Forensic News February 2015
Financial/Accounting Fraud
U.S. bank exec ‘cooked the books’ to hide bad loans: prosecutor
The former chief operating officer of a major Chinese-American bank in San Francisco knowingly “cooked the books” in an effort to conceal deteriorating loans at the height of the 2008 financial crisis, a U.S. prosecutor said in court. Opening statements began in a securities fraud trial against former United Commercial Bank executive Ebrahim Shabudin, a rare criminal prosecution connected to the government’s bank bailout program. UCB received $298.7 million from the Troubled Asset Relief Program during the financial meltdown. The ninth-largest bank to fail during the crisis, UCB catered to California’s Asian community and expanded rapidly before regulators closed it in 2009. Its operations were eventually taken over by East West Bancorp Inc. In an Oakland, California federal court, assistant U.S. attorney Adam Reeves said Shabudin “deliberately chose the wrong road” by hiding from auditors the plummeting value of the collateral which secured the bank’s biggest loans. However, Shabudin attorney James Lassart argued that the COO had wide ranging responsibilities at the bank and was “totally reliant” on other executives to handle the details of loan accounting. Lassart also suggested that the government’s TARP loans to UCB were driving the decision to pursue a case against Shabudin. “I would think that would lead to some embarrassing feelings,” Lassart said. UCB ex-chief executive Thomas Wu faces a civil lawsuit brought by securities regulators, but he was not criminally charged. During the government’s opening statement, Reeves said Shabudin acted to please the “often despotic” Wu and was the one senior executive who could have stood up to boss. Reeves did not explain why Wu was not charged. Last month U.S. District Judge Jeffrey White ruled that Shabudin’s attorneys could not raise questions before the jury about why Wu was not prosecuted as well. Two former UCB executives pleaded guilty and will testify in the hopes of receiving a reduced sentence, Reeves said, and the government has agreed not to charge two other former bank officials who are also set to take the stand. Shabudin settled claims brought by the SEC without admitting wrongdoing, and agreed to pay a $175,000 civil penalty in 2013.
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JPMorgan’s new approach to probing suspect transactions sparks internal friction
Clashes over strategy within JPMorgan Chase & Co’s compliance operations have led to the departure of a series of managers in the past year, according to three of those who have left. Faced with intense scrutiny after regulators found failings in its anti-money laundering (AML) program, and rising costs as it seeks to identify suspicious transactions, the biggest U.S. bank has invested in new automated systems and installed executives skilled in making bank operations more efficient. The moves are being watched closely by the rest of Wall Street and could be adopted more widely if JPMorgan is successful in keeping compliance costs under control. A senior executive in an AML role at a rival bank said that provided there isn’t a backlash from regulators over the new approach, it will be taken up elsewhere: “We’d all copy it.” But it has created friction with some current and former JPMorgan managers who have more of a traditional law enforcement background and are used to doing their own in-depth probes of transactions. They claim the bank is emphasizing quantity over quality in its investigations. One of the most senior of them, former U.S. Department of Homeland Security investigations official Jerry Robinette, quit last July, saying in a resignation letter to JPMorgan that he had done so to “protect my professional reputation.” He warned that the bank may be failing to satisfy regulators and sent a copy of the letter to the Office of the Comptroller of the Currency (OCC), the lead regulator for JPMorgan’s consumer and commercial bank. At least 30 of around 50 managers of the bank’s anti-money laundering investigations group have left in the past year or are due to leave, according to the three who have left and a Reuters analysis of various documents, including LinkedIn profiles. Some like Robinette are unhappy, while others are leaving because JPMorgan has closed offices, the former employees said. Those leaving include a half-dozen directors on the same level as Robinette and more than two dozen other managers who were on the tier below. A senior compliance official at a rival bank called it the most severe “bloodletting” of AML executives the industry has seen.
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Fraud, organized crime costing Africa billions per year: study
Africa loses at least $50 billion a year to illicit practices like tax fraud, corruption and organized crime, a worrying situation that is hurting the continent’s economies, a UN-mandated study group warned. Illicit financial flows – which range from international corporations dodging taxes to the trafficking of weapons and minerals – are a barrier to creating jobs on the world’s poorest continent, according to the group headed by ex-South African president Thabo Mbeki. “Large commercial corporations are by far the biggest culprits of illicit outflows, followed by organized crime,” said Mbeki in the report commissioned by the United Nations and African Union to study illicit cash flows. “We are also convinced that corrupt practices in Africa are facilitating these outflows.” Whatever the source of these illicit transfers of wealth, the impact on Africa is overwhelmingly negative and in need of a crackdown from customs, tax, business and anti-corruption authorities, the group said. “Their (African) economies do not benefit from the multiplier effects of the domestic use of such resources, whether for consumption or investment,” the group said in its report. “Such lost opportunities impact negatively on growth and ultimately on job creation in Africa.” African economies have been growing steadily at about five percent each year but still far below the double digit booms that have propelled economic leaps in India and China. The West, watchdogs say, plays a major role in this drain on Africa’s resources. “It is important to note that this isn’t just an African problem, much of the money that leaves Africa illicitly by way of corporate tax evasion or corruption ends up in banks within Europe and the United States”, said Henry Malumo, a coordinator at anti-poverty group Action Aid International.
