Forensic News December 2015
Financial/Accounting Fraud
Assessing How Important a Statement Is for Securities Fraud
For securities fraud, the government must prove that a misstatement or omission was material, meaning that it concerned information a reasonable investor would consider important in making a decision regarding how to proceed in the market. Two decisions from federal appeals courts could make life more difficult for the Justice Department and the Securities and Exchange Commission in pursuing cases by giving ammunition to defendants claiming that there is not enough evidence to prove the materiality of their misstatements. In the first case, the United States Court of Appeals for the Second Circuit in Manhattan overturned the securities fraud conviction of Jesse C. Litvak, a former Jefferies & Company trader, because the trial judge wrongly excluded evidence showing that his misstatements would not have been important to purchasers of residential mortgage-backed securities, or R.M.B.S., that lost significant value during the financial crisis. The appeals court also dismissed convictions for making false statements to the government about the trades, finding that any falsehoods would not have affected a decision by the Treasury Department overseeing sales of mortgage-backed securities as part of the bank bailout. Mr. Litvak was convicted in the Federal District Court in New Haven for lying about the prices that Jefferies paid for the residential mortgage-backed securities that he sold, generating about $2 million in revenue for the firm. Representatives from the counterparties to the trades, all from sophisticated investment firms, testified at trial that if they had been told the actual prices, it would have been important to their decision whether to proceed with the transactions. Mr. Litvak admitted he was dishonest in what he told them, but his lawyer argued that the misstatements were not material to the investment decisions. In other words, even if he lied, it was a bit like answering “good” when asked how the day is going because the purchasers did their own assessment about the value of the bonds before making the deal. The appeals court first found that the government had introduced enough evidence to show that Mr. Litvak’s misstatements were material, based on the testimony of the purchasers. When the actual buyer says that price is “important,” it is difficult to find that a misstatement could have no impact. The appeals court first found that the government had introduced enough evidence to show that Mr. Litvak’s misstatements were material, based on the testimony of the purchasers. When the actual buyer says that price is “important,” it is difficult to find that a misstatement could have no impact. The case was sent back to the Federal District Court for a retrial. If the government proceeds, the appeals court also found that the trial judge improperly prevented Mr. Litvak from presenting additional expert testimony that he was not acting as an agent of the purchasers. That evidence helps support his claim that any misstatement about the price of the securities should not be considered material because he need not act in the best interests of the purchasers, a type of caveat emptor (“let the buyer beware”) defense.
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The age of the whistleblower
Listen carefully and you can hear the sound of corporate lawyers rummaging through dirty laundry. Volkswagen, caught up in two devastating emissions scandals, is belatedly embracing whistleblowers. Desperate to put the mess behind it, the carmaker set a deadline of this week for employees to come forward with information, even if self-incriminating, in return for avoiding dismissal or damages claims (but not protection from prosecution). Whistleblowers have already played a part in exposing the company’s exaggerated claims on carbon-dioxide emissions—though no one from within VW lifted the lid on its other scandal, the fiddling of its vehicles’ output of nitrogen oxides during tests. That was uncovered by an NGO, possibly with help from leakers in the European Commission. As VW began to process the results of its amnesty, whistleblowers were making headlines elsewhere, too. It was reported that Takata, a Japanese firm mired in scandal over defective airbags, might have avoided the worst of its problems if it had paid more attention to American employees who rang alarm bells a decade ago. An investigation aired this week by BBC Television alleged that British American Tobacco had bribed officials from a World Health Organisation tobacco-control programme. Its conclusions were supported by documents provided by a manager who had participated in the alleged palm-greasing. BAT said it does not tolerate corruption. Whistleblowing has been on the increase since the 2007-08 financial crisis sparked a crackdown on corporate corruption and collusion. The number of tips received by the “Whistleblower Office” of America’s Securities and Exchange Commission (SEC) has risen steadily since it was opened in 2011, to nearly 4,000 a year. “We live in the age of the whistleblower,” says Jordan Thomas, a former SEC official now at Labaton Sucharow, a law firm. Surveys by the Association of Certified Fraud Examiners, a global group for financial sleuths, consistently find tips to be the leading mechanism for unearthing wrongdoing, well ahead of audits or regulatory reviews. Despite this, companies have often punished rather than praised whistleblowers. “The institutional equivalent of animal instinct is to strike back,” says Tom Devine, legal director of the Government Accountability Project, who has worked with 6,000 whistleblowers in the public and private sector since the 1970s. Take the case of Paul Moore, who was sacked as head of regulatory risk at HBOS in 2004 after warning that the British bank was lending recklessly, and then took his complaints public. The scrutiny that followed caused Mr Moore to battle depression and alcoholism; he has said he “wouldn’t have had the courage to do it” if he had known the misery it would cause. He was vindicated last month, with publication of a stinging official report on the failures that led to the bail-out of HBOS. Partly in response to that debacle, Britain’s financial regulator now insists that the firms it oversees explicitly tell staff they can complain directly to regulators, and that they nominate a senior manager as a “whistleblower’s champion”. According to one recent study, Britain is the third-best of the G20 large economies in terms of legal protection for whistleblowers (see chart 2). Enforcement of laws matters, too, of course. Few would say Turkey is a kinder climate for whistleblowers than Canada, which has weaker protections but applies them more assiduously. Europe is “where the action is” when it comes to improving protections, says Mr Devine. What has helped is a strong set of “best practice” guidelines from the Council of Europe, a club of 47 western and eastern European states, as have pro-whistleblower rulings from the council’s judicial arm, the European Court of Human Rights. Newer entrants to the 28-country European Union, such as Romania, had to adopt high standards as a condition of joining. The situation among older members is patchier. Protections are particularly weak in Germany, where whistleblowers who go public after failing to get a response internally face defamation suits, says Anja Osterhaus of Transparency International. Non-EU Switzerland is another with an unforgiving climate. America is the best place for whistleblowers. The SEC’s programme, created by the Dodd-Frank financial-reform act of 2010, is arguably the strongest of the more than 40 federal whistleblower-friendly laws on the books. It rests on three pillars: job protection, anonymity and bounties. It has handed out 22 awards, averaging $2.5m; these can rise to 30% of any fines that get levied on the employer. Though the programme is not marketed abroad, it has taken on a global hue: tips have come in from 96 countries, and several of the awards have gone to foreigners. In October a court ruled that whistleblowers can sue individual board members as well as the firm, if these were personally involved in any mistreatment of them.
