Forensic News October 2015
Financial/Accounting Fraud
For close watchers of the interactions between the Justice Department and the financial industry, the mistrial in the Dewey & LeBoeuf case was about more than just the fact that a handful of jurors were too overwhelmed by the evidence presented to reach a verdict. The mistrial, after four months in court and 22 days of deliberations, hints at a much deeper problem: Perhaps most financial crime has reached a level of such complexity that it’s beyond the reach of the law. Since the financial crisis sent the economy into a spiral, leading to millions of lost jobs and foreclosed homes, there have been public cries to see bankers responsible for the frauds underpinning the crisis put in jail. This would have fit with the pattern of how things have gone since the beginning of time: Booms and bubbles led to market collapses and crises, followed by the tightening of regulations and criminal prosecutions. In the case of 2008, however, the crackdown never really came. Only one high-level banker went to prison, and the Justice Department pursued enormous multi-billion-dollar civil penalties against big banks, rather than charges against individuals. The U.S. attorney general, the Security and Exchange Commission, Preet Bharara, U.S. Attorney for the Southern District of New York, and others have taken enormous amounts of criticism for this. Still, several years later, many high profile attempts to charge financial criminals have failed, raising the question of whether the crimes themselves have evolved to a point where the resources designed to combat them are hopelessly out of sync. Putting aside the question as to whether the Dewey & LeBoef fraud case was a wise one to bring, reports suggest that jurors were overwhelmed by the volume and complexity of the evidence they were asked to consider, which led to the deadlock. Manhattan District Attorney Cyrus Vance Jr. has also suffered losses in a handful of other financial cases, one involving mortgage fraud at tiny Abacus Bank in Chinatown and another involving a former Goldman Sachs programmer. In 2009, two Bear Stearns hedge fund managers were acquitted after being charged with lying to investors about their holdings in dicey mortgage securities; jurors seemed to have little grasp of what the defendants had done. More recently, the Supreme Court declined to revisit an appeals court decision in an insider trading case, which effectively means that trading on material nonpublic information is legal in New York, so long as the person trading on it doesn’t know too much about circumstances surrounding the source of the information. The Justice Department acknowledged that things haven’t been going too well in this area when it released new guidelines in September for prosecuting corporate crime. One of the key changes, it said, would be that the department would focus more on individual financial criminals. There’s nothing wrong with bringing an ambitious case to trial and losing. But the pattern suggests that law enforcement may have lost the ability to choose the right cases, or that it lacks the expertise to try them in a courtroom in a way that makes sense to jurors, many drawn from the ranks of working people who must struggle to understand the vast, mind-boggling modern financial system.
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German prosecutors launched an investigation into fraud allegations against former Volkswagen boss Martin Winterkorn, showing their determination to get quickly to the bottom of a scandal over rigged emissions tests that has rocked the global car industry. The German company also suspended three top engineers as it tries to get to grips with a crisis that has knocked more than a third off its market value and could harm Germany’s economy. Volkswagen has admitted cheating diesel emissions tests in the United States but Germany’s transport minister says it also manipulated tests in Europe, where it has much bigger sales, and it faces the worst business crisis in its 78-year history. The German prosecutor’s office said it was investigating Winterkorn over “allegations of fraud in the sale of cars with manipulated emissions data” based on charges filed by about 10 unidentified individuals. Winterkorn, replaced as chief executive by company veteran Matthias Mueller, said when he quit, he was not aware of any wrongdoing on his part and wanted to give the company a new start. The crisis is an embarrassment for Germany, which has for years held up Volkswagen as a model of its engineering prowess and has lobbied against some tighter regulations on automakers. The German car industry employs more than 750,000 people and is a major source of export income. In a sign of Volkswagen’s own efforts to tackle the crisis, sources close to the matter said it had suspended Heinz-Jakob Neusser, head of brand development at its core VW brand. Also suspended were Ulrich Hackenberg, the head of research and development at premium brand Audi who oversees technical development across the group, and Wolfgang Hatz, R&D chief at sports-car brand Porsche who heads group engine and transmissions development, they said. One source said Hackenberg was taking legal action against the decision. Winterkorn was at the helm of Volkswagen for nine years and was the highest paid CEO on Germany’s blue-chip DAX stock market last year.
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Spain’s public prosecutor has asked the country’s High Court to investigate German carmaker Volkswagen and the scandal surrounding its rigging of diesel emissions tests. The public prosecutor argued that Volkswagen might have committed fraud, including by taking subsidies illicitly, and may have committed a crime related to the environment due to pollution by its cars. If Spain’s High Court agrees to take on the case, it would be handed to an investigating magistrate and could still take months or even years to go to trial – or it could be dropped. Europe’s largest automaker has admitted rigging diesel emissions tests in the United States, and its operations elsewhere are also being scrutinized. It has said that in Spain alone, nearly 700,000 cars, mostly linked to its SEAT brand, may have included the illegal software at the heart of the scandal which erupted in mid-September. Volkswagen’s share price has suffered as a result and its long-time chief executive had to quit. Spain’s public prosecutor is requesting that Spain’s Industry Ministry, which has been in close contact with Volkswagen over the case, hand over all the information it has gathered so far. It also wants Volkswagen to provide more details on its Spanish operations and on the software it used. Spain’s government had said it would try to claw back car purchase subsidies handed out to Volkswagen, though it has since been more cautious, noting that the incentives to buy greener vehicles were not linked to the exact types of emissions under scrutiny and may not be recoverable. The Industry Ministry has stressed, however, that a 4.2 billion-euro ($4.75 billion) investment in Spain by Volkswagen would be guaranteed, at a time when the carmaker is contemplating massive cost savings.
