facts related to her review,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit. “Regardless of her motivation, her conduct was inconsistent with what the SEC expects of compliance professionals and what the law requires.”

Click here for full article.

SEC’s FY 2014 Enforcement Actions Span Securities Industry and Include First-Ever Cases

The Securities and Exchange Commission announced that in fiscal year 2014, new investigative approaches and the innovative use of data and analytical tools contributed to a very strong year for enforcement marked by cases that spanned the securities industry. In the fiscal year that ended in September, the SEC filed a record 755 enforcement actions covering a wide range of misconduct, and obtained orders totaling $4.16 billion in disgorgement and penalties, according to preliminary figures. In FY 2013, the Commission filed 686 enforcement actions and obtained orders totaling $3.4 billion in disgorgement and penalties. In FY 2012, the Commission filed 734 enforcement actions and obtained orders totaling $3.1 billion in disgorgement and penalties. The agency’s enforcement actions also included a number of first-ever cases, including actions involving the market access rule, the “pay-to-play” rule for investment advisers, an emergency action to halt a municipal bond offering, and an action for whistleblower retaliation. “Aggressive enforcement against wrongdoers who harm investors and threaten our financial markets remains a top priority, and we brought and will continue to bring creative and important enforcement actions across a broad range of the securities markets,” said SEC Chair Mary Jo White. “The innovative use of technology – enhanced use of data and quantitative analysis – was instrumental in detecting misconduct and contributed to the Enforcement Division’s success in bringing quality actions that resulted in stiff monetary sanctions.” “Time and again this past year, the Division’s staff applied its tremendous energy and talent, uncovered misconduct, and held accountable those who were responsible for wrongdoing,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “I am proud of our excellent record of success and look forward to another year filled with high-impact enforcement actions.” In addition to the first-ever cases, Chair White noted that the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative was an important effort that began in the last fiscal year. The SEC reached a settlement with a California school district for charges of misleading bond investors, making it the first settlement under the initiative targeting municipal disclosure. Director Ceresney added that, going forward, the Enforcement Division will continue to bring its resources to bear across the entire spectrum of the financial industry, from complex accounting fraud and market structure cases, to investment adviser and municipal securities cases, microcap fraud, insider trading, and cases against gatekeepers.

Click here for full article.

SEC Sanctions Florida-Based Auditor for Circumventing Rules

The Securities and Exchange Commission sanctioned a Florida-based auditor for violating federal laws and regulations requiring lead audit partners to periodically rotate off their audit engagements with a publicly traded company in order to preserve the integrity of the financial reporting process. The lead partner primarily responsible for the audit of a public company is prohibited from performing lead audit partner services for the same issuer for more than five consecutive fiscal years. The SEC finds that Eliot Berman attempted to circumvent this auditor rotation requirement. For the audit of a company that he conducted for the previous five years, Berman installed as lead audit partner an employee at his firm who was not a certified public accountant nor otherwise qualified to lead such an audit. Berman improperly continued to perform many of the lead audit partner functions for that audit. Berman and his firm Berman & Company, located in Boca Raton, agreed to settle the SEC’s charges. Berman must pay a $15,000 penalty and is suspended for at least one year from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC. The case is part of the SEC’s ongoing Operation Broken Gate designed to identify auditors who disregard their gatekeeper roles in violating professional standards and thereby increasing the risk of undetected fraud in financial statements that are not being properly audited. “When investors receive an audited financial statement, they have a right to expect that the audit was performed by a qualified and independent auditor,” said Paul Levenson, Director of the SEC’s Boston Regional Office. “Berman attempted to subvert the independence rules by concocting a sham rotation and naming an unqualified employee of the firm to serve as token lead audit partner while he continued to pull the strings.” The SEC’s order instituting a settled administrative proceeding finds that Berman and his firm engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Securities Exchange Act of 1934 as well as Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. The order finds that they violated Section 10A(j) of the Exchange Act and caused their client’s violations of Section 13(a) of the Exchange Act and Rule 13a-1. The order further finds that Berman & Company violated and Berman willfully aided and abetted Rule 2-02 of Regulation S-X. Without admitting or denying the SEC’s findings, Berman and his firm consented to the order, which censures Berman & Company for its misconduct.

Click here for full article.