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Forensic News April 2016

Financial/Accounting Fraud

Panama Papers and ‘who owns what’ — big implications for financial services

The mushrooming “Panama Papers” scandal is a warning to financial services firms that they cannot be complacent about their obligation to determine beneficial ownership, know their customers, and perform due diligence on all of their business associates. Several governments across the world, including the United States have initiated investigations of possible financial wrongdoing by the rich and powerful after a leak of four decades of documents (dubbed the “Panama Papers”) belonging to a Panamanian law firm that specialized in setting up offshore companies. The U.S. Department of Justice is determining whether the findings point to evidence of corruption and other violations of U.S. law, and the anti-bribery unit of the Securities and Exchange Commission is reviewing the disclosures for investigative leads. The revelations are also prompting a number of financial transparency groups to nudge the U.S. Treasury’s anti-money laundering unit to issue a final rule requiring investment advisers to help combat financial crime. The incidents further make people question whether the U.S. Foreign Account Tax Compliance Act (FATCA) – designed to ferret out individuals who have unreported offshore bank accounts and other assets – has enough teeth to compel other jurisdictions to perform the reporting required. As the British-based Tax Justice Network (TJN) has noted, the problem has been widespread for many decades, as an array of lawyers, accountants, bankers and broker dealers have played a role in shielding clients from financial regulations.

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SWIFT network says aware of multiple cyber fraud incidents

SWIFT, the global financial network that banks use to transfer billions of dollars every day, warned its customers that it was aware of “a number of recent cyber incidents” where attackers had sent fraudulent messages over its system. The disclosure came as law enforcement authorities in Bangladesh and elsewhere investigated the February cyber theft of $81 million from the Bangladesh central bank account at the New York Federal Reserve Bank. SWIFT has acknowledged that the scheme involved altering SWIFT software on Bangladesh Bank’s computers to hide evidence of fraudulent transfers. The statement from SWIFT marked the first acknowledgement that the Bangladesh Bank attack was not an isolated incident but one of several recent criminal schemes that aimed to take advantage of the global messaging platform used by some 11,000 financial institutions. “SWIFT is aware of a number of recent cyber incidents in which malicious insiders or external attackers have managed to submit SWIFT messages from financial institutions’ back-offices, PCs or workstations connected to their local interface to the SWIFT network,” the group warned customers in a notice seen by Reuters

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Diagnostics company Alere hit with securities fraud class action

Diagnostics company Alere Inc has been hit with a securities fraud lawsuit accusing it of artificially inflating its share prices ahead of the Feb. 1 announcement of its proposed $5.8 billion acquisition by Abbott Laboratories Inc. The shareholder lawsuit, filed in federal court in Boston, accused Alere of misleading investors by stating that its financial reporting followed generally accepted accounting principles. The plaintiffs, a group of individual investors, cited a federal probe into the company’s accounting for overseas sales in arguing that Alere had not adhered to those principles. Based in Waltham, Massachusetts, Alere makes tests for infections such as HIV, tuberculosis and malaria. Alere’s shares rose more than 45 percent to $54.11 when the Abbott acquisition was announced, though the stock price later fell again on disclosures in February and March that federal authorities were looking into its sales and accounting practices overseas. The lawsuit said Alere failed to disclose “material adverse facts” about the company that eventually threw its merger with Abbott into doubt. Alere’s shares dropped about 18 percent to $40.51 after Abbott Chief Executive Officer Miles White, speaking on a post-earnings conference call, declined to respond directly when asked whether he would reaffirm Abbott’s commitment to the Alere deal. The deal has been approved by the boards of both companies but is subject to approval of Alere shareholders. White said he did not know when the shareholders would vote. On Feb. 26, Alere disclosed that it had received a subpoena from the U.S. Securities and Exchange commission asking for information about revenue accounting and sales in Africa. The company said its annual report would be delayed while it looked into revenue recognition in Africa and China but did not say that any errors had been found. On March 15, Alere said it had received a grand jury subpoena from the U.S. Department of Justice for documents relating to its sales and dealings with third parties in Africa, Asia and Latin America.