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California leaders announce investigation into missing bond funds
California officials and lawmakers said they will hold legislative hearings following allegations of embezzlement of $1.3 million in bond funds held by a Bay Area government financing entity. State Treasurer John Chiang and Senate President Pro Tempore Kevin de León said they would conduct legislative oversight hearings to ensure that government bonds were safe from fraud, abuse, and mismanagement. The hearings follow the disappearance of nearly $1.3 million of bond funds held by the Association of Bay Area Government (ABAG), an organization that issues bonds for local governments, nonprofits and private entities, the Treasurer’s office said. The missing money was earmarked for infrastructure improvements in downtown San Francisco and was controlled by ABAG’s Finance Authority for Nonprofits (FAN), a separate entity from ABAG but whose workers are ABAG employees. Clarke Howatt, who resigned as FAN’s financial services director, appeared to have “executed a sophisticated scheme to defraud the agency by creating illegitimate documents, creating false identities, and deceiving the FAN board and bank trustees to wire these funds,” ABAG said in a January 30 statement. State Controller Betty Yee said that her office would conduct an audit of ABAG following the theft allegations, which her office described as “a sophisticated scheme involving illegitimate documents, false identities and deception of the finance authority’s board and bank trustees.” ABAG’s Deputy Executive Director Brad Paul said the association would work with investigators. “We want to learn as much as we can from a forensic audit,” Paul told Reuters. “FAN is financially siloed from every other ABAG program. Mr. Howatt did not have access to any other money at this agency.” California and its local governments issued more than $700 billion in public debt over the last decade, the state treasurer’s office reported. “The ease in which one of ABAG’s leaders allegedly fleeced more than a million dollars in bond funds raises concerns regarding whether there are sufficient safeguards at the thousands of State and local agencies which are responsible for nearly three-quarters of a trillion bond dollars,” said Chiang in a statement. Senator Bob Hertzberg (D-Van Nuys), chairman of the Senate Committee on Governance and Finance, will lead the legislative hearings, focused on finding problems and solutions to avoid abuse and waste.
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France ends investigation of HSBC’s Swiss bank, eyes first trial
A French investigation into HSBC’s Swiss private bank over a suspected tax-dodging scheme for wealthy customers has ended, bringing it a step closer to a possible trial, a judicial source said. HSBC last week admitted failings in compliance and controls in the Swiss unit and faces investigation by U.S. authorities and an inquiry by British lawmakers after reports that it helped customers conceal millions of dollars of assets in a period up to 2007. French magistrates put HSBC Private Bank under formal investigation in November. They ended their inquiries on February 12, the source said, adding that prosecutors had three months to request that the bank be sent to trial to answer charges. The alleged fraud involves some 3,000 French taxpayers. Cases against specific clients of the Swiss bank are already in progress with 62 cases in the works, according to the daily Le Monde. The tax fraud trial of the heiress of the Nina Ricci perfume fortune opened in Paris, one of the first people to be tried in France since a list of thousands of clients alleged to have evaded taxes through HSBC’s Swiss private bank became public. Arlette Ricci is suspected of hiding more than $22 million from French tax authorities via a bank account kept by HSBC’s Swiss arm. She is on trial for tax fraud, money laundering and the crime of fraudulent bankruptcy to avoid tax. Ricci, 73, who denies the charges, could face up to five years in prison and a 75,000 euro fine. Also on trial are her daughter and accountant. A separate French investigation into the bank’s parent company is continuing.
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Fake companies, fake workers: State battling new type of unemployment fraud
More than a quarter million people in North Carolina are unemployed, and many turn to the state to help them get through until another job comes along. But not everyone who files a claim has good intentions. The state Division of Employment Security says it is battling a new type of unemployment fraud, one that involves fake businesses, fake workers and false claims of unemployment. During its latest investigation, which spanned 18 months, the division identified 105 fake employers statewide and 672 fake unemployment claims filed by people who allegedly worked for the bogus companies. The state stopped $5.2 million in payments. “We’ve set up these filters so that we can catch these people on the front end instead of paying it out and chasing it down,” said Dale Folwell, assistant secretary of the Division of Employment Security. “We owe it to those employers who are doing it the right way to be the fiduciaries and the stewards of not only their money but also the process.” The state red-flagged a company, BH Hauling, that tried to register using the address of a vacant lot on Poole Road in Raleigh. The state flagged another company on West Morgan Street in Raleigh that was supposed to be Hall Trucking Service. In reality, it’s a shelter for troubled youth. In that case, the state was able to stop the fraud before it happened, but that’s not always the case. One example is Optimum Touch Lawn Care Services in Charlotte . It registered with the state, got a state tax ID and used a popular business web site to claim the company had 26 employees with an annual revenue of $910,000. Not long after registering with the state, Optimum reported “layoffs.” The unemployment claims came in, and the state paid out $194,000 in fraudulent unemployment claims. State unemployment leaders say the fake company’s two owners filed the claims using their own names and stole the identities of others to cash in on the scheme. The owners, Letitia and Michael Johnson, pleaded guilty in federal court late last year. “It’s not just enough to stop money from going out. Money that has gone out, we need to make sure those people are prosecuted to the fullest extent of the law,” Folwell said. Folwell says anti-fraud efforts are part of the agency’s larger goal of eliminating debt. Before Gov. Pat McCrory took office, DES faced a $2.5 billion debt to the federal government. Lawmakers made the controversial move to reduce the amount and length of benefits. Since that time, the debt has dropped to about $400 million. Folwell says once the debt is paid off this summer, the rate businesses must pay will drop. During the latest crackdown, the division realized it paid out $2.7 million in claims linked to fake businesses, money the state is now trying to get back. That angers business owners like Margaret Haga, who runs H & H Shoe Repair & Pedorthic Facility in Cameron Village in Raleigh. For more than 30 years, Haga said, her business has paid unemployment insurance on behalf of her employees, not realizing fake businesses would try to steal from the system. “It’s taxpayer money,” she said. “People who lose their jobs, it’s important that there’s something to give them a hand up … When I think about being a small business and paying into that and the money not going where it’s supposed to, it’s very, very disappointing.” North Carolina has more than 200,000 employers who pay into the unemployment system. The fake business didn’t pay a dime but found a weakness in the system to take taxpayer dollars. State leaders say, with new technology and tactics, the fake employer schemes are a thing of the past in North Carolina.