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DOJ recovered $1.1B in contract fraud settlements in 2015
The Department of Justice recovered more than $3.5 billion in fraud claims for FY2015, with a third of it coming from government contracts and procurement. Justice officials said the department has recovered $26.4 billion in settlements and judgments since January 2009 under the False Claims Act. “The False Claims Act has again proven to be the government’s most effective civil tool to ferret out fraud and return billions to taxpayer-funded programs,” said DOJ’s principal deputy assistant attorney general Benjamin Mizer, in a statement released Dec. 3. “The recoveries announced help preserve the integrity of vital government programs that provide health care to the elderly and low-income families, ensure our national security and defense, and enable countless Americans to purchase homes.” Government contracts accounted for $1.1 billion in 2015, driven largely by a series of large settlements resulting from defense procurement investigations. Among the biggest investigations, the DOJ logged a $146 million settlement from Supreme Group B.V. over alleged false contract claims from its subsidiaries for supplying food, water, fuel and cargo to troops stationed in Afghanistan. Two companies affiliated with Supreme Group also paid more than $288 million in criminal fines. Lockheed Martin Integrated Services and DRS Technical Services Inc. paid a combined $41.2 million to settle claims that the companies charged the Army’s Communication and Electronics Command a higher rate for the use of qualified employees who allegedly did not meet those qualifications. The General Services Administration also received a $75.5 million combined settlement from VMware Inc. and Carahsoft Technology Corporation to settle claims that the pair overcharged the agency for software and services. Iron Mountain Companies also paid $44.5 million to settle claims that the records storage company failed to give GSA commercial-customer-discounts required for a Multiple Schedule Award contract.
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EU Anti-Fraud Arm Investigating Loans to VW Amid Diesel Scandal
The European Union’s anti-fraud office OLAF is investigating loans Volkswagen AG received from the European Investment Bank to produce cleaner engines. The authorities picked up the issue after EIB chief Werner Hoyer said in October the lender was looking into the loans itself in light of the emissions scandal. The credits were granted to Volkswagen to help fund the development of cleaner engines. “The fact that OLAF is examining the matter does not mean that the persons or entities involved have committed an irregularity,” the authority said in a statement. “OLAF fully respects the presumption of innocence and the rights of defense of the persons and entities concerned by an investigation.” The probe adds to the long list of investigations the company is facing in the wake of its disclosure in September that it cheated on pollution trials with its diesel cars. The carmaker installed software in some 11 million vehicles worldwide which lowered the level of nitrogen oxides emitted when it detected the car was being tested. VW hasn’t been informed of the probe and is “astonished that the authority goes public with this information without informing those subject to the issue,” company spokesman Eric Felber said in an e-mailed statement. VW has been talking to the EIB, the EU’s development bank, on the issue for months and has disclosed how the money was used, he said. Brussels-based OLAF is responsible for investigating fraud, corruption and evasion of taxes, duties and levies that contribute to the EU’s budget.
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Vilified for drug pricing, CEO Shkreli busted for securities fraud
Martin Shkreli, the boyish pharmaceutical entrepreneur who caused a public uproar after he drastically raised the price of a life-saving prescription drug, was arrested for engaging in what U.S. prosecutors said was a Ponzi-like scheme at his former hedge fund and a pharmaceutical company he previously headed. Shkreli, who has become a lightning rod for growing outrage over soaring prescription drug prices, was arrested before dawn at the tony Murray Hill Tower Apartments in midtown Manhattan. Clad in a grey hoodie, the 32-year old could be seen being escorted by a slew of law enforcement, including FBI, into a car. It was a dramatic turn of events for Shkreli, who became a pariah for his controversial remarks in the press and taunts on social media outlets, including to Democratic presidential candidate Bernie Sanders. Shkreli, who is chief executive officer of Turing Pharmaceuticals and KaloBios Pharmaceuticals Inc (KBIO.O), was charged in a federal indictment filed in Brooklyn relating to his management of hedge fund MSMB Capital Management and biopharmaceutical company Retrophin Inc (RTRX.O). Brooklyn U.S. Attorney Robert Capers said at a news conference that Shkreli “essentially ran his companies like a Ponzi scheme, where he used each subsequent company to pay off defrauded investors in the prior company.” Authorities highlighted what they called the “brazenness” of his actions. Shkreli’s efforts to conceal the fraud led him to use the assets of Retrophin to pay off debts from his hedge funds, Capers said. Shkreli was charged with securities fraud, securities fraud conspiracy and wire fraud conspiracy. The maximum sentence for the top count is 20 years in prison. The indictment, the result of an ongoing investigation, also charged Evan Greebel, a former partner at law firm Katten Muchin Rosenman who was Retrophin’s outside counsel. Greebel, 42, was also arrested. Both were also sued in a related lawsuit by the U.S. Securities and Exchange Commission, which also named New York-based hedge fund MSMB Capital Management as a defendant. The securities fraud investigation predated the controversy surrounding Shkreli since September, when reports surfaced that his privately held Turing had raised the price of Daraprim, a 62-year-old treatment for a dangerous parasitic infection, to $750 a tablet from $13.50 after acquiring it.