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The Federal Bureau of Investigation and the U.S. Department of Justice are examining Goldman Sachs Group Inc’s role in allegations of corruption and money laundering at Malaysian state investor 1Malaysia Development Bhd (1MDB), the Wall Street Journal reported. The U.S. inquiries are at the information-gathering stage, and there is no suggestion of wrongdoing by Goldman Sachs, the paper reported. Investigators “have yet to determine if the matter will become a focus of any investigations into the 1MDB scandal,” the Journal quoted a spokeswoman for the FBI as saying. In July, Malaysian anti-corruption officials investigating the allegations visited the local office of Goldman Sachs seeking documents relating to 1MDB, Reuters reported earlier. Investigators in Malaysia have been probing 1MDB’s management, including allegations that nearly $700 million was channeled from the fund to Prime Minister Najib Razak’s bank accounts. Malaysia’s attorney general said he was right to close an investigation by the country’s central bank as there was no evidence the fund’s officials had knowingly flouted the law.
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Burkina Faso is owed more than 123 billion CFA francs ($212 million) in unpaid taxes due between 2012 and 2014, with senior members of ousted President Blaise Compaore’s government among the worst offenders, according to a parliamentary report. Alexandre Sankara, vice-president of the parliamentary commission investigating tax fraud, said that former ministers and members of parliament under Compaore’s 27-year rule featured on a list of suspected fraudsters sent to the head of the transitional assembly. “This fraud is seriously harming our economy,” Sankara said. Compaore was swept from power in October 2014 by an uprising when he attempted to prolong his rule by removing a constitutional term limit. Many in the West African country are pushing for members of the former government to face justice. A short-lived coup by Compaore’s presidential guard failed to derail the transition to presidential elections, rescheduled for the end of November. Supporters of Compaore’s efforts to extend his rule have been barred from running. The commission said that losses to the Treasury from unpaid loans contracted by former ministers, parliamentarians and the former heads of state institutions amounted to 49 billion CFA francs. Economy Minister Jean Gustave Sanon told Reuters the report was part of an attempt to improve revenue collection as part of a modernization of government finances in one of the world’s poorest nations. He said the government, including the customs agency and tax department, would for the first time open bank accounts with commercial banks, making it much easier to make and accept payments.
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Accounting giant BDO America admitted that it missed red flags and issued false audit opinions about one of its client companies, and agreed to pay more than $2 million to settle the charges, U.S. regulators said. The Securities and Exchange Commission also charged five of the firm’s partners for their role in issuing deficient audits of their client, the employment agency General Employment Enterprises Inc. In addition, the SEC charged two former chief executives of General Employment Enterprises, as well as its former chairman and majority shareholder, Stephen B. Pence, who is a former U.S. attorney and former lieutenant governor of Kentucky. All of the executives settled the charges, except Pence, who is continuing to contest the case. Michael A. Valenti, an attorney for Pence, said the SEC’s case represents a “strong arm tactic of the highest degree by the SEC” and he will vigorously contest the charges. The SEC said that problems came up during BDO’s 2009 audit of General Employment after the company told its auditors that the $2.3 million it had invested in bank certificates of deposit had not been repaid by the bank. The $2.3 million represented about half of the company’s assets, but a bank employee said there was no record that the company had ever purchased the CDs. BDO received conflicting stories from company management about what happened with the alleged $2.3 million investment. Eventually the company received a series of deposits totaling $2.3 million from three entities unaffiliated with the bank, including one owned by Pence, the SEC said. At first, BDO demanded an independent investigation into the matter, but it later withdrew the request and issued an unqualified audit opinion for the company’s financial statements. In a statement, BDO said it is pleased to have the SEC’s case resolved. It added that its auditors were misled by two senior corporate officers and that BDO still “significantly contributed to the return of the $2.3 million in diverted funds.” BDO’s five partners and the two former General Employment CEOs are all settling without admitting or denying the charges.
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The Boeing Company has paid the United States $18 million to settle allegations that the company submitted false claims for labor charges on maintenance contracts with the U.S. Air Force for the C-17 Globemaster aircraft, the Justice Department announced. Boeing, an aerospace and defense industry giant, is headquartered in Chicago. “Defense contractors are required to obey the rules when billing for work performed on government contracts,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. The “settlement demonstrates that the Justice Department will ensure that government contractors meet their obligations and charge the government appropriately.” The government alleged that Boeing improperly charged labor costs under contracts with the Air Force for the maintenance and repair of C-17 Globemaster aircraft at Boeing’s Long Beach Depot Center in Long Beach, California. The C-17 Globemaster aircraft, which is both manufactured and maintained by Boeing, is one of the military’s major systems for transporting troops and cargo throughout the world. The government alleged that the company knowingly charged the United States for time its mechanics spent on extended breaks and lunch hours, and not on maintenance and repair work properly chargeable to the contracts. The allegations resolved by the settlement announced were originally brought by former Boeing employee James Thomas Webb under the qui tam, or whistleblower, provisions of the False Claims Act. The act permits private individuals to sue on behalf of the government those who falsely claim federal funds, and to share in the recovery. Mr. Webb’s share of the settlement has not yet been determined.
