Forensic News December 2016

FINANCIAL/ACCOUNTING FRAUD

U.S. charges Platinum Partners execs with $1 billion fraud

Top executives of New York-based hedge fund manager Platinum Partners were arrested on Monday and charged with running a $1 billion fraud that federal prosecutors said became “like a Ponzi scheme” as its largest investments lost much of their value. Led by Mark Nordlicht, Platinum was known for years for producing exceptionally high returns – about 17 percent annually in its largest fund – by taking an unusually aggressive approach to investing and fund management, as detailed by a Reuters Special Report in April. (reut.rs/1TRovwx) Nordlicht, Platinum’s founding partner and chief investment officer, was arrested at his home in New Rochelle, New York. Federal prosecutors accused him and six others of participating in a pair of schemes to defraud investors. “The charges ... highlight the brazenness and the breadth of the defendants’ lies and deceit,” Brooklyn U.S. Attorney Robert Capers told reporters. Capers added that the case was one of the largest and “most brazen” investment frauds ever and Platinum was ultimately exposed to have “no more value than a tarnished piece of cheap metal.” The U.S. Securities and Exchange Commission announced parallel charges Monday against the same executives and two Platinum entities for similar civil fraud charges. A 48-page criminal indictment said since 2012, Nordlicht and four other defendants defrauded investors by overvaluing illiquid assets held by its flagship Platinum Partners Value Arbitrage funds, mostly troubled energy-related investments. This caused a “severe liquidity crisis” that Platinum at first tried to remedy through high-interest loans between its funds before selectively paying some investors ahead of others, the indictment said. “So to some extent, there is a Ponzi-esque aspect to this scheme,” Capers said. Founded in 2003, Platinum until this year had more than $1.7 billion under management, with more than 600 investors, authorities said. Some of those investors came from the same New York-area Jewish community as Nordlicht and other Platinum executives. They have included a charitable trust set up by day-trading pioneer Aaron Elbogen; the Century 21 Associates Foundation, led by department store executive Raymond Gindi; and the SFF Foundation, a non-profit controlled by the Schron family, known for its real estate investments. Avi Schron declined to comment; Gindi and Elbogen did not immediately respond to requests for comment.

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U.S. indicts three Romanians over $4 mln cyber fraud

Three Romanian nationals have been extradited to the United States to face charges that they operated a cyber fraud scheme in which they infected at least 60,000 computers and stole at least $4 million, U.S. prosecutors said on Friday. Bogdan Nicolescu, 34, Tiberiu Danet, 31, and Radu Miclaus, 34, were charged in an indictment filed in federal court in Cleveland with charges including wire fraud, aggravated identity theft and conspiracy to commit money laundering. The trio were extradited to the United States this week after being arrested in Romania earlier this year, prosecutors said. In court on Friday, Danet and Miclaus pleaded not guilty. Nicolescu has not yet been arraigned, court records show. Danet’s lawyer confirmed his client pleaded not guilty. A lawyer for Miclaus did not respond to requests for comment and an attorney for Nicolescu could not be identified. Prosecutors said they belonged to a group in Bucharest called “Bayrob” that in 2007 began to develop and deploy malware sent through e-mails claiming to be from entities like Western Union, Norton AntiVirus and the U.S. Internal Revenue Service. Prosecutors said after users clicked on an attached file, the malware would get installed on the computer. It would then harvest e-mail addresses from contact lists or e-mail accounts, which then received e-mail with the malware as well, they said. More than 60,000 computers were infected, prosecutors said. Once infected, the defendants could control these computers to collect information including credit card details, user names and passwords, they said. They also used the infected computers to mine for digital currencies like bitcoin, causing the devices to become unusable or slow, prosecutors said. When users with infected computers visited web sites like Facebook or eBay, the defendants would redirect the computer to a nearly identical site, allowing them to steal account credentials, prosecutors said.

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Ex-JPMorgan employee accused of $5 million scheme to defraud bank

A former JPMorgan Chase & Co employee who has been ordered to attend counseling for gambling is facing criminal charges that he engaged in a scheme to defraud the bank out of $5 million in order to pay personal debts. Lawrence Obracanik, who worked as an operations manager for JPMorgan’s broker-dealer services, was charged in a criminal complaint made public on Wednesday in federal court in Manhattan with wire fraud and attempted wire fraud. Obracanik, a 42-year-old resident of Fort Worth, Texas, turned himself in to authorities on Tuesday in New York, according to a spokesman for U.S. Attorney Preet Bharara. Following a court appearance that day before U.S. Magistrate Judge Katharine Parker, he was released on a $100,000 bond. He was instructed as part of his bail conditions to seek employment and attend counseling for gambling, according to court records. A lawyer for Obracanik did not immediately respond to a request for comment on Thursday. The complaint against Obracanik did not identify JPMorgan by name. But a profile for him on LinkedIn said that he had worked for the bank in Texas. A spokesman for JPMorgan declined to comment. The bank is based in New York. According to the complaint, from July 2014 to February 2016, Obracanik made or tried to make 22 wire transfers for more than $5 million from an account at a bank that was apparently JPMorgan to an account at another bank belonging to an unnamed individual. The complaint said that during an interview with two Federal Bureau of Investigation agents in August, Obracanik admitted wiring the money to that person’s account and said that he had done so to pay personal debts.