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Shameful’ Mitsubishi Fraud Risks Pushing Carmaker to Brink

Mitsubishi Motors Corp.’s disclosure that it manipulated fuel-economy tests risks putting the Japanese carmaker back in a familiar position: needing help from Mitsubishi group companies to stay in business. Mitsubishi Motors reported having 484.7 billion yen in cash and equivalents as of the end of December, the least among Japan’s major automakers and about one-tenth the cash pile on Toyota Motor Corp.’s balance sheet. Mitsubishi Motors has a market value of about $5.2 billion. The company’s meager financial resources leave it stretched thin for research and development. Mitsubishi Motors forecast spending 82 billion yen for the fiscal year ended in March. By contrast, Toyota would have had to spend about 88 billion yen on average per month to meet its annual projection. It’s unclear whether the falsification of data will compromise Mitsubishi Motors’s minicar alliance with Nissan, which discovered the discrepancy. Nissan voluntarily suspended sales of the Dayz and Dayz Roox models until Mitsubishi Motors provided further clarification, said Jonathan Adashek, a Nissan spokesman. The episode deals another blow to an industry already dealing with reputation damage. Volkswagen AG admitted last year to rigging diesel models with software to meet U.S. emissions standards. Hyundai Motor Co. and Kia Motors Corp. agreed to pay fines and forfeit emissions credits in late 2014 to settle U.S. claims they overstated mileage ratings. Ford Motor Co. also lowered ratings for hybrid models in 2014 and 2013. The scandal also draws parallels to another crisis engulfing a Japanese auto company at the center of the industry’s largest safety recall: troubled parts supplier Takata Corp. The company has admitted to manipulating air-bag inflator test data, prompting a rebuke from its biggest customer Honda Motor Co. Takata is now seeking sponsors that would replenish its capital and allow it to emerge as a new company.

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SunEdison audit panel identifies cash accounting issues

SunEdison Inc said an independent audit committee had identified several issues with the company’s cash-flow management but found no “material misstatements” in its historical financial reports. SunEdison, which has more than $12 billion in debt, is widely expected to file for bankruptcy. Shares of the company, which has delayed filing its 2015 annual report twice, rose 43 percent to 53 cents in premarket trading. The committee said in a regulatory filing that management’s assumptions about the company’s cash forecasts were overly optimistic and it did not respond appropriately when forecasts were not met. “These accounting issues are a side issue ... SunEdison’s fundamental problem is the excessive leverage, which is why there is a high likelihood of bankruptcy within weeks,” Raymond James analyst Pavel Molchanov said. SunEdison was until recently the fastest growing renewable energy developer in the United States but now faces a severe cash crunch. Its shares have tumbled about 99 percent over the past 12 months. The company is under regulatory scrutiny over a failed deal to buy solar panel installer Vivint Solar Inc. The panel said it wants SunEdison to implement improved cash forecasting systems, flag changes in outlook directly to the board and strengthen its internal accounting controls. The recent hiring of Ilan Daskal as chief financial officer may help resolve these accounting issues, the panel said. The committee said it had not found substantial evidence of fraud or willful misconduct of management. However, the panel identified wrongdoing by a former non-executive employee in connection with talks over the termination of SunEdison’s deal to buy Vivint. The panel said the employee, whose name was not disclosed, had been subsequently fired by SunEdison.

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PSA Group Raided by French Fraud Office in Emissions Probe

PSA Group premises in France were searched by government fraud investigators as part of an broader probe into vehicle emissions, with the scrutiny sending its shares down as much as 4.5 percent. The Paris-based maker of Peugeot, Citroen and DS cars said in a statement that it is cooperating fully with the inquiry. The French Economy Ministry’s fraud office said it searched five premises following “anomalies” in emissions tests. “It was unexpected, a total surprise,” a company spokesman said. Peugeot’s shares fell to as low as 13.47 euros and traded down 3.9 percent at 13.55 euros as 11:00 a.m. in Paris. PSA sites in Saint-Ouen, Velizy, La Garenne-Colombes, Carrieres-sous-Poissy and Montbeliard were after irregularities were spotted in the nitrogen-oxide emissions of three diesel vehicles. The probe, which has been looking at carmakers that sell vehicles in France since September, is open and ongoing.