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Canada’s top securities regulator mulls whistleblower program
Canada’s most prominent securities regulator said on it is looking at launching a whistleblower program that would pay up to C$1.5 million ($1.21 million) to tipsters who help it snare those breaking securities laws. The Ontario Securities Commission (OSC) proposal, the first of its kind in Canada, comes after the U.S. Securities and Exchange Commission (OSC) awarded $30 million last September to an unnamed whistleblower who helped the regulator in a fraud case. The OSC, the largest of Canada’s 10 provincial securities regulators, said it had begun seeking input on the proposal from investors, lawyers and market participants. Under the program, an employee or individual providing original and high quality information could receive up to 15 percent of the money collected by the regulator in settlements or sanctions. Payouts would be capped at C$1.5 million. They will only be made upon final completion of a case, and only in those cases where monetary penalties exceed C$1 million. The regulator said it would also work to prevent retaliation against Canadian whistleblowers, who lack the tough legal protections available in the United States. The OSC said it would use all reasonable efforts to keep a whistleblower’s identity confidential and may ask for changes to Ontario’s Securities Act to include anti-retaliation provisions. “We have proposed a realistic and concrete program that, in our view, needs to be put into action for the benefit of Ontario investors,” OSC Chairman Howard Wetston said in a statement.
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As CEOs seek tax cuts, US senator slams corporate tax haven use
U.S. Senator Bernie Sanders lashed out at widespread use of offshore tax havens by U.S. companies, and the liberal independent targeted a group that represents CEOs of big corporations and wants corporate taxes lowered. Sanders, top opposition member on the U.S. Senate Budget Committee, released a report decrying what he called “legalized tax fraud.” It showed that 111 of the 201 member companies of the Business Roundtable are sheltering more than $1 trillion in profits overseas, where they are not subject to U.S. taxes. Using the Cayman Islands, Bermuda and other tax havens, these companies have saved more than $280 billion in tax liabilities, Sanders concluded in the report. The senator from Vermont delivered his broadside a day ahead of a media event the Business Roundtable scheduled at its Washington office. The group was expected to call again for a rewrite of the U.S. tax code including a lower corporate income tax rate. Sanders said Business Roundtable companies account for roughly half of an estimated $2 trillion in profits held overseas by U.S. companies under a loophole that lets them defer taxation on profits from overseas subsidiaries. The “last thing” Congress should do is provide more tax breaks to such profitable businesses, Sanders said. “Instead of sheltering profits in the Cayman Islands and other offshore tax havens, the largest corporations in this country must pay their fair share of taxes so that our country has the revenue we need to rebuild America and reduce the deficit,” Sanders said in a statement. Many business groups have sought a “repatriation holiday” that would allow them to bring home overseas profits at a reduced tax rate. The senator’s report relies heavily on data compiled in June 2014 by Citizens for Tax Justice, a left-leaning activist group, and U.S. Public Interest Research Group, a consumer advocacy group that says it “stands up to powerful special interests.” The report said the data comes from Securities and Exchange Commission filings compared with offshore subsidiaries listed in a 2008 Government Accountability Office report on tax havens. Among Business Roundtable members listed in the report with large amounts of profits held abroad were General Electric Co with $110 billion, Pfizer Inc with $69 billion and IBM Corp with $52.3 billion.
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Fraudulent smartphone payments are becoming a pricey problem
After years of false starts, mobile payments are beginning to live up to the hype. They accounted for $52 billion worth of U.S. transactions last year, up from $32 billion in 2013, and are expected to rise to $67 billion this year, according to analyst Forrester Research. From Uber to Starbucks, startups and old-school retailers alike see the benefits of letting customers leave their credit cards in their wallets or even at home. Where the money goes, criminals follow. Mobile devices now make up a disproportionate share of the $6 billion that fraud costs merchants and card issuers in the U.S. each year. While mobile payments account for 14 percent of transactions among merchants who accept them, they make up 21 percent of fraud cases, according to a survey of about 1,100 companies published on January 26 by LexisNexis Risk Solutions. “We certainly see a surge in mobile payment attacks,” says Tomer Barel, chief risk officer at PayPal, who says his company deals with more cases of fraud on mobile devices than on PCs. “There are many more avenues for fraudsters to try.” The typical case begins with the hack of a trove of credit card data from a big company (think Target or Home Depot). Hackers sell the stolen cards on a black-market web site, and buyers use their phones to rack up as many purchases on each card as they can online, through apps, or in stores before someone notices. The Federal Trade Commission is also pursuing scammers who obtain people’s credit card numbers using standard phishing schemes, sending e-mails or texts with links to phony web sites. Each dollar worth of misbegotten mobile payments winds up costing a fooled merchant $3.34. That’s slightly more than the cost of a fraudulent credit card swipe or mail order, 27 percent more than a similar payment made from a PC. Along with the cost of lost merchandise, the total includes investigation of the fraud. That’s tougher on phones than on PCs, because many businesses aren’t equipped to track mobile devices’ unique identifiers such as IP addresses. Stores often don’t catch when a card issued in Los Angeles is used for a mobile order from Mexico, says Aaron Press, director of e-commerce and payments at LexisNexis Risk Solutions. “It’s kind of a wake-up call,” he says. Some mobile fraud remains low-tech. Last year, the Better Business Bureau warned consumers about a scam in which people posted absurdly cheap offers for used cars online, then tricked interested buyers into wiring funds through a phony version of Google Wallet. Other frauds are more technical, such as the hackers who found a bug in a Chilean public transportation app that let them top off their travel credits for free. Like the brief flurry of duplicate charges that accompanied Apple Pay’s debut in October, such glitches highlight the vulnerability inherent in a system that requires banks, card networks, and software makers to keep pace with thieves. “If you don’t make the proper investment, they’ll be attracted to the weakest link,” says PayPal’s Barel. Smartphone operating systems, at least, are tougher to infiltrate than those of PCs. Phones with biometric sensors can also make a person’s identity tougher to steal. Mobile payment service LoopPay says it’s adding support for biometric features such as Apple’s fingerprint reader, despite hackers’ claims that they can fool the iPhone’s sensor.