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Credit Suisse Must Face New York Mortgage Suit, Court Says

Credit Suisse Group AG must face New York Attorney General Eric Schneiderman’s $10 billion lawsuit accusing the bank of fraud in the sale of mortgage-backed securities before the 2008 financial crisis, a state appeals court ruled Tuesday. The Zurich-based bank lost its bid to dismiss the 2012 lawsuit, which accused Credit Suisse of misrepresenting the risks of investing in mortgage-backed securities. The appellate panel rejected Credit Suisse’s arguments, saying Schneiderman had shown the bank may have engaged in misconduct and that the claims were within the six-year statute of limitations. Two of the five judges disagreed, saying a three-year statute of limitations applied so the case should have been thrown out. Andrew Wilson, a spokesman for Credit Suisse, declined to comment on the ruling. In December 2014, New York State Supreme Court Justice Marcy Friedman denied the bank’s first request to dismiss the lawsuit, which Credit Suisse appealed. Credit Suisse is among European banks in settlement talks with the Justice Department and U.S. states over abuses in residential mortgage-backed securities, people familiar with the matter said in September.Tuesday’s decision by the appeals court may clear the path for the lender to resolve similar claims with U.S. authorities, Bloomberg Intelligence analyst Elliot Stein said. Credit Suisse is also scheduled to go to trial in March in a lawsuit by the National Credit Union Administration on behalf of failed credit unions that bought billions of dollars in mortgage-backed bonds, which could push the bank to reach a global settlement before then, Stein said. He estimated that Credit Suisse would pay $2 billion to $4 billion, based on other settlements with the Justice Department’s task force on mortgage-backed securities. Amy Spitalnick, a spokeswoman for Schneiderman, said, “We’re pleased with the appellate court’s decision, which recognizes that a six-year statute of limitations applies to our statutory fraud claims.” Schneiderman serves as co-chair of the task force of state and federal agencies probing wrongdoing in the mortgage-bond market.

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Ex-Expedia IT employee pleads guilty in U.S. to insider trading

December 5 A former Expedia Inc computer support technician pleaded guilty on Monday to having secretly accessed senior executives’ e-mails in order to engage in insider trading based on confidential information he stole. Jonathan Ly, 28, entered his plea in federal court in Seattle to one count of securities fraud stemming from an insider trading scheme that prosecutors said netted the San Francisco resident $331,000. He is scheduled to be sentenced February 28. As part of a plea deal, Ly agreed to repay Expedia the $81,592 it spent investigating the computer intrusion. He also reached a $375,907 settlement with the U.S. Securities and Exchange Commission. A lawyer Ly did not immediately respond to a request for comment. According to court papers, in 2013, Ly began exploiting his administrative access privileges to secretly review the contents of devices belonging to executives including Expedia’s chief financial officer and head of investor relations. Prosecutors said that using the non-public information he obtained, Ly executed a series of well-times trades in Expedia stock options. Even after he left the company in 2015, prosecutors said, Ly kept a company laptop and continued accessing the electronic devices and e-mail accounts of Expedia executives. “The irony of our increasingly digital world is that the greatest threat to our networks is a human one,” U.S. Attorney Annette Hayes said in a statement. “In this case, an IT professional used his employer’s networks to facilitate a get-rich-quick scheme.” Prosecutors said Expedia ultimately discovered the computer intrusion and reported it to the Federal Bureau of Investigation. Expedia in a statement confirmed it worked closely with law enforcement in the probe. “Expedia has been and remains committed to a rigorous and continual improvement cycle for all elements of its security posture,” the company said in a statement.

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U.S. congressman from Pennsylvania gets 10 years’ prison for fraud

Former U.S. Representative Chaka Fattah, who served in Congress for more than 20 years, was sentenced on Monday to 10 years in federal prison for orchestrating a series of frauds to enrich himself and boost his political career, U.S. prosecutors said. Fattah, 60, represented parts of Philadelphia from 1995 until resigning earlier this year after being convicted in June on more than 20 counts of racketeering, bribery and fraud. He had already lost the Democratic primary in April amid the corruption scandal. Fattah misappropriated hundreds of thousands of dollars in campaign, charity and taxpayer money in multiple unrelated schemes stretching over several years, according to prosecutors. Some of the frauds stemmed from his unsuccessful bid in 2007 to become Philadelphia’s mayor, a campaign that left him deeply in debt to several supporters. He accepted an illegal secret loan of $1 million from Albert Lord, a former chief executive officer of student loan servicer SLM Corp, known as Sallie Mae, authorities said. He then convinced Karen Nicholas, who oversaw his nonprofit educational organization, to funnel charitable donations and federal grant money to repay the loan. Lord testified at trial under an immunity order and said he never discussed the specifics of the loan with Fattah. Fattah also encouraged consultant Thomas Lindenfeld to apply for federal funds for a fake nonprofit in an effort to repay Lindenfeld more than $100,000, prosecutors said. In a third scheme, Fattah used another consultant, Gregory Naylor, to transfer campaign money to pay off his son’s student debt. The son, Chaka Fattah Jr., was convicted in an unrelated federal fraud case and sentenced to five years in prison. Fattah also accepted bribes from a close friend, retired businessman Herb Vederman, in exchange for making a personal appeal to President Barack Obama to appoint Vederman to a U.S. ambassadorship, prosecutors said.