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Foreign Corrupt Practices Act (FCPA)

Las Vegas Sands Paying Penalty for FCPA Violations

The Securities and Exchange Commission announced that Las Vegas Sands Corp. has agreed to pay a $9 million penalty to settle charges that it violated the Foreign Corrupt Practices Act (FCPA) by failing to properly authorize or document millions of dollars in payments to a consultant facilitating business activities in China and Macao. An SEC investigation found that LVS kept inaccurate books and records and frequently lacked supporting documentation or proper approvals for more than $62 million in payments to a consultant in Asia. The consultant acted as an intermediary to obscure the company’s role in certain business transactions such as the purchases of a basketball team and a building in China, where casino gambling isn’t permitted. At one point, LVS could not account for more than $700,000 transferred to the consultant for team expenses, yet continued to transfer millions of dollars to him. A portion of the payments were improperly recorded in company books and records, such as money supposedly spent on artwork for the building when none was actually purchased. “Publicly traded companies must have appropriate financial controls in place to ensure that expenses are paid for bona fide services,” said Andrew J. Ceresney, Director of the SEC Enforcement Division. “Las Vegas Sands failed to implement controls to prevent tens of millions of dollars from being paid out without appropriate documentation or authorization.”

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Italy judge’s warning on political corruption triggers furor

A warning by one of Italy’s most prominent judges over what he said were unprecedented levels of corruption among politicians has angered Matteo Renzi’s government and unleashed a political storm over the role of the judiciary. Piercamillo Davigo, a supreme court judge, made his name 24 years ago as one of the pool of Milan prosecutors that led the “Clean Hands” corruption investigation that swept away an entire political class. In an interview in Corriere della Sera daily, Davigo, who heads Italy’s national association of magistrates, said political corruption is now worse than it was in 1992 and criticized Renzi’s government for failing to tackle it. “The politicians haven’t stopped stealing, they’ve stopped being ashamed of it,” he said. “Now they blatantly claim a right to do what they used to do secretly.” Italy came 61st in Transparency International’s 2015 corruption perceptions index, second to last among the 28 European Union countries above only Bulgaria. It slipped below Greece and Romania compared with the year before. Davigo said magistrates’ powers to tackle corruption and tax evasion had been weakened by lenient legislation brought in by former center-right Prime Minister Silvio Berlusconi and also by center-left leaders, including Renzi. Renzi made no comment, but Davigo was attacked by the premier’s allies in his Democratic Party (PD) and other parties in the ruling coalition. He was applauded by the anti-establishment 5-Star Movement and right-wing Northern League. PD President Matteo Orfini said people with institutional responsibilities “shouldn’t talk as if they were in a bar”. The furor comes at an awkward time for Renzi, whose industry minister resigned last month over an influence-peddling scandal. Renzi says he has taken important steps to fight corruption, including raising prison sentences. Defending his government over the influence peddling affair in parliament this month, he said an over-zealous judiciary had been guilty of “barbaric episodes” in the past 20 years. Renzi offered no examples, but many commentators noted the similarity of his words with those of Berlusconi, who was found guilty of tax fraud in 2013 and has repeatedly clashed with the judiciary during his 22-year political career.

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Canadian senator acquitted in high-profile fraud trial

Canadian Senator Mike Duffy was acquitted of fraud and bribery charges, marking the end of a high-profile trial that contributed to the defeat of the ruling Conservative government last year. Duffy had faced 31 criminal charges related to roughly C$90,000 ($71,000) in expenses he charged after former Conservative Prime Minister Stephen Harper appointed him to the Senate – the upper chamber of Parliament – in late 2008. The trial started amid enormous media coverage last August, shortly after Harper, who took power in 2006, had launched an election campaign. As the case progressed, polls showed the Conservatives starting to lose support. The Liberals of Justin Trudeau, who said the affair showed Harper could not be trusted, won a majority in the federal election on Oct. 19. Harper’s chief of staff, Nigel Wright, told the court he had pressed Duffy to repay the expenses, even though he felt they were most likely legal. Evidence showed that Harper’s aides effectively took control of the leadership of the Senate, which is supposed to be independent, and provided Conservative senators with scripted lines. Emails indicated Wright had told one senator to approach an accounting firm that was carrying out an independent audit of the Senate, to try to influence its report. In a 308-page ruling, Judge Charles Vaillancourt said he found Duffy to be a credible witness but blasted Harper’s aides for their “mind boggling and shocking” conduct. “In the context of a democratic society, the plotting ... can only be described as unacceptable,” he told the court. Duffy, a former television journalist, had been a popular fund-raiser for the Conservative Party before the scandal broke. He insisted all along he was innocent, saying the Senate’s expense rules were so vague he had done nothing wrong. “I don’t think I’ve ever been witness to such a resounding acquittal,” Duffy’s chief lawyer Donald Bayne told reporters. Duffy, who did not comment, was not the only senator to run into expenses problems. In June 2015, an official report found that 30 current and former senators had improperly spent almost C$1 million ($810,000) in just two years.