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North Carolina Man Charged for Making $2.3 Million Fraudulent Claim to Deepwater Horizon Spill Compensation Fund
A North Carolina resident was arrested for allegedly making a fraudulent claim on the fund set up to compensate victims of the 2010 Deepwater Horizon oil spill, announced Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division. Michael R. Rosella, 45, of Wilmington, North Carolina, was arrested in connection with an indictment. The indictment by a grand jury in the District of Columbia charges Rosella with one count of mail fraud, three counts of wire fraud and two counts of money laundering. According to allegations in the indictment, Rosella, who lived in the District of Columbia in 2010, submitted a claim for compensation in the amount of $2.3 million to the Gulf Coast Claims Facility (GCCF), the entity that formerly handled claims for persons and businesses injured by the Deepwater Horizon oil spill. Rosella allegedly submitted the claim on behalf of a fictitious entity called the Bayou Barataria Sportsmen’s Resort, which Rosella allegedly represented to have been a successful hotel and sport fishing business in Louisiana immediately before the spill, and to have suffered lost profits due to the spill’s impact on the Gulf of Mexico. The documents submitted by Rosella allegedly included false affidavits of the Resort’s “owners,” federal tax filings, state sales tax records, financial statements, and invoices. The charges contained in an indictment are merely accusations, and a defendant is presumed innocent unless and until proven guilty.
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Foreign Corrupt Practices Act (FCPA)
SNC Charged With Corruption, Fraud in Qaddafi-Era Libya Case
SNC-Lavalin Group Inc. was charged with attempted bribery and fraud related to construction projects in Libya as Canada cast a wider net in a corruption probe that already had ensnared former executives. The shares slid the most in three months after the Royal Canadian Mounted Police said SNC and two units were charged with one count of corruption and one count of fraud. SNC, Canada’s largest construction and engineering company, vowed to “vigorously defend itself,” saying that the case involves former employees who left “long ago.” The charges complicate SNC’s attempts to distance itself from a scandal over improper payments that led to the departure of Chief Executive Officer Pierre Duhaime three years ago. Since then, several former executives have been charged individually in Canada and Switzerland, while SNC and more than 100 of its units were barred for 10 years from World Bank projects after “misconduct” in relation to bridge work in Bangladesh. “The market will treat the information as yet another cloud over the company’s head,” Maxim Sytchev, an analyst at Dundee Securities in Toronto, said in a note to clients. Charges and a possible settlement “is a process that will take time and something that SNC does not control,” he said. SNC fell 7 percent to C$40.63 at the close in Toronto, the biggest daily decline since November 6. Earlier the stock tumbled as much as 8.8 percent, the most intraday since February 2012, when the company disclosed the probe into incorrectly booked expenses. Any penalties for less than C$300 million ($240 million) would be viewed positively by investors, Sytchev said. NC and two of its units offered to bribe “one or several” Libyan officials “in order to obtain or retain an advantage in the course of business” between 2001 and 2011, the RCMP said in a statement. The attempts involved at least C$47.7 million, the police agency said. The fraud charge involved a value of about $C130 million, the RCMP said. The company spent years trying to win business in North Africa before a rebellion ousted dictator Muammar Qaddafi in 2011. Libyan projects on SNC’s books at the time of Qaddafi’s ouster included an airport, a prison and a water line network known as the Great Man-Made River, according to the company’s 2010 annual report.
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New York assembly ex-speaker Silver indicted on corruption charges
A grand jury indicted Sheldon Silver, the former New York State Assembly speaker and one of the most powerful state politicians for two decades, on federal corruption charges, federal prosecutors said. Silver, who has resigned as speaker but remains the assemblyman for Manhattan’s Lower East Side, was indicted on one count of honest services mail fraud, one count of honest services wire fraud and one count of using his office for extortion. Silver was originally charged with five counts relating to bribery and kickback schemes on January 22 and it was not immediately clear why two of the counts appear to have been dropped. Silver had long listed New York personal injury firm Weitz & Luxenberg on his financial disclosure forms as a source of income for representing its clients in cases. A licensed lawyer, Silver is accused of wrongly earning more than $3 million for referring asbestos sufferers from a doctor whose research had been secretly provided $500,000 in state funds at Silver’s direction, as well as other benefits. Prosecutors said Silver also received $700,000 in kickbacks by steering real-estate developers with business before the legislature to another law firm, identified by its defense lawyer as Goldberg & Iryami.