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FOREIGN CORRUPT PRACTICES ACT (FCPA)

Argentine firm reaches $112.8 million deal with U.S. in FIFA probe

U.S. prosecutors on Tuesday announced an agreement allowing Argentine sports media Torneos y Competencias SA to pay about $112.8 million to settle charges stemming from a sweeping bribery probe targeting FIFA, soccer’s world governing body. The deferred prosecution agreement with Torneos, whose former chief executive pleaded guilty last year to engaging in schemes to bribe soccer officials, was approved by U.S. District Judge Pamela Chen at a hearing in federal court in Brooklyn. Under the deal, Torneos agreed to forfeit $89 million and pay a $23.76 million penalty. Prosecutors charged it with one count of wire fraud conspiracy, which will be dropped if it abides by the agreement’s terms for four years. Outside of court, Ignacio Galarza, the company’s general manager, said he welcomed the agreement, which is the first with a company in the FIFA corruption probe. “Today is a great day for us as we start to leave this investigation behind,” Galarza told reporters. In a statement, Brooklyn U.S. Attorney Robert Capers said the company cooperated and is “being given a chance to change the way the business of soccer is done in the future.” As part of the agreement, the company said it would implement internal compliance and accounting controls. The company is one of 43 people and entities charged as part of a U.S. investigation that upended Zurich-based FIFA and the soccer world. To date, 20 people and two related companies have pleaded guilty in connection with the probe. Torneos is 40 percent owned by DirecTV, which AT&T Inc acquired in 2015. In August 2015, DirecTV valued its stake at $147 million, but said its investment could be adversely impacted by the probe. Prosecutors said Torneos paid bribes and kickbacks to high-ranking soccer officials over 15 years to obtain lucrative media and marketing rights for international soccer tournaments. Torneos paid millions of dollars in bribes to acquire the broadcasting rights for the 2018, 2022, 2026, and 2030 World Cup games in several South American countries, according to court documents. The court documents also say that Torneos paid millions of dollars in annual bribes to support its affiliate, T&T Sports Marketing. An affiliate of Twenty-First Century Fox Inc owns 75 percent of T&T and Torneos owns 25 percent, according to Torneos.

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Gabonese man pleads guilty in U.S. hedge fund bribery case

A Gabonese man who prosecutors say acted as a “fixer” for a joint-venture involving the hedge fund Och-Ziff Capital Management Group LLC pleaded guilty on Friday to U.S. charges that he engaged in a foreign bribery scheme. Samuel Mebiame, a son of the late former Gabon Prime Minister Leon Mebiame, entered his plea in federal court in Brooklyn to conspiracy to violate the U.S. Foreign Corrupt Practices Act. In court, Mebiame admitted that he participated in a scheme to provide “improper benefits” to government officials in certain African countries such as Guinea in exchange for obtaining business opportunities, including a mining contract. “I apologize for and regret my actions,” he said. Mebiame, 43, has been held without bail since his arrest in August. He faces a maximum of five years in prison and is scheduled to be sentenced on April 6. His plea came after Och-Ziff and its chief executive, Daniel Och, agreed in September to pay $412 million and $2.17 million, respectively, to resolve U.S. probes into the hedge fund’s role in bribing officials in several African countries. That settlement led to a subsidiary of Och-Ziff pleading guilty to participating in a scheme to bribe officials in the Democratic Republic of Congo, in what prosecutors said marked the first U.S. foreign bribery case against a hedge fund. Mebiame was arrested in connection with what prosecutors said was his work as a “fixer” for a mining company owned by a joint venture between Och-Ziff and an entity incorporated in the Turks and Caicos Islands. While court papers do not identify the joint venture, its description matches one Och-Ziff formed with Palladino Holdings Ltd, an investment vehicle founded by South African businessman Walter Hennig.

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Petrobras ‘Carwash’ Probe Said to Bring $2.5 Billion Bribe Fine