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The U.S. requires banks to know their customers. Looks like several big ones, including Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co., may have missed getting acquainted with Daniel Fernandes Rojo Filho. Filho, a 48-year-old Brazilian self-proclaimed billionaire living in Orlando, Florida, came under U.S. investigation in 2009 related to an alleged conspiracy involving drug trafficking, money laundering and a Ponzi scheme. Around then, he and others under the federal probe forfeited tens of millions of dollars worth of Lamborghinis, gold bars and other assets, according to court documents. He agreed in 2013 to forfeit another $25 million in accounts registered to his children and businesses. That was all a matter of public record in mid-2014, when Filho started opening new bank accounts. He set up at least 17 of them in the name of his company – DFRF Enterprises, derived from his initials – and signed his own name. Filho’s banking flurry is detailed in several fresh cases against him, including an August criminal indictment alleging he used some of these accounts in a scheme that promised investors income from nonexistent gold-mining operations. Filho faces similar allegations in separate lawsuits filed this year by the Securities and Exchange Commission and by a group of investors. The Justice Department didn’t bring charges against Filho or any others in the earlier probe that resulted in the asset forfeitures. In the current matter, neither the SEC nor U.S. prosecutors have accused any banks of wrongdoing. Still, their latest allegations against Filho – including that he duped 1,400 people into signing up for a pyramid scheme whose payments flowed through these accounts – offer an anecdotal spot check of how some big banks are doing as a first line of defense against financial crime. By the time Filho went to open his accounts, U.S. authorities had already penalized global banks more than $10 billion since the financial crisis for providing services to suspected money launderers, sanctions violators or other criminals. Six months earlier, JPMorgan had agreed to pay more than $2.5 billion in settlements and penalties, admitting oversight lapses in handling accounts for Ponzi schemer Bernard Madoff. The banks where Filho allegedly opened the new accounts included the North American units of JPMorgan and Wells Fargo, as well as RBS Citizens of Massachusetts, according to the class-action suit. The suit named Filho and the banks among the co-defendants. After the plaintiffs reached an undisclosed settlement with Filho in April, they voluntarily dismissed their complaint against JPMorgan, Wells Fargo and Citizens, said Carter. Filho also used an account at Citigroup’s Citibank as part of the scheme, according to the indictment. Citigroup has been cooperating with authorities, spokesman Mark Costiglio said. Several big global banks have bolstered their compliance departments in recent years. These workers are responsible, among other things, for making sure the banks don’t run afoul of so-called Know Your Customer laws meant to keep the institutions from handling criminal proceeds. JPMorgan spent an extra $2 billion from 2012 through 2014 to improve its overall compliance and cybersecurity efforts, it said last year. Citigroup, which has said it is cooperating with a U.S. money-laundering investigation related to its Mexico unit, has spent about $1.5 billion to boost the number of staff with some form of compliance or control function to 30,000.
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Three former top executives of Dewey & LeBoeuf LLP avoided potential prison terms after a Manhattan jury failed to agree on whether they lied to investors in the run-up to the largest law-firm bankruptcy in history. The mistrial followed weeks of deliberations during which jurors acquitted the trio of lesser charges. The case, while prosecuted by the office of Manhattan District Attorney Cyrus Vance Jr., involved the type of alleged fraud often pursued by the U.S. government. The outcome underscored the difficulty prosecutors face – even with the benefit of cooperating witnesses – as they seek to hold individuals accountable for corporate crimes. Prosecutors charged the defendants with grand larceny, fraud and conspiracy, alleging they inflated income as the law firm’s cash flow slowed amid the financial crisis. The jury deadlock “may necessitate a retrial, pending a thorough review of the case,” Vance said in a statement. “We continue to believe in the strength of the evidence and that the defendants’ actions broke state law.” The firm cut costs by mischaracterizing payments to salaried lawyers, reversing disbursements that had been written off, double-booking income, encouraging clients to backdate checks and delaying expenses, prosecutors said. A $150 million bond deal that Dewey sold to the public in 2010 was based on inflated revenue and hidden expenses, they argued, adding that the three men allegedly stole almost $200 million from 13 insurers and two financial firms. While law firms aren’t subject to the same regulatory scrutiny as public companies, they do face pressure to boost metrics, such as profits-per-partner used in industry rankings. Even without a conviction, the case should serve as a “wake-up call” for the industry, attorneys following the case said. The three men still face a lawsuit by the U.S. Securities and Exchange Commission.
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Foreign Corrupt Practices Act (FCPA)
A three-year long investigation by the U.S. government found evidence Wal-Mart Stores Inc. paid bribes to local officials in India, the Wall Street Journal reported. The same probe found less-than-expected signs of corruption in Wal-Mart’s Mexico business, it said. The bribing in India comprised thousands of small payments to low-level officials to help move goods through customs or obtain real estate permits, the newspaper reported, citing persons it didn’t identify. The vast majority of the payments were below $200, and some were as low as $5, with the total amounting to millions of dollars, the report said. Wal-Mart is likely to face charges of violating the U.S. Foreign Corrupt Practices Act due to these payments, the paper said. The Bentonville, Arkansas-based retailer is “cooperating fully“ with the U.S. government on the matter, Wal-Mart India spokesman Rajneesh Kumar said. Wal-Mart, has suffered its worst stock decline in more than 27 years after predicting a drop in annual profit, and has seen its Indian operations plagued by botched ventures and sluggish growth. The world’s largest retailer in 2007 entered a supermarket joint venture with Bharti Enterprises only to see it split up in 2013, and Wal-Mart India has since then focused only on its wholesale business. The charges in India are unlikely to amount to a large fine as FCPA penalties are connected to profits the alleged misconduct generated, the Journal said. Wal-Mart’s Indian unit has not turned a profit since inception eight years ago, and posted a loss of 2.3 billion rupees ($35 million) on sales of about 30 billion rupees in the year ended December 2014, according to the Economic Times of India, citing registrar filings. Wal-Mart has been the subject of several Indian government probes in recent years, including an investigation into allegations it lobbied officials which ended 2013 without any conclusions.