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Congo loses up to $15 billion per year to fraud
Democratic Republic of Congo loses up to $15 billion a year due to fraud, the president’s anti-corruption adviser said on, an amount close to twice the central African country’s budget. Luzolo Bambi, a counselor to President Joseph Kabila on graft and money laundering, did not give any specifics during an interview with local radio but said corruption existed at some of the highest levels of government. “When you have an evasion, a leak, a fraud evaluated at 10 to 15 billion ... dollars per year ... it’s up to the head of state to reverse that trend,” Bambi said. Congo is Africa’s leading copper producer and boasts abundant reserves of gold, diamonds and cobalt but the country ranks 186 out 187 on the U.N. Human Development Index, largely due to endemic corruption. Congo also comes near the bottom of Transparency International’s index of perceptions of corruption, coming in at 154 out of 175 countries. Bambi filed a criminal complaint in June on behalf of Kabila against more than a dozen current and former government officials for fraud, corruption and money laundering.
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Arcadis says cooperating with police in Brazilian fraud probe
Dutch engineering firm Arcadis said on it was cooperating with Brazilian police as part of an investigation into suspected misuse of funds at a $6.4 billion water management project in northern Brazil. Arcadis, which has water management and mining industry contracts in Brazil, did not specify whether it may also be targeted in the investigation into the São Francisco project. “We are also not clear on that,” spokesman Joost Slooten said. The company acts as manager for the project in a 50/50 joint venture with Brazil’s Concremat. SBM Offshore, which paid a record $240 million to Dutch prosecutors to settle allegations of bribery, made 60 percent of its sales in the country. Work to divert the São Francisco, Brazil’s second-longest river, to the country’s drought-prone northwest has been under way since 2006, and the estimated cost has nearly doubled. Brazilian police arrested four people, saying they had evidence companies involved in the long-delayed project had used shell companies to divert funds. Slooten said no Arcadis workers were arrested. The company said in a statement federal authorities visited Arcadis offices in São Paulo and the home of one of its managers. Police asked for and were given documentation, he said, adding the company would continue to cooperate with authorities and had opened its own internal assessment of the situation. The company warned in July a slowdown in procurement by the Brazilian government would lead to a decline of up to 30 percent in Arcadis’s revenue in Brazil. It does not break out separate figures for Brazil.
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U.K. Loses $24 Billion a Year to Tax Fraud, Watchdog Says
The U.K. loses 16 billion pounds ($24 billion) a year to tax fraud, almost half of the amount of potential revenue that goes uncollected, the National Audit Office estimated. Smaller businesses and criminals are responsible for 17 of the 21 biggest “tax-fraud risks,” with eight relating to organized crime and nine involving medium-sized, small or micro-businesses, the government spending watchdog said in a report published. It cited the example of a small business failing to register for value-added tax, a levy on sales, as one such risk. Her Majesty’s Revenue & Customs “clearly needs to think harder about how it tackles tax evasion, the hidden economy and criminal attacks,” said Meg Hillier, chair of the Public Accounts Committee, the parliamentary panel that scrutinizes NAO reports. “HMRC needs to use the powers and sanctions it has to make a public example of those who break the rules.” The NAO said reducing tax fraud was a “high priority” for the U.K. tax authority and called for better use of its data and analysis. The report is the first in a series examining how HMRC tackles tax fraud. “Reducing these losses is not straightforward,” said Amyas Morse, head of the NAO. “We will be looking for further improvements in the way HMRC uses data and analysis to understand the effect of its actions in both the long and short-term.”
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Japan regulator seeks punishment of Ernst-affiliate over Toshiba audit
Japanese regulatory board recommended punishing an Ernst & Young affiliate after its audit of Toshiba Corp failed to spot Japan’s worst accounting scandal in four years. The Certified Public Accountants and Auditing Oversight Board, a regulatory panel within Japan’s Financial Services Agency (FSA), said it had found Ernst & Young ShinNihon LLC’s auditing “conspicuously inappropriate”, but added that there was no indication that Toshiba had pressured the company. Ernst & Young ShinNihon “failed to exercise professional scepticism in auditing Toshiba,” a senior panel official told reporter, declining to be named as per the regulator’s policy. It was not immediately clear how the auditor would be punished. In a statement in Japanese, Ernst & Young ShinNihon apologized for “causing great concern and trouble” in a statement in Japanese, adding: “We will work to regain public trust with fresh determination and commitment.” Toshiba, whose businesses range from laptops to nuclear power, is undergoing a restructuring after revelations this year that it overstated earnings by $1.3 billion as far back as fiscal 2008. The company is behind Japan’s biggest accounting scandal since fraud was discovered in 2011 at medical equipment and camera maker Olympus Corp, which was also an ShinNihon client.
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Dip in UK financial misconduct fines can’t mask upward trend
Fines dished out to misbehaving banks in Britain are set to top 900 million pounds ($1.35 billion) this year, bringing a bumper windfall for some charities and further evidence of a shift nearer the U.S. model of severe penalties to deter wrongdoing. Britain’s financial watchdog has fined banks, insurers, asset managers and individuals 899 million pounds so far and though the final tally will almost certainly be below last year’s record 1.5 billion pounds, it will still be the second highest ever and more than 13 times the total in 2011. The dip from 2014 can be attributed to last year’s 1.1 billion pound settlement with five banks for rigging foreign exchange rates and lawyers said there remains a clear upward trend as Britain moves nearer to United States-style punitive action. “Those blockbuster cases were always going to result in huge penalties. But leaving those aside, we’re starting to see much bigger penalties in other areas,” said Marcus Bonnell, counsel in the regulatory team at law firm RPC. Barclays was fined 284 million pounds in May for failing to stop its traders manipulating foreign exchange markets, the biggest fine imposed by the UK regulator. Lloyds Banking Group was slapped with the biggest retail banking fine of 117 million pounds in June for mistreating customers sold payment protection insurance. And Barclays was fined 72 million pounds for not making proper checks on wealthy clients, the biggest fine for such failings. There have also been hefty fines for failures relating to client assets, conflicts of interest or transaction reporting, including a 126 million pound penalty for Bank of New York Mellon and an 18 million pound hit for Aviva Investors. Accountancy firm EY estimates that the average UK fine imposed on firms has almost trebled in the past two years. John Smart, head of EY’s UK fraud investigation and dispute services team, said that recent scandals and more political pressure mean that regulators are now more willing to pursue cases that may once have been considered too difficult. There has also been a significant shift in the treatment of individuals, with 20 fined so far this year, compared with 13 last year. Numbers could continue to rise, lawyers said, noting new rules that make senior management more accountable for any misconduct, while scores of enforcement staff will no longer be concentrating on the FX and rate-rigging investigations that have tied them up for several years. “With the freeing up of resources and the introduction of the senior managers regime you could see an increase in the number of cases against individuals,” RPC’s Bonnell said. The biggest UK fine on an individual this year was a 2.7 million pound penalty for Alberto Micalizzi, a former hedge fund CEO who tried to conceal losses from investors.