U.S. and Brazilian authorities are set to impose $2.5 billion in foreign-corruption penalties on Odebrecht SA, Latin America’s biggest construction company, and an affiliate for violating anti-bribery laws, people familiar with the discussions said. Prosecutors say Odebrecht and the affiliate, Braskem SA, paid officials at Petroleo Brasileiro SA, the state-run oil producer known as Petrobras, to win contracts. Odebrecht and Braskem will plead guilty to charges involving the U.S. Foreign Corrupt Practices Act, three people said. A Swiss investigation of Odebrecht is also part of the settlement. “Odebrecht recognizes it participated in inappropriate practices,” the company said in a written statement on Thursday after a Bloomberg News report that more than 60 company executives were signing plea agreements in the case. “It was a grave mistake, a violation of our principles, an aggression to values of honesty and ethics. We won’t allow it to happen again.” Braskem said that it is in advanced talks with authorities from both the U.S. and Brazil regarding the probe and expects to sign a settlement agreement. In all, the penalties would set a record for a multi-country corruption settlement. The bulk of the fines will be paid to Brazil by Odebrecht, one of the people said. Braskem is expected to pay about $700 million, the person said. The previous record for anti-bribery penalties was imposed against Siemens AG, which in 2008 paid $800 million to the U.S. for FCPA violations and another $800 million to German authorities. The fines would be the first corporate penalties in the U.S. to come out of the nearly three-year investigation known as Operation Carwash, which initially focused on illicit payments made to executives at Petrobras. The probe then spread to other industries in Brazil, implicating construction companies, banks, shipyards and leading politicians from several parties. “This is a first crucial step in a coordinated course of action by the law enforcement authorities in Brazil, the USA and Switzerland,” the Swiss Attorney General’s Office said in an e-mailed statement. It added that it was “pleased to note that a settlement has been reached in Brazil in terms of which the Odebrecht Group acknowledges that there has been misconduct and has undertaken to pay over a billion of dollars in damages.”

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LITIGATION MATTERS

J&J questions fairness of hip implant trial, $1 billion verdict

Johnson & Johnson (JNJ.N) will challenge the fairness of a trial that produced a verdict of $1 billion in damages against the company last week over allegations of design flaws in its Pinnacle hip implant. Although legal experts think J&J faces an uphill battle, both they and investors believe the Texas jury’s penalty, the largest product liability verdict so far this year, is unlikely to stand. In the two-month trial, five separate people from California argued that design flaws in the metal-on-metal implant made by J&J subsidiary DePuy Orthopaedics caused tissue death, bone erosion and other injuries. It is the second large verdict against J&J in the Pinnacle implant litigation, which has been consolidated before U.S. District Court Judge Edward Kinkeade in Texas. In July, another jury awarded six Texas plaintiffs $500 million. Both cases were so-called bellwethers, intended to gauge the value of claims for more than 9,000 other pending implant cases. J&J said in a statement it was confident in its appeal prospects and would not settle. It also said it stood by the safety of its product. Last Thursday’s verdict has had little impact on J&J stock. Les Funtleyder, a portfolio manager with ESquared Asset Management, said investors assume large health products companies will occasionally be sued and lose and that the costs are ultimately manageable. J&J said it will ask Kinkeade to reduce or throw out the jury award before appealing to the 5th U.S. Circuit Court of Appeals in New Orleans. According to the company, the multi-plaintiff format stacked the deck against it by parading a series of victims in front of the jury and exaggerating the number of complaints about the implant. The company won the first bellwether trial in a case involving a single plaintiff in 2014. The next is scheduled for September 2017, and Kinkeade has not decided how many plaintiffs will be involved in that trial. These results “perfectly illustrate the distortions and confusion inherent in multi-plaintiff trials and underscore the extent of the legal errors that have been repeated,” said J&J defense lawyer John Beisner.

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Energy Future, senior creditors reach $800 million bankruptcy deal

Energy Future Holdings Corp and its senior creditors agreed to an $800 million deal aimed at bringing the owner of Texas’s largest network of power lines works out of Chapter 11 next year, according to a securities filing on Tuesday. The deal follows a federal appeals court ruling in November that found Dallas-based Energy Future was liable for paying hundreds of millions of dollars in early redemption premiums, or make-whole claims, to its first-lien and second-lien noteholders. In response, Energy Future rewrote its bankruptcy exit plan to shift the cost of the ruling to junior creditors by reducing their payouts. Under the terms of the settlement, Energy Future agreed to pay its first-lien noteholders 95 percent of their make-whole claims if junior creditors back the new bankruptcy plan, according to the filing. Double-digit interest continues to accrue on the make-wholes, and Energy Future estimated the first-lien claim to be worth $574 million if the company exited bankruptcy in April. The company agreed to pay second-lien noteholders 87.5 percent of their estimated make-whole claim of $244.6 million. Both noteholders will also collect fees and other payments worth around $50 million. Make-whole payments protect holders of high-yielding securities from losing potential interest if the debt is repaid before maturity. Energy Future refinanced most of the $6 billion in notes soon after filing for bankruptcy, although the company had argued Chapter 11 barred make-whole claims. The settlement does not have the support of holders of billions of dollars of unsecured notes, according to the filing. The company said these junior creditors had sought an additional $150 million of distributable value under the plan. They also proposed reducing the amount first-lien noteholders could collect on their make-whole claim to 93 percent and the amount second-liens could collect to 80 percent.