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United Nations Secretary-General Ban Ki-moon has ordered an audit of all dealings the organization had with two entities that are the subjects of a U.S. bribery probe, a U.N. spokesman said. Ban asked the Office of Internal Oversight Services to audit all of the U.N.’s interactions with the Global Sustainability Foundation and the Sun Kian Ip Group, as well as the use of any funds received from them, spokesman Stephane Dujarric said. Speaking to reporters at U.N. headquarters, Dujarric said Ban was “committed to ensuring that funds received from such private entities were handled properly, according to relevant U.N. rules and regulations.” There “will be no tolerance for any corruption at the United Nations or in the name of the United Nations,” he added. In a complaint filed in federal court in New York, U.S. prosecutors said more than $1.3 million in bribes were received from Chinese businessmen, including billionaire Macau real estate developer Ng Lap Seng. John Ashe, a former U.N. ambassador from Antigua and Barbuda who was president of the U.N. General Assembly from 2013 to 2014, was one of six people charged and arrested. Prosecutors said some of the bribes were arranged through Sheri Yan, chief executive officer of a New York-based organization, and Heidi Park, its finance director, who were also arrested. The organization was not named, but the Global Sustainability Foundation web site lists Yan and Park as holding those positions. Ng, also known as David Ng, heads Macau-based Sun Kian Ip Group. Its foundation arm lists several diplomats, including Ashe and Francis Lorenzo, a deputy U.N. ambassador from the Dominican Republic, as holding leadership positions. Dujarric said the Sun Kian Ip Group Foundation gave $1.5 million to the U.N. Fund for South-South Cooperation in May. He said an internal examination showed no irregularities with that money. “All disbursed funds were tracked and accounted for, and there is no evidence that any funds received ... were misdirected or misappropriated,” he said. Regarding the allegations against Ashe, Dujarric noted that all funds in accounts of the president of the General Assembly are subject to U.N. rules and regulations and can be audited, even though that post is not on the U.N. payroll and the persons who hold it are working on behalf of their own governments. He said that what Ashe and others are accused of doing appeared to be “outside of the realm” of the U.N. financial system. Dujarric added that the U.N. has not been contacted by the U.S. attorneys so far. The world body has pledged to cooperate with U.S. authorities if contacted by them.
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Former Chief Financial Officer of Siemens Argentina Pleads Guilty to Role in Multimillion Dollar Foreign Bribery Scheme
The former chief financial officer (CFO) of Siemens S.A. – Argentina (Siemens Argentina) pleaded guilty to conspiring to pay tens of millions of dollars in bribes to Argentine government officials to secure, implement and enforce a $1 billion contract to create national identity cards. Andres Truppel, 61, of Argentina, pleaded guilty in the Southern District of New York to conspiring to violate the anti-bribery, internal controls and books and records provisions of the Foreign Corrupt Practices Act (FCPA); and to commit wire fraud. In 1998, the government of Argentina awarded to a subsidiary of Siemens Aktiengesellschaft (Siemens AG) a contract worth approximately $1 billion to create state-of-the-art national identity cards (the Documento Nacional de Identidad or DNI project). The Argentine government terminated the DNI project in 2001. In connection with his guilty plea, Truppel admitted that he engaged in a decade-long scheme to pay tens of millions of dollars in bribes to Argentine government officials in connection with the DNI project, which was worth more than $1 billion to Siemens. Truppel admitted that he and his co-conspirators concealed the illicit payments through various means, including using shell companies associated with intermediaries to disguise and launder the funds, and by paying $7.4 million as part of a hedging contract with a foreign currency company incorporated in the Bahamas. In addition, Truppel admitted that he and his co-conspirators paid nearly $1 million to a former official in Argentina’s Ministry of Justice that was used to bribe an Argentine government official. Truppel also admitted that he used a $27 million contract between a Siemens entity and a company called MFast Consulting AG that purported to be for consulting services to conceal bribes to Argentine officials.
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The Securities and Exchange Commission announced that New York-based pharmaceutical company Bristol-Myers Squibb has agreed to settle charges that its joint venture in China made cash payments and provided other benefits to health care providers at state-owned and state-controlled hospitals in exchange for prescription sales. Bristol-Myers Squibb will pay more than $14 million to settle the SEC’s finding that it violated the Foreign Corrupt Practices Act (FCPA) and reaped more than $11 million in profits from its misconduct. According to the SEC’s order instituting settled administrative proceedings, Bristol-Myers Squibb lacked effective internal controls over interactions with health care providers at BMS China, its majority-owned joint venture. Between 2009 and 2014, BMS China sales representatives sought to secure and increase business by providing health care providers in China with cash, jewelry and other gifts, meals, travel, entertainment, and sponsorships for conferences and meetings. BMS China inaccurately recorded the spending as legitimate business expenses in its books and records, which were then consolidated into the books and records of Bristol-Myers Squibb.
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Litigation Matters
Uber says its drivers should enjoy the freedom that comes with setting their own hours, as long as that freedom ends at the courthouse steps. As its California drivers battle to be treated as employees with benefits—rather than independent contractors—the world’s most valuable startup is arguing they can’t go to trial. According to the contracts most drivers signed, Uber says disputes have to go through private arbitration. The company’s position has taken on greater importance since a September 1 decision by U.S. District Court Judge Edward Chen in San Francisco. Chen granted class-action status to a lawsuit brought by two Uber drivers seeking reclassification as employees. That means thousands more of the company’s 160,000 drivers in California could join the suit. The drivers are seeking reimbursement for expenses and tips, which would open the door to a minimum wage, meal breaks, workers’ compensation, and unionization. On September 15, Uber asked the U.S. Court of Appeals for the Ninth Circuit in San Francisco to take up “the leading case raising urgent questions about the classification of sharing-economy workers“ and reverse Chen’s decision. In its appeal, Uber continues to argue its drivers aren’t a class because they don’t have set hours or other commitments. It’s also urging the appellate court to overturn Chen’s ruling in a related case last June, which invalidated the arbitration agreements barring drivers from joining class actions.
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Sprint Corp must face a $300 million fraud lawsuit by New York State claiming the company deliberately failed to bill customers for taxes on its wireless services over seven years. The Court of Appeals in a 4–1 decision rejected Sprint’s claims that a 2002 state law imposing sales taxes on interstate mobile phone services violated the U.S. Constitution. The office of Attorney General Eric Schneiderman in a 2012 lawsuit based on whistleblower information said Sprint ignored the law and failed to collect more than $100 million in taxes from New York customers. The prosecutor is seeking three times that amount in damages and penalties. Schneiderman said Sprint’s decision not to collect and pay taxes was part of a nationwide effort by the Kansas-based company to lure customers from rivals such as AT&T Inc and Verizon Wireless, and saved Sprint customers in New York $4.6 million a month. The case was stayed pending the outcome of Sprint’s appeal.