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Former Jefferies Trader Wins Reversal of Fraud Conviction
A former Jefferies & Co. managing director accused of lying to customers about bond prices had his conviction overturned, setting back government efforts to hold individuals accountable for alleged wrongdoing on Wall Street. In a ruling that will shape how the U.S. Justice Department and Securities and Exchange Commission pursue several similar cases already in the pipeline, a federal appeals court threw out Jesse Litvak’s March 2014 conviction for defrauding the U.S. Troubled Asset Relief Program and making false statements to the government. Prosecutors will retry charges of lying to buyers and sellers of mortgage-backed securities. The decision forces the U.S. to bolster its case that traders who lie to customers are committing fraud. In it, the appeals court faulted the judge for excluding some defense evidence, saying the accused must be allowed to show that his actions were in keeping with how Wall Street does business. That puts the industry in the uncomfortable spot: To beat government accusations that bond traders are cheating investors, defense attorneys may have little choice but to tell juries the market’s sophisticated participants understand that trading securities is a lot like stepping onto a used-car lot. A central issue in the Litvak case is whether it’s important for the buyer of a bond to know how much a trader paid for it. Prosecutors argued that Litvak’s lies about how much he paid constituted fraud. Litvak’s team compared their client to used-car salesman who isn’t expected to be honest about what he paid for a car: If a sophisticated bond-buyer agrees the price is fair, they argued, it doesn’t matter what the dealer originally paid. The government welcomed the ruling, in which the judges said “a rational jury could have found that Litvak’s misrepresentations were material” after hearing all the evidence, including defense testimony that was excluded. “We are gratified that the panel unanimously upheld the government’s securities fraud theory and found that the jury was justified in concluding that Mr. Litvak’s misstatements were material to investors,” Connecticut U.S. Attorney Deirdre Daly said in a statement.
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Foreign Corrupt Practices Act (FCPA)
Don’t shy away from exposing corruption, EU anti-fraud body tells Hungary
Hungary needs to do a better job of reporting potential misuse of European Union funds, the head of the European Anti-Fraud Office (OLAF) said, adding that the authorities must be “able and willing” to expose wrongdoing. According to its 2014 annual report, OLAF concluded 13 investigations into the use of EU funds in Hungary last year, the second-highest figure in the 28-member bloc, exceeded only by 36 probes in its poorer southern neighbor Romania. OLAF Director General Giovanni Kessler told an anti-corruption forum that for the 2007-2013 financing period Hungary had reported 0.42 percent of irregularities as a share of the total amount of funds received. He said the rate was even lower for reported frauds, where the amount reported by Hungary was 0.02 percent of total payments affected, a fraction of the EU average of 0.35 percent. Jozsef Peter Martin, Executive Director of Transparency International Hungary, told the forum that EU development funds, worth about 3.5 percent of economic output per year, were vital for the country but also carried heightened risk of abuse. He said the possible misuse of EU funds, worth nearly 2 trillion forints ($6.92 billion) this year alone, included what he called “systemic overpricing” of projects worth as much as 20-25 percent. “The authorities are not interested in strictly controlling expenditures, therefore, overpricing goes essentially unpunished,” he said. “As a result, the beneficiary of part of EU funds is not society, but corruption.” He said public procurement procedures, how Hungary spends a large chunk of the EU funds it receives, were the most risky part of the process. “In several sectors there is data to support that companies whose owners are close to those holding public office perform better than their rivals,” he said. He added that a recent parliamentary amendment to the new public procurement law to allow relatives of politicians to compete for public funds was “alarming” and further increased corruption risks.
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Suspended U.N. diplomat cites immunity in U.S. bribe case
A suspended deputy U.N. ambassador from the Dominican Republic has asked a U.S. judge to dismiss an indictment accusing him of participating in a bribery scheme, saying he has diplomatic immunity. A lawyer for Francis Lorenzo, 48, filed papers in federal court in Manhattan, asking U.S. District Judge Vernon Broderick to dismiss charges including bribery and money laundering facing the diplomat. He is one of six individuals facing charges in connection with an alleged scheme to pay more than $1.3 million in bribes to John Ashe, a former U.N. ambassador from Antigua and Barbuda and onetime General Assembly president. In the filing, Lorenzo’s lawyer, Brian Bieber, cited Lorenzo’s status as a deputy ambassador to the United Nations at the time of his Oct. 6 arrest and during the period of alleged wrongdoing in the indictment. “As such, Lorenzo is protected from prosecution by virtue of his diplomatic agent immunity,” Bieber wrote. Prosecutors alleged that Ashe, 61, took more than $1.3 million in bribes from Chinese businessmen, including billionaire Macau real estate developer Ng Lap Seng. The prosecutors said Ng, through intermediaries, paid Ashe more than $500,000 to seek U.N. support of a U.N.-sponsored conference center in Macau. Authorities said the intermediaries included Lorenzo, who prosecutors said also received bribes from Ng, and Jeff Yin, Ng’s assistant. Ashe also received more than $800,000 from Chinese businessmen to support their interests within the United Nations and Antigua, prosecutors said. The question of the extent Ashe and Lorenzo have diplomatic immunity and its effect on any charges has loomed over the case. Ashe, who was General Assembly president from 2013 to 2014, has to date only been charged with tax fraud, with prosecutors citing his possible diplomatic immunity as a potential obstacle to charging him with bribery.