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CarMax Settles FTC Probe of Inspection Claims

Three major used auto retailers, including CarMax Inc., have agreed to settle federal charges that they allegedly promoted meticulous inspections while failing to disclose some vehicles under open recall for safety issues weren’t repaired. The Federal Trade Commission said they “touted how rigorously they inspect their used cars, yet failed to adequately disclose that some of the cars were subject to unrepaired safety recalls.” The agency proposed prohibiting the companies from making unqualified inspection or safety-related claims about their used vehicles if they are under any such recalls. The FTC filed complaints against CarMax, Georgia-based Asbury Automotive Group Inc. and West Herr Automotive Group, the largest auto group in New York, alleging they made claims of multipoint inspections by official team members. But some cars sold were under recall for issues that could cause serious injury, including the General Motors Inc. ignition switch defect and the Takata Corp. air bag inflator defect. Under proposed consent orders, the three retailers would be prohibited from claiming their used vehicles are safe, have been repaired for safety issues, or have been subject to an inspection for safety-related issues, “unless they are free of open recalls, or the companies clearly and conspicuously disclose that their vehicles may be subject to unrepaired recalls for safety issues and explain how consumers can determine whether a vehicle is subject to a recall for a safety issue that has not been repaired, and the claims are not otherwise misleading,” according to the FTC. The companies would also be required to inform recent customers, by mail, that vehicles they bought as far back as July 1, 2013, may be subject to open recalls. In a statement, CarMax said it isn’t paying any fines to the FTC and will modify some language about recalls in its advertising. “We share vehicle specific open recall information in-store and online to ensure our customers know about open recalls prior to purchase,” said CarMax Chief Operating Officer Cliff Wood. “We will continue to make enhancements to our comprehensive recall disclosure program.”

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CHINA MARKET

Hong Kong Regulators Create Team to Focus on Shell Companies

Hong Kong’s Securities and Futures Commission has established a team to investigate the creation and use of so-called shell companies, amid a focus on malfeasance and fraud by companies listed in the city. The team will probe suspected shells on the Growth Enterprise Market, the regulator wrote in a biannual report published Thursday. Firms listed on GEM, Hong Kong’s exchange for smaller companies, sometimes change hands soon after a public offering and are seen as targets for what’s known as backdoor listings, a way for a Chinese enterprise that does not want to go through the initial public offering process to get on the stock market. “We are seeking to prevent the creation and use of listed shells and have been conducting inquiries into possible shell companies,” the SFC said in its report. “Where we can prove that such activities are taking place, we will take appropriate action to address the problem.” Shell companies are one of several issues on Hong Kong’s public market that have caused concern among regulators, lawmakers and investors. Targeting shells will be part of a broader clampdown of behavior in the city that Tom Atkinson, head of enforcement at SFC, previously said has wiped HK$200 billion ($25.6 billion) in value from Hong Kong’s public companies. Wrongdoing by public companies has caused significant damage to the integrity and reputation of the city’s markets, the SFC report said. “By prioritizing resources on cases which pose the greatest risk to Hong Kong’s financial markets, the SFC’s approach echoes that already adopted by U.S. and European regulators, who are all seeking to achieve the maximum results from their relatively limited resources,” said Veronique Marquis, head of the financial services disputes and investigations team in Asia at the law firm Eversheds LLP. The initiatives come as Hong Kong has been stepping up efforts to improve scrutiny of its markets, and as mainland investors start to trade the city’s small-caps shares through the stock-trading link with Shenzhen that opened on Monday.

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China’s $8.6 billion P2P fraud trial starts: Xinhua

Criminal prosecution of 26 people involved in China’s biggest alleged online fraud – a nearly 60 billion yuan ($8.64 billion) case involving online peer-to-peer lender Ezubao – has started in Beijing, the official Xinhua news agency reported on Friday. Ten individuals, along with Ezubao’s parent companies Yucheng Holdings and Yucheng Global, are charged with fraudulent fund-raising, the news agency said. Sixteen other individuals face charges of illegally taking public deposits. Other charges include smuggling precious metals, illegal possession of weapons and undocumented border crossings, Xinhua said. Ezubao, once China’s biggest P2P lending platform, allegedly collected 59.8 billion yuan of funds from investors through fake investment projects it advertised on its web site and failed to repay 38 billion yuan. It collapsed in February, with executives saying the firm was “a complete Ponzi scheme”, which used investor funds to support lavish lifestyles for its executives. The alleged scam has put the spotlight on risks in China’s fast growing and loosely regulated wealth management product industry. The authorities have since August unveiled a slew of new regulations aimed at strengthening the online finance industry. More than 1,700 problematic P2P lending platforms will “have to exit” the market, a regulatory official said at the time. China’s peer-to-peer industry has boomed in recent years. Outstanding P2P loans jumped 153.5 percent to 956 billion yuan by the end of September, a record high, according to a report by domestic industry portal P2P001.

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China to tighten green car subsidy program following scandal

China will raise technical requirements for green energy cars to receive subsidies and make awards retroactive rather than at the time of purchase, as it tries to rein in widespread cheating by automakers uncovered earlier this year. China has spent heavily on its green car subsidies, $4.5 billion last year alone, to combat heavy pollution which affects large swathes of the country and as a means for the Chinese automotive industry to catch up to global competitors. The program helped quadruple sales of electric and plug-in hybrid cars in 2015 and fueled a 60 percent jump this year, but it also spurred fraud. Beijing has so far accused 5 automakers of breaking rules on green car subsidies and alluded to more violations by unnamed firms, while state media has reported the names of a further twenty. “(The cheating) has attracted a high degree of attention from all of society and even the international automotive industry with the State Council attaching great importance to demanding that acts of cheating be seriously investigated and dealt with,” the Ministry of Industry and Information Technology said in a statement on Wednesday. China will soon issue a policy making a variety of adjustments to the program, including setting upper limits on local and central subsidies, the ministry said, adding subsidies will be rewarded retroactively and the government will strengthen the application and inspection procedure. The ministry said it would particularly change requirements for coach buses and special-use vehicles. The Ministry of Finance announced results of a probe into subsidy cheating in September, with violations particularly prevalent among bus makers.