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Fifth Third Bancorp will pay more than $84.9 million to resolve U.S. civil fraud charges that it failed to disclose material defects in more than 1,400 mortgage loans in a timely manner after certifying that they qualified for federal insurance. Fifth Third admitted and accepted responsibility for taking too long to tell the U.S. Department of Housing and Urban Development about the defects, which made loans ineligible for Federal Housing Administration insurance, after discovering them in post-closing reviews from 2003 to 2013. The $84.9 million covers losses on 519 defaulted loans for which HUD paid insurance claims. Fifth Third will also indemnify HUD for losses on more than 900 other loans that have yet to default and pay HUD $2.04 million under another indemnification agreement. Fifth Third joined JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc, Deutsche Bank AG and other lenders in resolving U.S. claims, often raised by Bharara’s office, over home loan defects. Wells Fargo& Co is defending one such lawsuit by Bharara. The Fifth Third settlement resolved claims under the federal False Claims Act and Financial Institutions Reform, Recovery, and Enforcement Act. Bharara said Fifth Third voluntarily disclosed its defective loans in 2012 and 2014, reformed its business practices and fired the employees responsible. False Claims Act cases let whistleblowers pursue claims on behalf of the government and share in recoveries. The Fifth Third lawsuit was filed in 2011. Two whistleblowers, John Ferguson and George Mann, will receive $6.37 million, court papers show. Fifth Third ended June with $141.7 billion of assets and 1,299 branches. On September 28, U.S. authorities said Fifth Third would pay $21.5 million to settle separate civil charges over discrimination in auto loans and excess fees on credit cards.
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Texas joined the Volkswagen AG litigation bandwagon, accusing the company’s U.S. unit of violating state consumer protection laws and clean air standards by using rigged software in some of it diesel vehicles. The state’s claims, in two lawsuits by Texas Attorney General Ken Paxton in state court in Austin, follow similar actions brought by West Virginia and a separate case by the county that encompasses Houston. The lawsuits are part of the widening fallout from the U.S. Environmental Protection Agency’s September 18 announcement that Volkswagen installed deceptive software to make vehicles appear as if they met emissions standards. The company has admitted that 11 million of its vehicles worldwide were affected, including almost a half million in the U.S. Investigations are being conducted by prosecutors and other agencies in the U.S. and Germany, among other countries. Authorities raided Volkswagen facilities and some employees’ homes in Wolfsburg, Germany. Later, in the first congressional hearing in Washington, the automaker’s top U.S. executive denied accusations that the doctored software was the result of a corporate decision. The attorneys general of 45 states and the District of Columbia are conducting a joint investigation into allegations of violations of consumer-protection and environmental laws. The number of lawsuits filed by VW and Audi car owners is increasing daily. More than 250 lawsuits have been filed as consumer class actions in U.S. federal courts in at least 38 states, claiming fraud. The lawsuits seek returns of premiums paid for vehicles with the clean-diesel feature and lost value of the vehicles. If fixing the cars so they comply with emissions standards hurts performance, the car owners want a full refund of the purchase price, minus depreciation.
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A unit of Australia’s Macquarie Group has agreed to pay $7.4 million to settle shareholder allegations that it underwrote a securities offering for Puda Coal without disclosing that the Chinese mining company was an empty shell. Filed in 2011, the securities fraud lawsuit said Macquarie Capital USA helped sell $108 million of shares for then-New York Stock Exchange-listed Puda Coal in 2010 while knowing that the company’s main coal business had been transferred to its chairman and then sold or pledged as collateral to an investment fund. The lawsuit said Macquarie received an investigative report revealing the transfer of the coal business six days before the 2010 offering but did not act on it. The preliminary settlement was disclosed in a court filing and must be approved by a Manhattan federal judge. The underwriters denied all charges of wrongdoing, the filing said. The settlement is the latest legal fallout for Macquarie over its underwriting for Puda. In March, Macquarie agreed to pay $15 million to settle U.S. Securities and Exchange Commission charges that it misled investors about the 2010 offering. Puda’s shares collapsed in 2012 after a research report disclosed the transfer of Puda’s 90 percent stake in its main asset, Shanxi Coal. Puda’s shares have been delisted and the company is no longer in business. The lawsuit sought damages for investors who bought the company’s shares between November 2009 and April 2011. The shares became worthless after Puda’s coal assets were transferred, leaving only a shell company with no operations or revenue, the lawsuit said. Puda Chairman Ming Zhao and Chief Executive Liping Zhu were charged by the SEC with fraud in 2012. The lawsuit also accused Brean Murray Carret & Co, a joint underwriter on Puda’s 2010 share offering, of failing to do its own due diligence to verify that Puda owned Shanxi Coal. Brean agreed to pay $1.2 million to settle shareholders’ claims, according to the filing.
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The trustee recouping money for victims of Bernard Madoff’s multibillion-dollar Ponzi scheme sought approval to release $1.5 billion from legal reserves, potentially boosting the total payout to $9.13 billion. Irving Picard, the trustee appointed to oversee the liquidation of Bernard L. Madoff Investment Securities LLC, said the request was made possible after the U.S. Supreme Court on October 5 declined to hear an appeal by victims seeking inflation or interest adjustments on the money they lost. The decision ended litigation that had delayed nearly $1.25 billion from being dispersed to Madoff’s former customers, paving the way for the request to a federal bankruptcy judge in New York. If approved at a November 18 hearing, payouts would go to fraud victims who had accounts at Madoff’s firm. Madoff, 77, pleaded guilty to fraud in March 2009 and is serving a 150-year prison term. Under Picard’s plan, the trustee will allocate $1.5 billion, with $1.18 billion available for immediate distribution and another $320 million held in reserve for claims deemed determined pending the resolution of litigation. That would bring the total amount distributed to eligible Madoff customers to about $9.13 billion and mean nearly 57 percent of losses will be returned to customers, the trustee said. Recoveries to date total $10.9 billion of the $17.5 billion of principal he estimates that Madoff’s victims lost. Picard said payouts would range from $1,286 to nearly $200.4 million and would result in claimants on 1,264 of the 2,564 accounts he found with valid claims being fully paid, including everyone owed $1.16 million or less.