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Former Russian Nuclear Energy Official Sentenced to 48 Months in Prison for Money Laundering Conspiracy Involving Foreign Corrupt Practices Act Violations
A former Russian official residing in Maryland was sentenced to 48 months in prison for conspiracy to commit money laundering in connection with his role in arranging more than $2 million in corrupt payments to influence the awarding of contracts with a Russian state-owned nuclear energy corporation. Vadim Mikerin, 56, of Chevy Chase, Maryland, was also ordered to forfeit $2,126,622.36 by U.S. District Judge Theodore D. Chuang of the District of Maryland. According to court documents, Mikerin was the director of the Pan American Department of JSC Techsnabexport (TENEX), a subsidiary of Russia’s State Atomic Energy Corporation and the sole supplier and exporter of Russian Federation uranium and uranium enrichment services to nuclear power companies worldwide, and the president of TENAM Corporation, a wholly owned subsidiary and the official representative of TENEX. Court documents show that between 2004 and October 2014, conspirators agreed to make corrupt payments to influence Mikerin and to secure improper business advantages for U.S. companies that did business with TENEX, in violation of the Foreign Corrupt Practices Act (FCPA). Mikerin admitted that he conspired with Daren Condrey, Boris Rubizhevsky and others to transmit approximately $2,126,622 from Maryland and elsewhere in the United States to offshore shell company bank accounts located in Cyprus, Latvia and Switzerland with the intent to promote the FCPA violations. Mikerin further admitted that the conspirators used consulting agreements and code words to disguise the corrupt payments.
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Two FIFA Executives Arrested in Corruption Probe, Swiss Say
Two FIFA vice presidents were arrested at dawn at their luxury Zurich hotel, signaling that U.S. prosecutors have widened a seven-month corruption investigation that’s led to the biggest crisis in soccer’s history. Alfredo Hawit of Honduras and Juan Angel Napout of Paraguay were arrested at the Hotel Baur au Lac at the request of U.S. authorities on suspicion of accepting millions of dollars in bribes for selling marketing rights to soccer tournaments in Latin America. The pair are opposing extradition to the U.S., the Swiss Federal Office of Justice said in a statement. U.S. Attorney General Loretta Lynch will detail the charges in Washington. On May 27, seven FIFA officials gathered in Zurich for FIFA’s congress were detained in a dawn hotel sweep as part of an American federal indictment of 14 sports officials for racketeering and bribery. Prosecutors accused U.S. and South American sports marketing executives of paying more than $150 million in bribes and kickbacks for media and marketing rights to soccer tournaments. The arrests are the latest by the U.S. Department of Justice and Switzerland’s Attorney General as they crack down on corruption on the sport’s governing body. Swiss prosecutors opened an investigation into a 2 million-Swiss franc ($1.96 million) payment from Joseph ‘Sepp’ Blatter, who’s overseen FIFA for nearly two decades, to Michel Platini, European soccer’s head. Both were suspended in October. “As it stands, FIFA is not corrupt,” Issa Hayatou, FIFA’s acting president told reporters at a building known as the Home of Football at the organization’s headquarters in the hills above Zurich. “We have individuals who have shown negative behavior, so do not generalize the situation.” Napout, the head of the South American Football federation known as Conmebol, didn’t answer an e-mail seeking comment. A spokesman for Concacaf, the North and Central American association headed by Hawit, said the organization is cooperating with authorities, and would continue with reforms made earlier this year.
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ICBC Standard Bank to Pay $33 Million to End Bribery Case
ICBC Standard Bank Plc will pay about $33 million to resolve an investigation into bribery at its former Tanzanian unit, after a London court approved the first-ever deferred prosecution agreement in the U.K. The deal with the U.K. Serious Fraud Office, which lasts for three years, was signed-off by Judge Brian Leveson in London. The settlement includes a $16.8 million fine, the disgorgement of $8.4 million in profits, $7.04 million in compensation and interest to the Tanzanian government and 330,000 pounds ($500,000) in SFO legal fees. The DPA means ICBC Standard Bank won’t face prosecution for bribery committed by two executives at the bank’s former Tanzanian unit between June 2012 and March 2013. The executives committed bribery “to retain business” and to “induce public officials to act improperly”, the SFO’s lawyer Edward Garnier said at the hearing. Under a DPA, prosecution is suspended if the company agrees to conditions that can include paying a fine, repaying profits, and helping bring cases against individuals. SFO Director David Green said in recent speeches the agency is planning two such deals to be agreed by the end of the year. DPAs are a common enforcement tool in the U.S. but were only introduced into U.K. law in February 2014. “This landmark DPA will serve as a template for future agreements,” Green said in a statement. “The judgment from Lord Justice Leveson provides very helpful guidance to those advising corporates. It also endorses the SFO’s contention that the DPA in this case was in the interests of justice and its terms fair, reasonable and proportionate.” The DPA relates to a $6 million payment by former sister company of Standard Bank, Stanbic Bank Tanzania, in March 2013. The funds were sent to Enterprise Growth Market Advisors, a consulting firm linked to the Tanzanian government. The payment was intended to encourage Tanzania’s government to favor the bank in its $600 million private placement, which generated fees of $8.4 million for the bank. The bank said in a statement that the facts to which the DPA relate took place before ICBC acquired a 60 percent majority shareholding in South Africa’s Standard Bank in February.