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HEALTHCARE INDUSTRY

Abbott Files Suit to Terminate $5.8 Billion Alere Purchase

Abbott Laboratories filed suit to terminate its $5.8 billion purchase of Alere Inc., citing setbacks since the deal was signed in January that it says have significantly eroded the value of the medical-test maker. The news sent Alere shares falling as much as 11 percent on Wednesday, and they were down 7.7 percent to $36.79 at 1:26 p.m. in New York. Alere called the lawsuit “entirely without merit,” and said in a statement that it has complied with all of the terms under the merger. Shares of Abbott Park, Illinois-based Abbott fell less than 1 percent to $38.20. The lawsuit is the latest twist in an acquisition that’s been troubled almost from the start. In February, Alere disclosed a delay in filing its financial results with securities regulators because of revenue recognition problems in China and Africa. That marked the beginning of a drumbeat of bad news as the company said it received subpoenas from the U.S. regarding bribery investigations and billing practices, restated earnings, pulled a product off the market and had its diabetes division excluded from the Medicare health insurance program after billing for patients who had already died. The complaint, filed under seal Wednesdayin Delaware Chancery Court, claims that Abbott has the right to terminate the transaction because the setbacks’ cumulative effect constitutes a material change in Alere’s prospects. A redacted copy of the suit will be available later this month under the court’s rules. “Alere is no longer the company Abbott agreed to buy 10 months ago,” Abbott spokesman Scott Stoffel said in a statement. “These numerous negative developments are unprecedented and are not isolated incidents brought on by chance.” While Alere acknowledged challenges, the Waltham, Massachusetts-based company saidWednesday that setbacks this year didn’t constitute a material change and insisted that the deal would close as originally agreed. “As Abbott well knows, none of the issues it has raised provides it with any grounds to avoid closing the merger,” Alere said in a statement. “Alere will take all actions necessary to protect its shareholders and to compel Abbott to complete the transaction in accordance with its terms.” If Abbott prevails in a court battle, it would be the first time material changes at a target company have led to the involuntary termination of a deal in Delaware court, according to Kai Liekefett, an attorney who has worked on similar cases at Vinson & Elkins LLP and isn’t involved in the conflict between Alere and Abbott. “It looks like they have a number of issues here that, taken together, could very well constitute a material adverse effect,” Liekefett said in a telephone interview. “It would not surprise me if a Delaware court would find a material adverse effect in this instance. In fact, I find it more likely than not. If ever I wanted to exit a deal, I would hope for facts like these.”

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Who can challenge FDA label decisions? Not plaintiffs’ firm with drug
cases – 3rd Circuit

The Philadelphia plaintiffs’ firm Sheller is at the center of a novel case that raises a rather disturbing prospect: Does anyone have legal standing to challenge FDA decisions based on citizen petitions? Sheller represents hundreds of children who claim to have suffered grievous side effects from the Johnson & Johnson antipsychotic Risperdal. Among those ill consequences, according to dozens of suits Sheller has filed in Pennsylvania and California state courts, is the development of abnormally large breasts in young men. The breast tissue does not shrink after patients stop using Risperdal, the suits allege, so the abnormal enlargement can only be reversed through surgery. In 2012, after obtaining Risperdal documents through discovery, the Sheller firm filed a citizen’s petition with the Food and Drug Administration. The petition asked the FDA either to revoke approval for Risperdal’s use in children and adolescents or to require Risperdal labels to include a black-box warning about the drug’s alleged side effects in young people. The plaintiffs’ firm also asked the FDA to review the drugmaker’s Risperdal files. (Sheller could not provide discovery documents to the government because the materials were subject to a confidentiality provision.) The FDA denied Sheller’s requests for a ban or a black-box warning in 2014, after Johnson & Johnson responded to a government demand for all of its previously unproduced data on Risperdal and children. Sheller sued the Department of Health and Human Services, challenging the FDA’s decision not to revise its warnings about Risperdal or to take the drug off the market for young patients. U.S. District Judge Legrome Davis of Philadelphia found that Sheller did not have standing to bring the challenge. Sheller had argued that as a result of the FDA’s decision, J&J was able to present stronger arguments that plaintiffs’ claims in the firm’s ongoing personal injury cases were pre-empted by the federal government’s labeling of Risperdal. Countering those beefed-up pre-emption arguments in contingency fee litigation, Sheller said, costs the firm money – an economic injury that confers standing. The judge said Sheller’s theory was fundamentally flawed because the causation chain included J&J. “That a third party – plaintiff’s adversaries in the Risperdal drug cases – has ostensibly caused and would need to rectify plaintiff’s injury undermines plaintiff’s position as to both causation and redressibility in its suit against the FDA,” the judge said.