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The U.S. Department of Justice said that it had found no basis for a criminal prosecution over the Internal Revenue Service’s mishandling several years ago of requests for tax-exempt status by political groups aligned with the Tea Party. “The IRS mishandled the processing of tax-exempt applications in a manner that disproportionately impacted applicants affiliated with the Tea Party and similar groups ... However, ineffective management is not a crime,” Assistant Attorney General Pater Kadzik said in a letter to lawmakers. In 2013, the IRS was enveloped in an embarrassing scandal after a government review found the agency had targeted tax-exempt political groups for greater scrutiny by looking for keywords, like “Tea Party” and “Patriots.” The row led to a congressional probe and accusations, primarily by Republicans, that the IRS was targeting those critical of the Obama administration. Lois Lerner, the former director of the agency’s tax-exempt division later resigned. The Justice Department said it found that Lerner mishandled oversight of tax-exempt applications and did not properly supervise her subordinates, but did not commit a crime.
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China Market
China’s top prosecutor pledged to speed up the pursuit of criminal cases related to a $5 trillion stock market rout, after a surge in the number of prosecutions for financial crimes during the first half of the year. Authorities will accelerate reviews, arrests and prosecution of cases linked to suspected stock-market misdeeds, Nie Jianhua, deputy director of the prosecuting department of the Supreme People’s Prosecutor’s Office, told reporters, according to a transcript of the news conference posted on the web site of the prosecutor’s office. China is hunting for culprits for the stock-market bust, which saw shares plunge more than 30 percent from a June peak. Chinese regulators have also implemented measures such as banning major shareholders from selling shares. The number of financial-crime cases surged 55 percent in the first half of 2015 from a year ago, according to Xiao Wei, a spokeswoman for the Supreme People’s Prosecutor’s Office. Credit-card fraud, insider trading and illegal fundraising are among the most common offenses, Xiao said. The number of insider-trading cases being prosecuted had already jumped to 38 last year from one in 2013, Xiao said. At least 10 people, including employees from the nation’s largest brokerage, Citic Securities Co., and a securities regulator, have been named by state media as being under investigation after stocks nosedived in June. A Chinese probe found evidence that Citic Securities engaged in insider trading connected to the government’s rescue of the stock market, people familiar with the matter said. China has “severe” punishments for stock market-related crimes such as insider trading and market manipulation, Nie said. Under Chinese law, a person can be sentenced to as long as 10 years in jail for insider trading and be fined up to five times the illicit gains, he said. When found guilty of spreading false information related to securities trading, a person can be sentenced to up to five years in jail and fined as much as 100,000 yuan ($16,000), Nie said.
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Donald Tsang, who completed his tenure as Hong Kong’s No. 1 official in 2012, was charged with two counts of misconduct in public office, the anti-corruption bureau said. One charge alleges that Tsang failed to disclose his negotiations to rent a property from a major shareholder of Wave Media Ltd., while the company was applying for licenses, the Independent Commission Against Corruption said in a statement. The other charge relates to his nomination of an architect for “honours and awards,“ without disclosing he had employed the person, it said. Tsang, 70, is the city’s highest-ranking official to face charges by the anti-corruption bureau, intensifying scrutiny of the ties between government officials and business interests in the former British colony. Thousands of protesters marched through the city for two days demanding Tsang’s resignation in March 2012, as news of the investigation broke. “Over the past three and a half years, I have assisted fully with the investigations by the Independent Commission Against Corruption,“ Tsang said in a statement. “My conscience is clear. I have every confidence that the court will exonerate me after its proceedings.“ While the ICAC also investigated other complaints against Tsang, there was insufficient evidence to proceed on them, the Department of Justice said in a separate statement.
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Healthcare Industry
Shock allegations concerning Valeant’s business practices poured oil on the fire in the pharmaceuticals sector, which has gone from hero to zero in little more than the blink of an eye. Pharma enjoyed a long run as a capital markets darling, delivering robust returns - in both bonds and equities - and churning up huge fees for bankers through waves of M&A. According to data from Bank of America Merrill Lynch, US high-yield healthcare bonds had returned 2.79 percent in the year to-date versus 0.023 percent from BAML’s broader high-yield index. Still, that is small beer: Valeant shares were up an eye-watering tenfold in the five-year period to August. But the wheels began to come off the wagon the following month, when Martin Shkreli, a former hedge fund executive and the founder of Turing Pharmaceuticals, jacked up the price of an Aids drug Turing had acquired from US$13.50 per pill to US$750. Hillary Clinton, making a White House run, immediately vowed to cap drug costs. In a flash, the goose that laid the golden returns was cooked. Biotech stocks have been hammered, losing some 15 percent since Clinton’s announcement. The seven life sciences companies that have gone public in the US since then all did so at valuations below where they were marketed. Bankers trying to sell a high-yield bond issue to finance Concordia Healthcare’s US$3.5bn acquisition of Amdipharm Mercury earlier were unable to do so, and they had to offer steep discounts on a loan backing the deal to get the buy-side on board. Across the sector, issuers have had to sweeten spreads dramatically. As it happens, Shkreli was merely taking a page from the playbook at Valeant, whose business model has been to buy drugmakers, halt their R&D, slash jobs and then raise prices. Other pharma companies have adopted similar tactics.While sector returns were soaring, complaints were relatively few and far between. But now sentiment has changed, and the allegations against Valeant from short-seller Citron Research appeared to hit especially hard.