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Brazil prosecutors sue Petrobras suppliers for $1.6 billion on fraud
Brazilian prosecutors filed lawsuits against six construction and engineering groups, seeking 4.47 billion reais ($1.55 billion) in damages in connection with a contract-fixing, bribery and political kickback scandal at state-run oil company Petrobras. The five lawsuits, filed in federal court in Brasilia, are against Camargo Corrêa SA, the Brazil unit of Japan’s Sanko Co; Mendes Junior Engenharia SA; OAS SA; Galvão Engenharia SA; and Engevix Engenharia SA, the federal public prosecutor’s office, known as MPF, said in a statement. The lawsuits also name 13 of these companies’ subsidiaries and 28 of their executives as defendants. All the companies except Sanko are Brazilian. Camargo Corrêa and Sanko are being sued together, the rest of the construction and engineering groups are being sued individually. The lawsuits seek to recover 319 million reais in lost state funds and 3.19 billion reais in damages and to impose a civil penalty of 959 million reais. The cases stem from what criminal prosecutors say was a scheme where the construction companies and their executives conspired with Petrobras executives to overcharge for contracts. Much of the excess was then kicked back to Petrobras executives, politicians and political parties as bribes and illegal campaign contributions. During criminal investigations, prosecutors showed that 16 construction and engineering companies had formed a cartel “allowing them to defraud the public auction process related to some of the projects tendered by Petrobras between 2004 and 2014, increasing the profits of the companies by hundreds of millions of reais,” the MPF said. The lawsuits also seek to ban the companies from receiving government business and prohibit them from obtaining tax benefits or loans from state-run or state-owned banks. Engevix said it would take the necessary steps to deal with the situation as soon as its lawyers are notified of the case.
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Rolls-Royce reaffirms anti-bribery policy after Brazil allegations
British engineering company Rolls-Royce said it did not tolerate improper business conduct after the Financial Times said the company had been accused of bribery in Brazil . The British company said in an e-mailed statement it did not tolerate wrongdoing. The statement did not specifically refer to the allegations about Brazil in the Financial Times report. “We want to make it crystal clear that we will not tolerate improper business conduct of any sort and will take all necessary action to ensure compliance,” a spokesman for Rolls-Royce said in the statement. Rolls-Royce, a supplier of gas turbines for oil platforms, was named by a former executive of Brazil’s state oil company Petrobras as having paid bribes there, according to the Financial Times, which cited court documents. Petrobras is engulfed in a widening corruption scandal, in which billions of dollars were allegedly paid by companies in bribes to win contracts from the Brazilian firm. Rolls-Royce, the world’s second-largest maker of aircraft engines, is under investigation by Britain’s Serious Fraud Office (SFO) into concerns of possible bribery and corruption in China and Indonesia, in a probe which dates back to 2012.
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Litigation Matters
Indian workers win $14 million in U.S. labor trafficking case
A New Orleans jury awarded $14 million to five Indian men who were lured to the United States and forced to work under inhumane conditions after Hurricane Katrina by a U.S. ship repair firm and its codefendants. After a four-week trial, the U.S. District Court jury ruled that Alabama-based Signal International was guilty of labor trafficking, fraud, racketeering and discrimination and ordered it to pay $12 million. Its co-defendants, a New Orleans lawyer and an India-based recruiter, were also found guilty and ordered to pay an additional $915,000 each. The trial was the first in more than a dozen related lawsuits with over 200 plaintiffs that together comprise one of the largest labor trafficking cases in U.S. history. Signal recruited about 500 Indian men as guest workers to repair oil rigs and facilities damaged by Hurricane Katrina in 2005, according to plaintiffs. The workers paid $10,000 apiece to recruiters and were promised good jobs and permanent U.S. residency for their families, according to the suit. When the men arrived at Signal shipyards in Pascagoula, Mississippi, they discovered that they would not receive promised residency documents. Signal also charged the men $1,050 per month to live in guarded labor camps where up to 24 men lived in single 1,800-square-foot (167-square-metre) units, according to the suit. An economist who reviewed Signal’s records for the plaintiffs estimated the company saved more than $8 million by hiring the Indian workers. “The defendants exploited our clients, put their own profits over the lives of these honorable workers, and tried to deny them their day in court,” plaintiffs’ attorney and Southern Poverty Law Center board chairman Alan Howard said in a statement. The center identified plaintiffs as Jacob Joseph Kadakkarappally, Hemant Khuttan, Andrews Issac Padaveettiyl, Sony Vasudevan Sulekha and Palanyandi Thangamani. Most of them are from Kerala. “Signal strongly disagrees with rulings from the court in the case which impacted its ability to present defenses and is disappointed with the verdict,” the company said. Separately, a suit brought by the U.S. Equal Employment Opportunity Commission alleging that Signal retaliated against its workers is slated for trial in June. In March 2007, Signal’s private security guards detained several workers during a pre-dawn raid of their quarters, including two the company planned to deport for complaining to workers rights advocates, according to the suit.
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U.S. prosecutors say pursuing ‘08 crisis cases, eye auto loans
The U.S. Department of Justice says it is still pursuing cases tied to the height of the financial crisis in 2008 and using lessons learned from those probes to examine new areas like subprime car loans. Ratings agency S&P agreed to pay $1.5 billion to settle U.S. and state lawsuits over mortgage ratings issued in the run-up to the crisis. That brings to more than $38 billion the amount that U.S. authorities have won in settlements from Wall Street firms since November 2013 over crisis-related activities. Despite the ample monetary settlements, U.S. prosecutors have been widely disparaged for failing to convict many senior Wall Street executives. Stuart Delery, the No. 3 official at the Justice Department and a key negotiator in the S&P deal, said investigations tied to the financial crisis “are continuing, and they are very active.” Officials are also drawing lessons from these cases “to turn our attention to the next types of financial fraud, whatever they might happen to be,” he said in an interview with Reuters ahead of the S&P settlement announcement. Delery, pointed to investigations into the securitization of auto loans as one such area. He declined to discuss details of any of the ongoing cases stemming from the financial crisis, but people familiar with the matter said global bank Morgan Stanley and other banks are still expected to face multi-billion dollar cases related to their mortgage securities activity. Both Morgan Stanley and rival Goldman Sachs Group Inc have disclosed that they received subpoenas and requests for information from an investigatory working group that includes the Justice Department and several states. Morgan Stanley said in a November regulatory filing that a probe involving its crisis-era loan conduct was in “advanced stages.” Delery also said the fact that seven years have passed since the height of the crisis is not an issue, when asked if S&P rival Moody’s might be off the hook for any similar conduct. Sources have said that a Justice Department investigation into Moody’s remains at an early stage. It is unclear how many more big cases in the area are yet to come, given that some of the largest have already been resolved, and the government only has a few more years to bring additional actions under a statute of limitations that is at most 10 years.