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Texas Hospital Leaders Face Bribery Charges

Leaders of Dallas’s Forest Park Medical Center face criminal charges after federal prosecutors said they paid roughly $40 million worth of bribes and kickbacks to health-care professionals who agreed to send patients to the high-end hospital. A federal grand jury indicted Forest Park Medical executives of paying surgeons, primary-care doctors, chiropractors and others for patient referrals. Prosecutors say the bribes also included sporting event tickets, custom cowboy boots, free carwashes and deals on medical office building space, according to the newly unsealed 44-page document filed in U.S. District Court in Dallas. Prosecutors said the bribes brought business into Forest Park Medical Center, enabling it to bill medical insurers and government-administered health-care programs like Medicare for more than $500 million between the facility’s 2009 opening and 2013, according to the indictment. “Massive, multi-faceted schemes such as this one, built on illegal financial relationships, drive up the cost of healthcare for everyone and must be stopped,” U.S. Attorney John Parker said Thursday in a statement. After years of declining revenue, the hospital shut down in October 2015. It was sold out of bankruptcy to another hospital operator earlier this year. The criminal charges were filed against 21 people, including Chief Operating Officer Alan Andrew Beauchamp and anesthesiologist Richard Ferdinand Toussaint Jr., who led the hospital’s board of directors. Both men founded the hospital with other investors, court papers say. Mr. Beauchamp pleaded not guilty on Thursday, court records show. His lawyer said that his client was “shocked and surprised” at the government’s decision to pursue the criminal charges because the hospital had already reached a civil settlement in January 2015 and agreed to pay $215,000.

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Walgreens, Rite Aid Find Unlikely Buyer for 865 Stores

Walgreens Boots Alliance Inc. and Rite Aid Corp. moved a step closer to consummating a $9.4 billion merger that would leave the U.S. dominated by two retail pharmacy chains. Under pressure from antitrust regulators, the merger partners said Tuesday they agreed to sell 865 Rite Aid locations, leaving the proposed combination with just under 12,000 stores. The buyer? A regional chain called Fred’s Inc., which had just $5.7 million in cash and has been losing money and closing stores. Fred’s has secured $1.65 billion in borrowings to fund the all-cash, $950 million purchase plus ongoing operating costs. It has pledged nearly all its assets as collateral for the loans, including prescription files, real estate and furnishings, according to a regulatory filing. Bank of America Merrill Lynch, which advised Walgreens on the transaction, is also one of the banks leading the financing package for Fred’s. The transaction would more than double the company’s size. Fred’s had 650 stores as of October 29—about half had pharmacies—and had a market cap of about $400 million before the deal was announced. “We got a very good price on these stores,” said Fred’s finance chief Rick Hans. Fred’s shares surged 85 percent to $20.75 in Tuesday afternoon trading. Analysts at Leerlink Partners said the company was getting a good price for the stores it is purchasing, noting Fred’s is paying about seven times earnings before interest taxes and depreciation. Leerlink estimated the stores average about $5.5 million in annual sales apiece. The transaction would give the Memphis-based company a broader reach but it would still be dwarfed by the Walgreens-Rite Aid as well as CVS Health Inc., which has 9,600 pharmacies. Fred’s is also up against giants like Wal-Mart Stores Inc. and Kroger Co., which operate pharmacies in most of their locations.

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Former Insys CEO Arrested in Opioid Prescription Kickback Case

Six former executives and managers at Insys Therapeutics Inc. were arrested on Thursday and charged with conspiring to defraud health insurers and bribe doctors in exchange for prescribing the company’s fentanyl painkiller, Subsys, the Justice Department said. Among those arrested were former Chief Executive Michael Babich, who resigned from the company in November 2015. Mr. Babich, 40 years old, was charged with conspiracy to commit racketeering, conspiracy to commit wire and mail fraud, and conspiracy to violate the anti-kickback law. The racketeering, wire fraud and mail fraud charges each carry penalties of up to 20 years in prison, in addition to fines and supervised release, the government said. Violation of the anti-kickback statute carries up to five years in prison. Before resigning last year, Mr. Babich had helped oversee the company’s early success, which included its stock becoming the best-performing initial public offering of 2013. He sold $30.6 million in Insys stock during his tenure as CEO, according to Thomson Reuters data. In addition, he was paid more than $10 million in accelerated stock options and cash as part of his severance from the company in 2015, according to Insys regulatory filings. Mr. Babich didn’t immediately respond to a request for comment. His attorney said he intends to plead not guilty. In a statement, Insys said the arrests on Thursday related to previously disclosed investigations and that the company “continues to cooperate with all relevant authorities in its ongoing investigations and is committed to complying with laws and regulations that govern our products and business practices.” Thursday’s arrests were the latest to result from ongoing investigations into Insys, a once-highflying pharmaceuticals company based in Chandler, Ariz., that has struggled over the past year amid increasing scrutiny by prosecutors and regulators.