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Valeant Pharmaceuticals International Inc, already under fire over steep price hikes for two heart drugs, said it had been subpoenaed by U.S. prosecutors seeking details on its patient assistance programs, drug pricing and distribution practices. The Canadian company, which was rapped by Democratic lawmakers in late September over those price increases, said it was reviewing subpoenas from the offices of attorneys for the District of Massachusetts and the Southern District of New York. Valeant tripled the price of its drug Isuprel and raised the price six-fold for another heart drug, Nitropress, after buying them in February. While the magnitude of the price hikes has put Valeant in the political crosshairs, raising drug prices is not illegal in the United States. The company said it had hired a consultant to review the drugs’ pricing and reimbursement. The consultant found that “there was considerable room to increase the price of both drugs,” Chief Executive Michael Pearson said in a letter in response to concerns expressed by Democratic Senator Claire McCaskill. Pearson has built Valeant into one of the world’s largest drugmakers through numerous acquisitions. His business model has featured price hikes on medicines, while slashing research spending of acquired companies. “Many companies charge high prices for drugs, but not many duplicate the Valeant business model,” said Erik Gordon, a professor at University of Michigan’s Ross school of business. In the letter to McCaskill, Pearson said Valeant has made substantial investments in manufacturing in the United States. Shares of many drugmakers have slumped since Democratic presidential hopeful Hillary Clinton proposed ways to prevent industry “profiteering.” Clinton’s comments followed reports that startup drugmaker Turing Pharmaceuticals had hiked the price of a 62-year-old drug it had acquired by more than 5,000 percent to $750 a tablet. The United States has no price controls on medicines, though such curbs are common in Europe. Piper Jaffray analyst Richard Purkiss does not see the Valeant subpoenas as a precursor to a larger industry investigation because of the significant investment in high-risk research made by most large drugmakers and biotechs.
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Shares of Valeant Pharmaceuticals International Inc plunged as much as 30 percent after an influential short-seller accused the company of fraud, saying it used its relationship with specialty pharmacies to inflate revenue. The report by Citron Research, a short-selling firm run by Andrew Left, said that Valeant’s previously undisclosed relationship is a sign of a cover-up. The shares were last trading down $41.62 at $105.12, representing a major loss for billionaire Bill Ackman, who holds a 5.7-percent stake in Valeant. Shares of some key competitors, including Allergan Inc , Endo International Plc and Mallinckrodt Plc also fell sharply. Citron alleged that Valeant was using specialty pharmacies – include Philidor and R&O Pharmacy Inc - to create “phantom sales” of its products or pushing more product through distribution channels than sales would warrant, and to avoid scrutiny from auditors. “Citron believes the whole thing is a fraud to create invoices to deceive the auditors and book revenue,” the note said. Valeant has been under fire over its practice of raising drug prices sharply once it acquires new medications. It had disclosed that it was under investigation by federal prosecutors in New York and Massachusetts. The government requested information on pricing and on programs that help patients cover their out-of-pocket expenses for Valeant’s drugs. Those drugs are often distributed by specialty pharmacies. Valeant defended its pricing and declined to comment on the federal investigations, saying it was cooperating with authorities. But the company disclosed new information about its dealing with two pharmacies, which distribute specialty drugs to patients, including that it had purchased an option to acquire Philidor and was already consolidating its results. Len Yaffe, an investor at StocDoc Partners, who is short on Valeant, said that he is not yet sure of what to make of Citron’s claims. He said the notion that Valeant would need to resort to phantom sales to juice revenues heightens existing widespread concerns about the company’s ability to produce growth in an increasingly hostile pricing environment. Valeant’s stock took a significant hit in late September in response to criticism from Democratic presidential candidate Hillary Clinton about rising drug prices and media reports of its particularly steep price increases. Independent Canadian equity research firm Veritas said it saw significant unquantifiable risks overhanging Valeant. Analyst Dimitry Khmelnitsky sees Valeant at risk of losing its ‘secret sauce’ that made it a darling of many investors due to the pullback in its share price. Valeant has traditionally used its highly-valued shares to pursue accretive acquisitions and tack on debt. The selloff knocked off $15 billion in market capitalization from Valeant, which was valued as high as $90 billion in early August. It has since lost more than half of its value.
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United States Resolves $237 Million False Claims Act Judgment against South Carolina Hospital that Made Illegal Payments to Referring Physicians
The Department of Justice announced that it has resolved a $237 million judgment against Tuomey Healthcare System for illegally billing the Medicare program for services referred by physicians with whom the hospital had improper financial relationships. Under the terms of the settlement agreement, the United States will receive $72.4 million and Tuomey, based in Sumter, South Carolina, will be sold to Palmetto Health, a multi-hospital healthcare system based in Columbia, South Carolina. The judgment against Tuomey related to violations of the Stark Law, a statute that prohibits hospitals from billing Medicare for certain services (including inpatient and outpatient hospital care) that have been referred by physicians with whom the hospital has an improper financial relationship. The Stark Law includes exceptions for many common hospital-physician arrangements, but generally requires that any payments that a hospital makes to a referring physician be at fair market value for the physician’s actual services, and not take into account the volume or value of the physician’s referrals to the hospital. The government argued in this case that Tuomey, fearing that it could lose lucrative outpatient procedure referrals to a new freestanding surgery center, entered into contracts with 19 specialist physicians that required the physicians to refer their outpatient procedures to Tuomey and, in exchange, paid them compensation that far exceeded fair market value and included part of the money Tuomey received from Medicare for the referred procedures. The government argued that Tuomey ignored and suppressed warnings from one of its attorneys that the physician contracts were “risky“ and raised “red flags.“ On May 8, 2013, after a month-long trial, a South Carolina jury determined that the contracts violated the Stark Law. The jury also concluded that Tuomey had filed more than 21,000 false claims with Medicare. On October 2, 2013, the trial court entered a judgment under the False Claims Act in favor of the United States for more than $237 million. The United States Court of Appeals for the Fourth Circuit affirmed the judgment on July 2, 2015. “This case reinforces the need for hospitals to abide by the requirements of the Stark Law,“ said U.S. Attorney Thomas G. Walker of the Eastern District of North Carolina. The case arose from a lawsuit filed on October 4, 2005, by Dr. Michael K. Drakeford, an orthopedic surgeon who was offered, but refused to sign, one of the illegal contracts. The lawsuit was filed under the qui tam, or whistleblower, provisions of the False Claims Act, which permit private individuals to sue on behalf of the government for false claims and to share in any recovery. The act allows the government to intervene and take over the action, as it did in this case. Dr. Drakeford will receive approximately $18.1 million under the settlement.