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Litigation Matters

Goldman Sachs Agrees to Pay More than $5 Billion in Connection with Its Sale of Residential Mortgage Backed Securities

The Justice Department, along with federal and state partners, announced a $5.06 billion settlement with Goldman Sachs related to Goldman’s conduct in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) between 2005 and 2007. The resolution announced requires Goldman to pay $2.385 billion in a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and also requires the bank to provide $1.8 billion in other relief, including relief to underwater homeowners, distressed borrowers and affected communities, in the form of loan forgiveness and financing for affordable housing. Goldman will also pay $875 million to resolve claims by other federal entities and state claims. Investors, including federally-insured financial institutions, suffered billions of dollars in losses from investing in RMBS issued and underwritten by Goldman between 2005 and 2007.

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Wells Fargo Bank Agrees to Pay $1.2 Billion for Improper Mortgage Lending Practices

The Department of Justice announed that the United States has settled civil mortgage fraud claims against Wells Fargo Bank, N.A. (Wells Fargo) and Wells Fargo executive Kurt Lofrano, stemming from Wells Fargo’s participation in the Federal Housing Administration (FHA) Direct Endorsement Lender Program. In the settlement, Wells Fargo agreed to pay $1.2 billion and admitted, acknowledged and accepted responsibility for, among other things, certifying to the Department of Housing and Urban Development (HUD), during the period from May 2001 through December 2008, that certain residential home mortgage loans were eligible for FHA insurance when in fact they were not, resulting in the Government having to pay FHA insurance claims when some of those loans defaulted. The agreement resolves the United States’ civil claims in its lawsuit in the Southern District of New York, as well as an investigation conducted by the U.S. Attorney’s Office for the Southern District of New York regarding Wells Fargo’s FHA origination and underwriting practices subsequent to the claims in its lawsuit and an investigation conducted by the U.S. Attorney’s Office for the Northern District of California into whether American Mortgage Network, LLC (AMNET), a mortgage lender acquired by Wells Fargo in 2009, falsely certified and submitted ineligible residential mortgage loans for FHA insurance.

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UBS blamed in U.S. trial for $2.1 billion in mortgage bond losses

UBS AG went to trial over $2.1 billion in losses that investors incurred on mortgage-backed securities after the collapse of the U.S. housing market. The non-jury trial in Manhattan federal court stems from a lawsuit being pursued by U.S. Bancorp on behalf of three trusts established for mortgage-backed securities, the type of financial product at the heart of the 2008 financial crisis. Sean Baldwin, the trusts’ lawyer, in his opening statement said UBS contractually agreed that the mortgages underlying those securities would meet certain standards. When pervasive defects emerged, the bank refused to buy them back, he said. “UBS’s strategy has always been the same throughout this process: Turn a blind eye to the problems and ignore its contractual obligations,” he said. But Thomas Nolan, a lawyer for UBS, told U.S. District Judge Kevin Castel that the trusts’ lawyers were looking at the loans with a “hindsight bias,” and the question was whether the loans were seen as defective when they were issued in 2006 and 2007. The lawsuit follows a related action against UBS by bond insurer Assured Guaranty Ltd over the same mortgage backed securities. UBS in 2013 agreed to pay $358 million to Assured, which was represented by the same lawyers as the three trusts. According to the lawsuit, 17,082 loans were pooled into three trusts that issued securities entitling investors to payments made by borrowers. But according to Baldwin, who represents the trusts, which are acting through trustee U.S. Bancorp, 9,611 loans contained material defects, largely because they did not comply with underwriting requirements or borrower fraud. Baldwin said $2.1 billion in losses subsequently resulted. He asked Castel to force UBS to buy back some loans and pay monetary damages for ones that have been liquidated. Baldwin said UBS failed to vet the loans, which it acquired from “shady” lenders that later failed. In internal emails, UBS employees called vendors hired to do due diligence on the mortgages “morons” and “crappy,” he said.