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BofA fails to overturn $1.27 billion Countrywide fraud verdict
A federal judge rejected Bank of America Corp’s bid to throw out a jury verdict finding it liable for the sale of questionable loans to Fannie Mae and Freddie Mac before the financial crisis, which led to a $1.27 billion civil penalty. U.S. District Judge Jed Rakoff in Manhattan said “the jury’s conclusion that this was a massive and intentional fraud was amply supported by the evidence.” He also rejected Bank of America’s alternative request for a new trial. Rebecca Mairone, a former midlevel executive at the bank’s Countrywide unit, was the only individual charged, and was also found liable by jurors. Rakoff also rejected her bid to void that verdict and her $1 million civil penalty. The U.S. Department of Justice had accused Countrywide of lying to Fannie Mae and Freddie Mac about the quality of loans it was selling to the government-controlled mortgage companies. Its lawsuit centered on Countrywide’s “High Speed Swim Lane” program, also called HSSL or Hustle, which was said to emphasize speed over quality, and reward staff based on volume. The now-defunct program was created before Bank of America bought Countrywide in July 2008. Rakoff rejected the defendants’ contention that there was not enough evidence that they made any material misrepresentation to Fannie Mae and Freddie Mac, saying this argument “borders on the frivolous.” Both penalties were imposed by Rakoff last July. Bank of America’s payout is not covered by the second-largest U.S. bank’s $16.65 billion mortgage settlement the following month with federal and state authorities. The Countrywide case was originally brought on the government’s behalf by Edward O’Donnell, a former Countrywide executive who as a whistleblower would share in any recovery. O’Donnell received a $57 million whistleblower award for a second Countrywide case that was resolved as part of the $16.65 billion settlement, court documents show.
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JPMorgan to pay $500 million in mortgage settlement
JPMorgan Chase & Co has agreed to pay $500 million to end more than six years of class action litigation over Bear Stearns’ sale of $17.58 billion of mortgage securities that proved defective during the U.S. housing and financial crises. The all-cash settlement was made public, and requires approval by U.S. District Judge Laura Taylor Swain in Manhattan. It resolves claims that Bear, which JPMorgan bought in 2008, misled investors when it sold certificates backed by more than 47,000 largely subprime and low documentation “Alt-A” mortgages in 14 offerings from May 2006 to April 2007. Bear was accused of making false and misleading statements in offering documents about underwriting guidelines used by its EMC Mortgage unit, Countrywide Home Loans, Wells Fargo and other lenders, and the accuracy of associated property appraisals. While Bear was not accused of fraud, investors sought to hold it strictly liable and negligent for their losses. They said that while most of the certificates were once rated “triple-A,” at least $16.96 billion fell to “junk” status. JPMorgan denied wrongdoing in agreeing to settle. The largest U.S. bank will pay an additional $5 million to cover administration costs. The accord is separate from JPMorgan’s $13 billion settlement with regulators in November 2013 over mortgage securities sales. It was announced three days after the New York-based bank agreed to pay $99 million plus $500,000 for costs to resolve litigation accusing it of conspiring with rival banks to rig prices in the foreign exchange market. Investors in the Bear lawsuit were led by the Public Employees’ Retirement System of Mississippi and the New Jersey Carpenters Health Fund. Their lawyers, led by Bernstein Litowitz Berger & Grossmann and by Cohen Milstein Sellers & Toll, plan to seek legal fees of up to 17 percent of the settlement amount. JPMorgan has resolved similar litigation over mortgage offerings from the former Washington Mutual Inc. It still faces litigation over some of its own mortgage offerings.
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Justice Department and State Partners Secure $1.375 Billion Settlement with S&P for Defrauding Investors in the Lead Up to the Financial Crisis
Attorney General Eric Holder announced that the Department of Justice and 19 states and the District of Columbia have entered into a $1.375 billion settlement agreement with the rating agency Standard & Poor’s Financial Services LLC, along with its parent corporation McGraw Hill Financial Inc., to resolve allegations that S&P had engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs). The agreement resolves the department’s 2013 lawsuit against S&P, along with the suits of 19 states and the District of Columbia. Each of the lawsuits allege that investors incurred substantial losses on RMBS and CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks. Other allegations assert that S&P falsely represented that its ratings were objective, independent and uninfluenced by S&P’s business relationships with the investment banks that issued the securities. The settlement announced is comprised of several elements. In addition to the payment of $1.375 billion, S&P has acknowledged conduct associated with its ratings of RMBS and CDOs during 2004 to 2007 in an agreed statement of facts. It has further agreed to formally retract an allegation that the United States’ lawsuit was filed in retaliation for the defendant’s decisions with regard to the credit of the United States. Finally, S&P has agreed to comply with the consumer protection statutes of each of the settling states and the District of Columbia, and to respond, in good faith, to requests from any of the states and the District of Columbia for information or material concerning any possible violation of those laws. “On more than one occasion, the company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised,” said Attorney General Holder. “As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business. While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.” Half of the $1.375 billion payment – or $687.5 million – constitutes a penalty to be paid to the federal government and is the largest penalty of its type ever paid by a ratings agency. The remaining $687.5 million will be divided among the 19 states and the District of Columbia. The allocation among the states and the District of Columbia reflects an agreement between the states on the distribution of that money.