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SEC Regulatory Actions
SEC Announces Enforcement Results For FY 2015: Results Include Significant Number of High-Impact and First-of-their-Kind Actions
The Securities and Exchange Commission announced that in fiscal year 2015, it continued to build a strong record of first-of-their-kind cases that spanned the spectrum of the securities industry. In the fiscal year that ended in September, the SEC filed 807 enforcement actions covering a wide range of misconduct, and obtained orders totaling approximately $4.2 billion in disgorgement and penalties. Of the 807 enforcement actions filed in fiscal year 2015, a record 507 were independent actions for violations of the federal securities laws and 300 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders. In fiscal year 2014, the SEC filed 755 enforcement actions and obtained orders totaling $4.16 billion in disgorgement and penalties. Of the 755 enforcement actions filed in fiscal year 2014, 413 were independent actions for violations of the federal securities laws and 342 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders. The agency’s first-of-their-kind cases included the first action involving: a private equity adviser for misallocating broken deal expenses; an underwriter for pricing-related fraud in the primary market for municipal securities; a “Big Three“ credit rating agency; violations arising from a dark pool’s disclosure of order types to its subscribers; an FCPA action against a financial institution; an admissions settlement with an auditing firm; and an SEC rule prohibiting the use of confidentiality agreements to impede whistleblower communication with the SEC.
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The Securities and Exchange Commission charged Grant Thornton India LLP and Australia-based Grant Thornton Audit Pty Limited with auditor independence violations that occurred when two Grant Thornton Mauritius partners served on the boards of Mauritius-based subsidiaries of companies that were Grant Thornton audit clients and performed non-audit services prohibited under the SEC’s auditor independence rules. According to the SEC’s orders instituting settled administrative proceedings, the two Grant Thornton International LLP member firms represented in audit reports that they were independent of their respective audit clients when the audit clients paid fees to a consulting firm owned by two Grant Thornton Mauritius partners who served as board members for these audit clients. The objective of auditor independence rules is to ensure that outside auditors remain independent from their clients both in fact and in appearance throughout the audit and professional engagement period. According to the SEC’s orders, GT India and GT Audit violated the independence rules because the Grant Thornton Mauritius partners provided prohibited services for the audit clients, including controlling bank accounts and having authority to act on the audit client companies’ behalf. The SEC’s orders also finds that GT India and GT Audit failed to follow Grant Thornton International’s compliance control procedures. According to the SEC’s orders, GT Audit failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations, as required by Grant Thornton International, while GT India failed to obtain the confirmation letter. According to the orders, the Grant Thornton firms failed to discover the independence violations until several months or years following the violations. The orders found GT Audit’s violations occurred with audits of four consecutive fiscal years, from 2008 through 2011, while GT’s India’s violations occurred for the 2013 fiscal year.
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The Securities and Exchange Commission announced that UBS AG has agreed to pay $19.5 million to settle charges that it made false or misleading statements and omissions in offering materials provided to U.S. investors in structured notes linked to a proprietary foreign exchange trading strategy. The case is the agency’s first involving misstatements and omissions by an issuer of structured notes, a complex financial product that typically consists of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indices. The return on the structured note is linked to the performance of the derivative over the life of the note. Between $40 billion to $50 billion of structure notes are registered with the SEC per year, with many of those notes sold to relatively unsophisticated retail investors. UBS, one of the largest issuers of structured notes in the world, agreed to settle the SEC’s charges that it misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap by falsely stating that the investment relied on a “transparent“ and “systematic“ currency trading strategy using “market prices“ to calculate the financial instruments underlying the index, when undisclosed hedging trades by UBS reduced the index price by about five percent.
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The Securities and Exchange Commission announced that three private equity fund advisers within The Blackstone Group have agreed to pay nearly $39 million to settle charges that they failed to fully inform investors about benefits that the advisers obtained from accelerated monitoring fees and discounts on legal fees. Nearly $29 million of the settlement will be distributed to affected fund investors. An SEC investigation found that Blackstone Management Partners, Blackstone Management Partners III, and Blackstone Management Partners IV failed to adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies prior to the companies’ sale or initial public offering. The payments to Blackstone essentially reduced the value of the portfolio companies prior to sale, to the detriment of the funds and their investors. The SEC investigation also found that fund investors were not informed about a separate fee arrangement that provided Blackstone with a much greater discount on services by an outside law firm than the discount that the law firm provided to the funds. “Full transparency of fees and conflicts of interest is critical in the private equity industry and we will continue taking action against advisers that do not adequately disclose their fees and expenses, as Blackstone did here,“ said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “As the beneficiary of the accelerated monitoring fees, Blackstone violated its fiduciary duty by failing to properly disclose the fees,“ said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Blackstone further breached its fiduciary duty by choosing to negotiate a legal fee arrangement with greater benefits for itself than the funds it advised, without properly disclosing the arrangement.“
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