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China Market

China tells Taiwan it will try telecoms fraud suspects

China will try the 45 Taiwan suspects in a telecoms fraud case who were deported by Kenya to China this month, the Chinese government told a delegation from Taiwan, state media reported, in a case that has angered the self-ruled island. China is battling an explosion of telecoms fraud that has cost billions of dollars in financial losses and driven some victims to suicide, say authorities in Beijing, who blame the scams on criminal gangs based in rival Taiwan. Kenya does not have official relations with democratic Taiwan and considers it part of “one China”, in line with the position of Communist Party leaders in Beijing, who regard Taiwan as a wayward province. Kenya said it deported the group back to where it came from. Taiwan accused China of effectively kidnapping its citizens, while China said it was simply going after criminals. An official of China’s Ministry of Public Security repeated that statement to the Taiwan delegation, state news agency Xinhua said. “The suspects specifically targeted people on the Chinese mainland and their victims are from the mainland. Not to mention that many of the suspects are themselves from the mainland,” said the official, Chen Shiqu. “They will thus be investigated, prosecuted and tried in accordance with mainland law,” he added. All the Taiwan suspects have already admitted their guilt, Chen said. “Mainland police will spare no efforts in dealing with telecom fraud syndicates, and we expect authorities in Taiwan will do the same and offer support to the mainland in returning their illicit gains,” he added. Taiwan’s Ministry of Justice said the delegation had visited the suspects in a Beijing detention center and they seemed in good health, with two of already having appointed lawyers. It added that the two sides had agreed to establish principles to fight crime together to ensure criminals were brought to justice and victims protected. Details, such as when the Taiwan suspects would be able to return to the island, would be worked out in negotiations, the justice ministry said. China slammed Taiwan for freeing 20 Taiwan suspects deported to the island from Malaysia, in a separate telecoms fraud case linked to China.

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China’s AMAC to impose tough new rules on hedge funds in ‘Wild East’ crackdown

China’s hedge fund operators can expect more stringent regulation from their self-regulatory industry body in an intensifying crackdown on “Wild East” fraud and illegal money raising, the Asset Management Association of China (AMAC) said. AMAC, the self-regulatory body that oversees private funds, said the new rules were intended to further protect investors’ legal rights and to regulate the private fund management industry, described by some insiders as a “Wild East” rife with fraud. Hedge funds have attracted increased scrutiny in China amid fears the relaxed registration-based licensing regime has allowed fraudsters and shadow-lenders to proliferate. The government has adopted a range of measures to clean up unqualified funds, online financial investment platforms and privately run exchanges. The new rules, which will officially take effect in July, require fund managers to fully disclose their investment risks, review the identities of investors, and set up special accounts to manage capital. China’s regulators will also step up supervision and punish fund managers who fail to comply.

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Healthcare Industry

Whistle-Blowers, Health Care and U.S.