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Payout to Madoff victims tops $7.2 billion
The trustee liquidating Bernard Madoff’s firm said he is distributing another $355.8 million to the swindler’s victims, bringing the total payout to more than $7.2 billion. Irving Picard, the trustee, said the payout began on February 6, and covers claims by fraud victims with 1,077 accounts at the former Bernard L. Madoff Investment Securities LLC. Claimants will receive between $431 to $67.1 million. Most of the payout comes from November settlements with the Herald, Primeo and Senator “feeder funds,” which Picard accused of sending customer money to Madoff to further his Ponzi scheme. The trustee said claimants on 1,160, or 52 percent, of the 2,216 accounts where he found valid claims have been fully paid. Madoff, 76, is serving a 150-year prison term after pleading guilty to running a decades-long fraud that was uncovered in December 2008. The $7.2 billion payout includes $823.7 million advanced by the Securities Investor Protection Corp, which helps liquidate failed brokerages. Picard has recouped roughly $10.55 billion for Madoff victims, or about 60 percent of the estimated $17.5 billion of principal he estimates they lost. Some of that money has been held back because of pending litigation, including by former Madoff customers who challenge Picard’s authority to block their competing claims. Picard has filed more than 1,000 lawsuits against feeder funds, and former customers he has labeled “net winners” because they took out more from Madoff’s firm than they put in. Through September 30, 2014, law firms, consultants and other professionals had billed $1.01 billion in fees and expenses to recoup money for Madoff’s victims, court papers show. Federal bankruptcy judges have so far approved more than $601 million of payments, largely comprising fees, to Picard’s law firm Baker & Hostetler. Former U.S. Securities and Exchange Commission Chairman Richard Breeden oversees a separate $4.05 billion fund to compensate customers and third parties who lost money because of Madoff.
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Cinedigm Sues Gaiam Claiming Fraud Over 2013 Division Deal
Cinedigm Corp. accused Gaiam Inc. of overvaluing the working capital of the home-entertainment division that it sold to the New York-based film distributor for $51.5 million in 2013. Cinedigm seeks a judge’s order requiring arbitration of its claim that Gaiam’s working capital calculations were a “complete sham and fraud,” according a complaint filed in Los Angeles County Superior Court. The acquisition of Gaiam’s entertainment unit in October 2013 was expected to add more than $15 million of annual earnings before interest, tax, depreciation and amortization, Cinedigm said at the time. Cinedigm said in a November regulatory filing that it was seeking a working capital adjustment in excess of $13 million, and that it had notified Gaiam in August 2014 of claims it was making as a result of the acquisition. Those claims related generally to alleged misrepresentations of its finances and business. Cinedigm said in a complaint it has identified more than $30 million in claims, a substantial part of which is recoverable as working capital adjustments. Cinedigm assisted theaters in the transition from film to digital over the past decade. It is now a global distributor of independent content and its film library includes documentaries and independent movies. Gaiam, a Louisville, Colorado-based maker of lifestyle, fitness and yoga DVDs, dropped 3.4 percent to $7.06 and is up 4.4 percent over the past year.
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China Market
HK securities regulator in test case to wind-up China Metal Recycling
Hong Kong’s securities regulator is set to take landmark legal action against China Metal Recycling Holdings Ltd in a court case that will test laws to sanction mainland Chinese companies listed in its market. The Securities and Futures Commission (SFC) forced ChinaMetal Recycling (CMR), which describes itself as China’s biggest recycler of scrap metal, into provisional liquidation in July 2013, alleging it had found evidence of accounting fraud. The action was the first time the regulator used a special provision of Hong Kong’s securities law, designed to protect investors, in the case of a listed company. The SFC goes before the Hong Kong High Court to wind up CMR with the aim of recovering as much value as possible for shareholders and creditors. “This is a critical test for the SFC,” said Michael Cheng, Asian Corporate Governance Association’s research director for China and Hong Kong. “What the SFC has to demonstrate is that regardless of where a company is incorporated, or where its assets are located, the regulator will go after it.” A victory for the SFC would represent a breakthrough in the watchdog’s policing of Chinese companies listed in its market by establishing for the first time its ability to force rogue listed companies into liquidation when it sees a public interest. But a victory would also set the scene for a potentially tougher battle ahead – an attempt by Hong Kong-appointed liquidators to secure CMR assets on the mainland. The SFC and the courts have limited authority outside of Hong Kong, which means reaching beyond the territory’s borders to dismantle CMR Group, a Cayman Islands incorporated holding company, will be difficult. CMR has operations in Hong Kong and Macau, but its most valuable assets are in mainland China. In an added complication for the SFC, the metal recycling company is subject to separate reorganisation and bankruptcy court proceedings in China. Mainland companies account for around 60 percent of Hong Kong listings. A record 66 Chinese firms were listed on the Hong Kong market in 2014, Thomson Reuters data shows. At least 20 Hong Kong stocks, most of which are mainland Chinese companies, are currently suspended by Hong Kong stock exchange due to irregularities or investigations, a Reuters analysis of exchange announcements shows. The SFC alleges that CMR overstated its financial position in its prospectus for a 2009 initial public offering. The allegations were outlined in a high court judgement relating to the case that was handed down in November. The SFC says around 38 percent, 64 percent and 90 percent of CMR’s gross profits for the years 2007, 2008 and 2009, respectively, were fictitious.