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Litigation Matters
Volkswagen diesel civil suits to be heard in California
More than 500 civil lawsuits filed against Volkswagen AG over the use of software to evade emissions limits will be heard by a federal judge in California, a U.S. judicial panel responsible for consolidating related lawsuits said. The U.S. Judicial Panel on Multidistrict Litigation said the cases will be heard by U.S. District Judge Charles Breyer in the Northern District of California. Volkswagen and the U.S. Department of Justice had both urged the panel to send the cases to Detroit, while plaintiffs’ lawyers from across the country suggested a range of venues, from Illinois and Ohio to New Jersey and Massachusetts. Ultimately, the panel decided to assign them to the Northern District of California in San Francisco, where the first Volkswagen case in the country was filed. The panel noted that while the Volkswagen litigation is “international in scope,” nearly a fifth of the cases filed so far were brought in California, while the California Air Resources Board played a key role in uncovering VW’s emissions fraud in 482,000 2.0-liter VW cars. The order will apply to more than 500 lawsuits that accuse Volkswagen of equipping certain “clean diesel” models with software that enabled them to cheat on emissions tests. The panel deferred on deciding whether the consolidated litigation should include several securities lawsuits against Volkswagen, as well as a case in Montana that says owners of VW vehicles should not be required to make payments on current loans. Breyer, brother of U.S. Supreme Court Justice Stephen Breyer and a member of the panel that made the decision, did not participate in the deliberations. Plaintiffs’ lawyer Steve Berman of Hagens Berman Sobol Shapiro said he was pleased with the panel’s selection, noting that Breyer is experienced at handling complex consolidated litigation “and will get the case moving quickly as it should.” VW spokeswoman Jeannine Ginivan said the German automaker had received the order. “We will vigorously defend the company in these cases,” she said.
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Gibraltar court awards Chevron $28 million in damages
Chevron Corp won $28 million in damages after Gibraltar’s highest court ruled against a company that was set up to receive and distribute funds resulting from a judgment against Chevron in Ecuador. Gibraltar-based Amazonia Recovery Ltd was set up by Steven Donziger, a U.S. lawyer who represented a group of Ecuadorians that sued the oil giant. Chevron is contesting a $9.5 billion judgment from the suit in Ecuador. It is also suing Donziger and others in federal court in Manhattan, claiming the judgment was the product of a fraud. Chevron continues to fight claims from Ecuadorean villagers, who have filed lawsuits in Canada, Brazil and Argentina seeking to enforce the judgment rendered in Ecuador. The Ecuador ruling followed years of litigation by the villagers, who sued Texaco, which Chevron later acquired, over contamination in the jungle around Lago Agrio, Ecuador, between 1964 and 1992. The Ecuadoreans initially sued Chevron in federal court in Manhattan in 1993. After Chevron successfully argued the case should be heard in Ecuador, the villagers filed a new lawsuit there. The case led to a $19 billion judgment against Chevron, which Ecuador’s highest court in 2013 slashed to $9.5 billion. Chevron said it still has claims pending in Gibraltar against some directors of Amazonia – Pablo Fajardo, Luis Yanza and Ermel Chavez. The Gibraltar court also issued a permanent injunction against Amazonia, preventing the company from assisting or supporting the case against Chevron in any way.
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LifeLock to pay $100 million to settle U.S. contempt charges: FTC
LifeLock Inc, which sells identity theft monitoring and fraud detection services, has agreed to pay $100 million to settle charges that it failed to properly protect its customers’ data, the Federal Trade Commission said. The FTC had accused LifeLock, which is based in Tempe, Arizona, of violating a 2010 court order that required it to take steps to secure data properly and said that LifeLock falsely advertised that it protected that information, among other allegations. The $100 million is to be deposited to the U.S. District Court for the District of Arizona. A total of $68 million may be used to reimburse consumers in a class-action lawsuit. The balance will be used by the FTC to reimburse LifeLock customers not involved in the lawsuit, an FTC spokesman said. The company charges $9.99 per month to monitor a customers’ accounts to get an early warning of identity theft and to help them clean up the mess when identity theft occurs. LifeLock said in the court filing that it neither admitted nor denied the FTC’s allegations. LifeLock said in a statement that it had already done system upgrades and taken other steps to address issues raised by the government. “The allegations raised by the FTC are related to advertisements that we no longer run and policies that are no longer in place,” the company said. “There is no evidence that LifeLock has ever had any of its customers’ data stolen, and the FTC did not allege otherwise.” LifeLock paid $12 million in 2010 to settle charges that it overstated the value of its services. The FTC said then that LifeLock advertised that it could stop identity theft for consumers who buy its service. But the FTC said the company’s fraud alerts did not protect customers from misuse of existing accounts, the most common form of the crime. As part of the settlement, LifeLock is required to refrain from misrepresenting how much they can do to protect their customers from identity theft and to implement a data security program, according to a court filing. The commission voted 3 to 1 to approve the settlement. Maureen Ohlhausen, the sole Republican on the panel, said in her dissent that she was unconvinced that LifeLock had fallen short in protecting its customers data. “During the relevant period, reputable third parties certified that LifeLock complied with the industry-standard Payment Card Industry Data Security Standard (PCI DSS)2 and other data security standards,” she wrote. “Nor is there evidence that LifeLock subscribers’ information suffered a breach.”
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Tennessee lender to pay $70 million to end U.S. mortgage fraud case
Franklin American Mortgage Co agreed to pay $70 million to settle U.S. Department of Justice charges that the Tennessee lender knowingly misled the government about the quality of home loans it submitted for Federal Housing Administration insurance. The accord resolves charges that Franklin American violated the federal False Claims Act by misleading the FHA, part of the Department of Housing and Urban Development, into believing that many of its loans qualified for insurance. The Justice Department said this led to “substantial losses” when the FHA paid insurance claims on hundreds of deficient loans. It said Franklin American’s improper conduct occurred from 2006 to 2012. The privately held company is based in Franklin, Tennessee, a suburb of Nashville. The case is part of a Justice Department crackdown on financial companies for shoddy mortgage loans that helped fuel the U.S. housing and financial crises. According to the department, Franklin American offered bonuses to underwriters for generating more loans, employed unqualified junior underwriters to perform key functions, and disciplined underwriters if they failed to meet quotas. The department also said that while internal audits showed “substantial percentages of seriously deficient loans,” Franklin American reported very few deficiencies to HUD. The settlement papers quoted from one manager who, during a period of high demand, pressed several underwriters to generate daily at least 50 percent more loans than usual. “Some of you are constantly hitting this number each and every day and the company is paying you a bonus for your achievements,” the manager wrote. “EVERYONE needs to be hitting this number each and every day not just a day here or a day there and we need to be consistent.” Bank of America Corp, Citigroup Inc and Deutsche Bank AG are among other lenders to settle U.S. government lawsuits over insured mortgage loans. Wells Fargo & Co and former vice president Kurt Lofrano are defendants in once such case in Manhattan federal court.