How should the government police the health-care industry? That question is before the Supreme Court as the justices hear arguments in an important case about the False Claims Act. Under the law as interpreted in most of the country, any time a health-care provider submits a bill to the government -- which is to say, millions of times a day -- the provider can be sued for a false claim if it’s failed to follow any of the myriad state and federal regulations governing the field. The law is meant to encourage citizens to blow the whistle on fraud, so it lets anyone bring a claim with the promise of receiving statutory damages up to three times the cost of the violation. That theory doesn’t literally appear in the Civil War-era statute or its 1986 overhaul, but it’s been adopted by most appeals courts. Known as the theory of “implicit certification,” it states that a provider who submits a bill to the government is implicitly certifying that its contents are true. If some of the services were not provided according to relevant regulations, then the bill counts as a false claim. Universal Health Services owns a subsidiary called Arbour Counseling Services that operates in Massachusetts and bills MassHealth, the state’s Medicaid program, for many services. Yarushka Rivera, a teenager, got counseling at an Arbour center from a pair of counselors who lacked special certification. Her parents met with the counselors’ supervisors who seemed, according to their suit, unfamiliar with their daughter’s treatment. Things got worse. Another therapist who saw Yarushka claimed to be a PhD but had an unaccredited online degree and no other professional certification. A fourth therapist prescribed medication for purported bipolar disease, but wasn’t a doctor. Yarushka went off the medication and suffered a seizure. After a second seizure, she died. Yarushka’s parents demanded an investigation. The Massachusetts Department of Public Health found that not only were Yarushka’s therapists unlicensed and unsupervised, but that Arbour had some 23 unlicensed therapists working and could not prove that they were supervised, either. The parents sued Arbour and its parent company under the False Claims Act. The law provides for private parties to bring claims on behalf of the government, functioning as what are sometimes called “private attorneys general” because they are technically litigating on behalf of the government’s interests. They stand to get a cut of whatever damages the court orders against the health-care provider. The U.S. Court of Appeals for the First Circuit held that, under the statute, the only relevant question was whether the provider “knowingly misrepresented compliance with a material precondition of payment.” It allowed the false-claims suit to go forward, adopting its own version of the theory that by submitting bills to Medicaid, the health-care provider implicitly certified that it was following Massachusetts regulations when it was not. Universal Health Services, supported by heavy hitters like the American Health Care Association and the American Hospital Association, argues that the implicit certification theory is unrealistic. When a provider submits bills to Medicaid, says UHS, it isn’t saying it followed every regulation to the letter, just that it performed the service for which it is billing. According to this view, the False Claims Act should be reserved for true fraud, where a provider never gave the service for which it’s billing. The federal government, appearing in support of Yarushka’s parents, disagrees. It says that a bill implies that the provider is claiming it deserves to be paid -- which isn’t true if it knows it hasn’t followed regulations. There are good arguments on both sides. At bottom, it’s a policy dispute about how the False Claims Act should be used to police health care. Professor David Engstrom of the Stanford University Law School, the leading academic expert in the field, submitted a friend-of-the-court brief highlighting empirical research suggesting that the growth of litigation in this field has been moderate, not extreme, as the health-care industry maintains. Engstrom points out that under the law, the Justice Department can always take over a suit brought by a private citizen, which makes the government into a de facto gatekeeper. In his view, the government effectively monitors the private lawsuits to make sure they’re only brought where the violations of regulations are significant, and where the providers actually know they’re not following the rules. For the justices, the case may well come down to their instinctive allegiances, whether with the health-care industry or with patients and government. If you think U.S. health care costs are too high because of legal compliance costs, you might conclude that the implicit certification theory is a bad idea. If you’re more worried about fraud, however, you’ll probably consider an army of private attorneys general to be the best and cheapest method for policing taxpayer-financed health-care providers.

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Jury Convicts Texas Doctor in Biggest Home Health Care Fraud

A jury on convicted a Dallas-area doctor of fraud for allegedly “selling his signature” to process almost $375 million in false Medicare and Medicaid claims in what investigators called the biggest home health care fraud case in the history of both programs. A federal jury deliberated for 14 hours over two days before finding Dr. Jacques Roy, 58, of Rockwall, Texas, guilty of eight counts of committing health care fraud, one of conspiracy, two of making a false statement and one of obstructing justice. Three others — Cynthia Stiger, 53, and Wilbert James Veasey Jr., 64, both of Dallas; and Charity Eleda, 55, of Rowlett, Texas — also were convicted of conspiracy and assorted other charges. Each health care fraud and conspiracy conviction is punishable by up to 10 years in prison, while each false statement and obstruction-of-justice conviction is punishable by up to five years in prison. Each count also carries fines of up to $250,000. Sentencing is scheduled for this fall. Trial evidence showed that Stiger, Veasey and Eleda recruited Medicare clients to sign up for their home health care services. Among those recruited were patients from a Dallas homeless shelter, with recruiters sometimes receiving bounties of up to $50 per patient. Once the patient was certified to receive services, records were falsified to show nursing services were being provided and Roy would perform unnecessary home visits and order unnecessary medical services. Three other defendants charged in the case — Cyprian and Patricia Akamnonu, both of Cedar Hill, Texas; and Teri Sivils, of Midlothian, Texas — each pleaded guilty to single conspiracy counts before the trial and are serving 10-year prison sentences. They also were ordered to pay $25 million in restitution. Roy owned Medistat Group Associates in the southern Dallas suburb of DeSoto. He and six co-defendants certified 11,000 Medicare beneficiaries through more than 500 home health providers between January 2006 and November 2011. Those numbers would have made Roy’s Medicare practice the busiest in the country, and the fraud was unprecedented in scope, said C.J. Porter, special agent in charge of the Dallas regional office of the Department of Health and Human Services. The verdict is “incredibly significant,” she said in a telephone interview. “This will send a message to the home health industry.” The trial in a Dallas federal courtroom took 22 days. The fact that the alleged scheme went undetected for years before an investigation began raised questions about the federal system for detecting fraud by Medicare and Medicaid contractors. The problem was not with the detection system but the complexity and sophistication of the conspiracy, said Miranda Bennett, assistant special agent in charge of the Dallas HHS office.