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SEC REGULATORY ACTIONS

Company Settles Charges in Whistleblower Retaliation Case

The Securities and Exchange Commission today announced that an oil-and-gas company has agreed to settle charges that it used illegal separation agreements and retaliated against a whistleblower who expressed concerns internally about how its reserves were being calculated. The SEC’s order finds that Oklahoma City-based SandRidge Energy Inc. conducted multiple reviews of its separation agreements after a new whistleblower protection rule became effective in August 2011, yet continued to regularly use restrictive language that prohibited outgoing employees from participating in any government investigation or disclosing information potentially harmful or embarrassing to the company. The SEC’s order further finds that SandRidge fired an internal whistleblower who kept raising concerns about the process used by SandRidge to calculate its publicly reported oil-and-gas reserves. The employee had been offered a promotion, which was turned down. Just months later, senior management concluded the employee was disruptive and could be replaced with someone “who could do the work without creating all the internal strife.” The company had conducted no substantial investigation of the whistleblower’s concerns and only initiated an internal audit that was never completed. The employee’s separation agreement also contained the company’s prohibitive language that violated the whistleblower protection rule. “Ignoring a rule that protects communications between outgoing employees and the SEC, SandRidge flatly prohibited such contact in their separation agreements and at the same time retaliated against an employee who raised concerns about the company to its management,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office. Jane Norberg, Chief of the SEC’s Office of the Whistleblower, added, “Whistleblowers who step forward and raise concerns internally to their companies about potential securities law violations should be protected from retaliation regardless of whether they have filed a complaint with the SEC. This is the first time a company is being charged for retaliating against an internal whistleblower, and the second enforcement action this week against a company for impeding employees from communicating with the SEC.”

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SEC Charges Gatekeepers in Microcap Frauds

The Securities and Exchange Commission today barred several market participants from the penny stock industry for their roles in various sham initial public offerings (IPOs) of microcap stocks that defrauded investors. In one case, Newport Beach, Calif.-based securities lawyer Michael J. Muellerleile authored false and misleading registration statements used in sham IPOs for five microcap issuers in order to transfer unrestricted shares of penny stocks to offshore market participants. Muellerleile’s law firm M2 Law Professional Corp. also is charged along with Lan Phuong Nguyen, an attorney who assisted Muellerleile by signing false and misleading attorney opinion letters, and Joel Felix, the CFO of one of the issuers, for making false and misleading statements. The SEC today suspended trading in that issuer, American Energy Development Corp. In another case, Nevada-based stock transfer agent Empire Stock Transfer and its supervisor of operations Matthew J. Blevins transferred large blocks of several penny stock securities without restrictions to offshore nominees despite red flags indicating the shares were likely part of an illegal operation. The SEC previously charged several offshore entities behind the illegal sales of unregistered penny stocks made possible by Empire Stock Transfer and Blevins. “These enforcement actions bar any further penny stock activity by these market participants, including attorneys and a transfer agent supervisor who betrayed the trust that investors place in gatekeepers to protect them in this highly risky market,” said Stephanie Avakian, Deputy Director of the SEC’s Enforcement Division. “The SEC is committed to combating microcap fraud through the investigative work of its Microcap Fraud Task Force, the initiatives of its Microcap Fraud Working Group, and repeated warnings to investors about the red flags of penny stock investing.” All of the market participants named in today’s cases have agreed to settle the charges without admitting or denying the SEC’s findings.

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SEC Files Charges in $26 Million Stock Manipulation Scheme

The Securities and Exchange Commission today charged two New Jersey-based traders with manipulating more than 2,000 NYSE- and NASDAQ-traded stocks and reaping more than $26 million in profits from their successful trades. The SEC alleges that Joseph Taub and Elazar Shmalo utilized dozens of accounts at various brokerage firms to carry out their scheme undetected, typically using two at a time to engage in a flurry of manipulative trading activity that usually lasted less than five minutes. According to the SEC’s complaint, they would use one account to buy a position in a stock, and then use a second account to place a series of small buy orders to walk up the price for the first account to sell its larger position into the market at an artificially high price for significant profits. In some instances before the first account purchased its position in a stock, they had the second account place a series of smaller sell orders to drive down the price of the stock, allowing the first account to buy its larger position in that stock at the artificially lowered price. “As alleged in our complaint, Taub and Shmalo schemed dozens of times per trading day to artificially move stock prices for their personal benefit,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Taub and Shmalo. The SEC’s complaint filed in federal court in Newark, N.J., charges Taub and Shmalo with violating and aiding and abetting violations of the antifraud provisions of the securities laws. The complaint seeks a permanent injunction as well as the return of ill-gotten gains plus interest and penalties. The SEC’s continuing investigation is being conducted by Michael Ellis, Janna Berke, and Wendy Tepperman in the New York office. Assisting the investigation are Artur Minkin, Jonathan Hershaff, and Scott Walster in the SEC’s Division of Economic and Risk Analysis and Jim Flynn in the New York office. The litigation will be led by Jack Kaufman, Ms. Berke, and Mr. Ellis, and the case is being supervised by Lara Shalov Mehraban. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

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