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China Market
China police take “coercive measures” against P2P lender Ezubao
Chinese police said had taken “coercive measures” against suspects at Ezubao, the country’s largest online peer-to-peer (P2P) platform by lending figures, which generally means detention. Police in Beijing, Shanghai, eastern province of Jiangsu and southern province of Guangdong said they had sealed, frozen and seized assets of Ezubao and its linked companies as part of probes into the company, according to postings on their official microblogs. The investigation into Ezubao is the latest case highlighting the growing financial risks, and potential social unrest, linked to China’s unregulated P2P industry, which has been dogged by reports of frauds in recent years. Recently, Ezubao investors have formed social media groups and attempted to protest in several cities around the country, including Beijing and Shanghai. Among China’s almost 3,800 P2P firms operating in the sector now worth of 133.1 billion yuan ($21 billion), more than 1,200 are in trouble, either running away with investors’ money, or closed down, according to industry data provider Wangdaizhijia. Ezubao’s offices in Beijing and Shenzhen were closed by police earlier, an investor told Reuters. State media Xinhua News Agency has reported Ezubao is under investigation for suspected illegal business activities. The P2P lender had lent 70 billion yuan ($11 billion) and counts Bank of China, the country’s fourth-biggest lender, as its major creditor, financial magazine Caixin reported.
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Top China Cop Targets Bankers After Locking Up Security Czar
The high-ranking cop who brought down one of China’s top Communist Party officials has been put in charge of a corruption probe of the securities industry in the wake of a summer stock crash, said a person familiar with the matter. The appointment of Fu Zhenghua underscores the importance that President Xi Jinping has given the investigation into possible securities fraud linked to the $5 trillion wipeout in June and July. Fu has had several promotions since Xi came to power in 2012, and oversaw the case against former Politburo Standing Committee member Zhou Yongkang, said three people familiar with the case, who asked not to be identified because Fu’s role hasn’t been made public. Zhou was sentenced to life behind bars in June. The 60-year-old former Beijing police chief, who also led a corruption case against one of China’s richest men and busted a huge prostitution ring in 2010, is overseeing a probe under which police have questioned dozens of executives at securities firms amid allegations of insider trading and other malfeasance stemming from the crash, one of the people said. The investigations have intensified, sending fear through China’s finance firms and chilling their investment strategies. Since August, official media have reported the detention of several senior executives of Citic Securities Co. – China’s biggest brokerage – on suspicion of insider trading and leaking sensitive information. Other top securities firms such as Guosen Securities Co. and Haitong Securities Co. are under investigation. China Merchants Securities Co. said a former general manager of its fixed-income division had been arrested and fired over undisclosed allegations. Like the Gome case, the probe of the securities industry is politically charged in part because all three firms are units of state-owned companies. Moreover, state media had fanned the rally that precipitated the crash, and concerns arose over the government’s ability to manage the crisis after regulators imposed and then lifted a series of measures to arrest the slide.
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Healthcare Industry
Valeant Pharmacy Fallout to Cut 2016 Profit by $500 Million
Valeant Pharmaceuticals International Inc. said that the fallout and remedies from its relationship with a controversial mail-order pharmacy, Philidor Rx Services, will slash hundreds of millions of dollars from the company’s earnings this quarter and next year. The drugmaker said in October that it was ending its relationship with Philidor, which used aggressive business practices to push Valeant’s products. Lower prices for drugs, retention bonuses to keep workers at the company after disruptions to business, legal fees and a new patient access program will cut about $500 million next year from the company’s adjusted Ebitda, or earnings before interest, tax, depreciation and amortization, Valeant said in a presentation to investors. As a result, adjusted earnings will be $6.9 billion to $7.1 billion next year, down from the $7.5 billion that the drugmaker predicted on Oct. 29. “While some components of the guidance may appear disappointing, we suspect that it is conservative,” said Alex Arfaei, an analyst with BMO Capital Markets. He has a market perform rating on the stock. Before it severed ties with Philidor, the pharmacy was an increasing part of Valeant’s strategy, and specialized in helping doctors and patients get access to Valeant drugs even when insurers declined to cover them. The drugmaker said in October that it was cutting ties after former employees alleged that the pharmacy altered codes on some doctors’ prescriptions. Philidor has said it only filled prescriptions with the drugs patients and doctors requested.
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Five charged in $600 million California health care fraud scheme
The former chief financial officer of a California hospital and four other people have been charged in a series of health care kickback schemes that generated nearly $600 million in fraudulent billings for spinal surgeries, prosecutors said. All five defendants have agreed to cooperate in a wide-ranging federal investigation into the fraud, dubbed “Operation Spinal Cap”, U.S. Attorney’s spokesman Thom Mrozek said, and two have already pleaded guilty to federal charges. The remaining three defendants were expected to plead guilty, Mrozek said. Under the terms of their plea agreements, all five will face prison terms and be ordered to pay restitution, he said. Prosecutors say one of the schemes involved kickbacks and fraudulent claims submitted in thousands of spinal surgery cases referred to Pacific Hospital in the Los Angeles suburb of Long Beach. The hospital’s former owner, Michael Drobot, pleaded guilty last year to taking part in the scheme and is cooperating in the investigation, Mrozek said. Former California state Senator Ron Calderon was indicted last year on charges that he accepted $100,000 in bribes from Drobot to preserve a loophole in the law that allowed companies he controlled to charge more for hardware used in spinal surgeries. Calderon, who was an influential Democrat before he termed out of the state senate last year, is also accused of taking bribes from undercover FBI agents posing as Hollywood movie executives in exchange for steering legislation in their favor. Calderon has pleaded innocent to the charges against him and is awaiting trial next year. In another scheme, doctors received illegal kickbacks for referring patients to Tri-City Regional Medical Center in the Los Angeles suburb of Hawaiian Gardens, according to prosecutors. James Canedo, the 63-year-old former chief financial officer of Pacific Hospital, pleaded guilty in September to fraud and other charges. Orthopedic surgeon Philip Sobol, 61, has agreed to plead guilty to conspiracy and other charges, prosecutors say. Chiropractor Alan Ivar was charged with conspiracy and other charges and, in a plea agreement, has admitted steering patients to Pacific Hospital in exchange for a monthly retainer, Mrozek said. Paul Richard Randall, 56, a health care marketer previously affiliated with Pacific Hospital and Tri-City Regional Medical Center, has pleaded guilty to conspiracy to commit mail fraud. Orthopedic surgeon Mitchell Cohen, 55, has agreed to plead guilty to failing to report income received from kickback payments, Mrozek said.