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SEC Regulatory Actions

SEC Charges Texas Attorney General with Fraud

The Securities and Exchange Commission filed fraud charges against current Texas Attorney General Ken Paxton. The charges are related to an investment in a Texas tech startup that Paxton helped promote before being elected in November 2014. Paxton was already facing securities fraud charges in a related case in Texas, but has refused to resign. The charges against Paxton involve Servergy Inc., a McKinney, Texas-based company that between 2009 and 2013 raised $26 million from outside investors. The company’s basic pitch was that it was making data center servers that were equally powerful, but more energy efficient than comparable offerings from companies like Dell, IBM ( IBM 0.21% ) and Hewlett Packard ( HPE -1.60% ) . According to the SEC, however, Servergy fraudulently told investors that its “cleantech servers” came with 64-bit processors (like its rivals’ newest offerings), even though they actually had less powerful 32-bit processors. The company and its CEO, William Mapp, also would allegedly make other misrepresentations to investors, such as having received an order from Amazon ( AMZN 0.92% ) . In reality, an Amazon employee had simply inquired about the server so that he could test it for personal use. Among those helping to pitch Servergy to investors was Paxton, who at the time was a private attorney and member of the Texas House of Representatives. He would successfully solicit nearly $1 million from friends and business associates in exchange for a previously agreed-upon stock commission, but the SEC says that Paxton never disclosed that he was being compensated by Servergy for his services. Moreover, Paxton did not ever register with the SEC as a broker-dealer.

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SEC sets penalties in two corporate fraud cases

The U.S. Securities and Exchange Commission announced two fraud cases alleging that accounting failures left investors in the dark about the finances of computer accessories maker Logitech International SA and now-defunct electric car battery maker Ener1 Inc. “We are intensely focused on whether companies and their officers evaluate judgmental accounting issues in good faith and based on GAAP,” or generally accepted accounting principles, Andrew Ceresney, head of the SEC enforcement division, said in a statement. Logitech agreed to pay a $7.5 million penalty to settle charges it inflated its fiscal 2011 results to meet its earnings guidance and committed other accounting violations over five years, culminating in a 2014 restatement. Former Chief Financial Officer Erik Bardman and former acting controller Jennifer Wolf were charged with minimizing inventory writedowns of a slow-selling TV set-top device because they felt “substantial pressure” to meet the guidance. Logitech’s former Chief Executive Officer Gerald Quindlen was not accused of misconduct but returned $194,487 in incentive pay and stock sale profits, the SEC said. Two other former executives also agreed to pay small fines. In the Ener1 case, the SEC said the company overstated revenue and assets in late 2010 and early 2011, when it failed to take needed writeoffs for Think, a Norwegian electric car maker and major customer. Former CEO Charles Gassenheimer, former CFO Jeffrey Seidel and former Chief Accounting Officer Robert Kamischke will pay respective fines of $100,000, $50,000 and $30,000, the SEC said. A PricewaterhouseCoopers official who helped audit Ener1 agreed to a two-year suspension from auditing public companies.

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Archived Forensic News



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