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Pharma CEO’s arrest a sign of health sector ills
Fraud charges against Turing Pharmaceuticals boss Martin Shkreli are a symptom of the sector’s ills. Healthcare has been prone to financial finagling, but the recent boom created more opportunities for misconduct. With good times fading, the excesses suddenly stand out like a sore thumb. Controversy has long been Shkreli’s calling card. He made his name publicly criticizing biotechnology stocks whose value his hedge fund bet would drop. Then he switched tactics, founding two biotech companies himself. U.S. presidential hopeful Hillary Clinton harshly criticized Shkreli for acquiring the manufacturing rights to an anti-parasite medication used by AIDS patients and infants – and raising its price from $13.50 a pill to $750. Pharma’s bad boy responded by saying he should have charged even more. To top things off, he paid $2 million for the only copy of an album by American hip-hop group Wu-Tang Clan but claimed never to have listened to it. Prosecutors believe Shkreli’s antics behind the scenes were far more serious, charging him with defrauding both his hedge fund investors and Retrophin, a company he founded and left in disgrace. They claim Shkreli tried to cover disastrous trades by illegally transferring Retrophin stock and cash to himself and former investors in his fund. He has denied the charges. Though Shkreli may be innocent, he has left himself vulnerable to scrutiny. It’s probably not the smartest move to, for example, take on Clinton publicly while profiting from AIDS patients and infants in a highly regulated industry that has attracted enormous controversy. His indictment may be the first of many in the sector. The NASDAQ index of the value of biotech stocks has quadrupled over the past four years before falling recently, and hospitals and health insurers have also done extraordinarily well. The lure of high profits often leads investors to overlook potential fraud and lavish money on questionable businesses. That can, of course, bring even more illegal activity. The National Health Care Anti-Fraud Association estimates at least 3 percent of the more than $2 trillion Americans spend on health is eaten up by fraud. Other estimates claim up to 10 percent. Shkreli may turn out to be just an appetizer for prosecutors hungry for big healthcare game.
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SEC Regulatory Actions
SEC: Grant Thornton Ignored Red Flags in Audits
The Securities and Exchange Commission announced that national audit firm Grant Thornton LLP and two of its partners agreed to settle charges that they ignored red flags and fraud risks while conducting deficient audits of two publicly traded companies that wound up facing SEC enforcement actions for improper accounting and other violations. Grant Thornton admitted wrongdoing and agreed to forfeit approximately $1.5 million in audit fees and interest plus pay a $3 million penalty. Melissa Koeppel was an engagement partner on the deficient audits of both companies, and Jeffrey Robinson was an engagement partner on one of the deficient audits, which spanned from 2009 to 2011 and involved senior housing provider Assisted Living Concepts (ALC) and alternative energy company Broadwind Energy. An SEC investigation found that Grant Thornton and the engagement partners repeatedly violated professional standards, and their inaction allowed the companies to make numerous false and misleading public filings. “Audit firms must be held responsible when systemic failures such as inadequate engagement procedures, staffing, or supervision cause the firms’ work to fall significantly short of expected standards, particularly when multiple audits and engagements are involved,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “Grant Thornton was aware of red flags suggesting audit quality issues in the audits conducted by one of its engagement partners and its audit quality more generally, but failed to remedy the situation.” Last December, the SEC announced fraud charges against two former ALC executives accused of making false disclosures and manipulating internal books and records by listing fake occupants at some senior residences in order to meet lease covenant requirements. Earlier this year, the SEC charged Broadwind and senior officers with accounting and disclosure violations that prevented investors from knowing that reduced business was damaging the company’s long-term financial prospects.
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SEC Suspends Public Accountants for Bad Auditing
The Securities and Exchange Commission suspended five accountants and two audit firms from practicing or appearing before the SEC after they violated key rules that are designed to preserve the integrity of the financial reporting system. According to the SEC’s orders instituting settled administrative proceedings, the accountants and firms at various times performed deficient audits of public companies, jeopardized the independence of other audits, and falsified and backdated audit documents among other misconduct. According to the SEC’s orders finding violations by Peter Messineo and his firm Messineo & Co., Charles Klein and his firm DKM Certified Public Accountants, Robin Bigalke, Joseph Mohr, and Richard Confessore, Messineo and his firm, which had more than 70 corporate clients, skipped mandatory quality reviews for their own audits and performed deficient quality reviews for audits by another audit firm. To cover up these violations, Bigalke falsified and backdated audit documents in her role as Messineo & Co.’s senior accountant. She also arranged with Mohr, the firm’s quality reviewer, the backdating of quality review documents. Mohr falsely identified himself as a certified public accountant during a time when was not licensed as a CPA. Messineo served as the CFO of two public companies being audited by Klein and DKM. Messineo falsely certified the companies’ public filings despite knowing that auditor independence rules were being violated as Confessore was improperly serving conflicting roles as a member of the DKM audit team and an employee of Messineo & Co. After Messineo resigned from his CFO positions at both public companies, he merged his audit firm into DKM and exacerbated DKM’s independence issues because he retained ownership interests in the two companies while DKM continued to audit them.
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