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CHINA MONEY-Investors finally abandon “junk stocks” in face of regulatory crackdown
Chinese investors are finally dumping shares in loss-making companies after years of speculation on them in a sign that punters are at last taking seriously tighter regulations and new delisting rules that make holding their stock a huge risk. The struggling firms have often been market outperformers in China as they were almost never delisted, providing an implicit floor on downside risk that speculators have exploited to their advantage. But China’s broad efforts to reform its capital markets, and in particular recent rules aimed at fostering a robust stock market and efficient allocation of capital, signal an end to such policy aberrations. “Tighter rules and stricter implementation are pushing investors away from ‘junk’ shares’,” said Xiao Shijun, analyst at Guodu Securities in Beijing. “It’s an attitude reversal; investors are finally turning to blue chips, given their surprisingly high returns of late,” he said. An unprecedented 38 firms published obligatory formal delisting warning statements in December, many citing fraud investigations as the cause, after the China Securities Regulatory Commission (CSRC) issued tougher delisting rules in October. So long as CSRC enforces the rules, most of these 38 firms will be kicked out of the Shanghai or Shenzhen stock exchanges within a year, though in the past the regulator has failed to walk the talk. This time around, however, Chinese investors are bailing out of at-risk shares as the regulators show more zeal in cracking the whip. Two thirds of the mentioned firms have suffered sharp stock price falls since December. Zhuhai Boyuan Investment Co , for example, has lost 36 percent to 7.52 yuan , while Weifang Beida Jadebird Huaguang Technology has dived 32 percent to 5.27 yuan before both companies suspended trading on December 22. Indeed, over the past three months shares in these 38 companies climbed only 2.3 percent on a weighted average basis, massively underperforming China’s blue-chip CSI300 index , which gained 39 percent during the same period. In 2013, by point of comparison, the same companies outperformed the CSI300 by an average of six percentage points. FACTBOX: Only 78 Chinese firms have been delisted since China established its modern stock market in 1990 and not a single stock was delisted from 2008 until mid-2014. There are two primary reasons for this. Firstly, most firms that manage to get through the highly regulated IPO queue are well connected politically and able to evade being evicted from the boards. Secondly, the length of the IPO queue, in which hundreds of companies are still mired, makes an existing ticker valuable real estate. Using a process called a reverse merger, a public company can acquire listed companies, allowing the acquiring firm a ticker without having to queue for an IPO – such acquisitions can also produce the massive stock pops speculators are looking for. Now regulators say there will be no exceptions and they even have a first target. China Erzhong Group Deyang Heavy Industries Co Ltd, under a trading halt since last year, looks likely to be delisted after posting a fourth year of losses of about 7.8 billion yuan Under current rules, the CSRC will halt trading in shares of companies with three consecutive years of losses, then eject them one year later if there is no turnaround in profitability.
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Hong Kong warns over digital currencies amid alleged bitcoin fraud
Hong Kong’s central bank has warned people against investing in virtual currencies amid local media reports that a bitcoin exchange may have run off with $387 million in client funds – making it potentially the biggest bitcoin scandal after last year’s bankruptcy at Tokyo-based Mt.Gox. The South China Morning Post reported that clients of Hong Kong-based MyCoin had approached a local lawmaker alleging the company absconded with their money. An assistant for Legislative Council member Leung Yiu-chung told Reuters that Leung had received more than 15 complaints from MyCoin clients regarding the alleged fraud, and these would be passed on to the police. The Hong Kong Monetary Authority (HKMA) said in a statement that the case “may involve fraud or pyramid schemes,” adding: “Given the highly speculative nature of Bitcoin, we have all along urged the public to exercise extra caution when considering making transactions or investments with Bitcoin.” Bitcoins are created through a ‘mining’ process where a computer’s resources are used to perform millions of calculations. Advocates say the virtual currency is revolutionary as it’s not controlled by a central bank and has potential as an alternative means of online payment. But the rise of bitcoin, which is unregulated in many countries including Hong Kong, has stoked concerns it can be used as a vehicle to launder money and finance extremist groups. Mt.Gox, once the world’s largest bitcoin exchange, filed for bankruptcy a year ago after it claimed to have lost around $500 million worth of customer bitcoins in a hacking attack. On its web site, MyCoin claims to be a “leading global Bitcoin trading platform and application service provider,” with a China-based research and development team. MyCoin promised clients a HK$1 million ($128,976) return over a 4-month period based on a HK$400,000 investment that would produce 90 bitcoins on maturity, the South China Morning Post reported, adding MyCoin claimed to have 3,000 customers each investing an average of HK$1 million.
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Healthcare Industry
Community Health Services unit to pay $75 million in fraud settlement
A unit of Community Health Systems Inc, one of the largest U.S. hospital groups, and three of its hospitals have agreed to pay $75 million to settle claims that they made illegal donations to county governments in New Mexico to secure federal funding. Whistleblower Robert Baker, former revenue manager for the Community Health unit, will receive $18.7 million of the settlement, subject to approval by the U.S. New Mexico federal court, the U.S. Department of Justice said. The lawsuit, filed by Baker in 2005 and joined by the U.S. government in 2009, claims that the three hospitals made donations to three New Mexico counties in order to get federal matching funds from a program that provided extra Medicaid funding to rural hospitals. Under the program, which was discontinued last year, the federal government provided $3 in matching funds for every dollar paid by the state. To encourage cost control, federal law required the state’s share to come from state or county funds, not hospital donations. The hospitals are Eastern New Mexico Medical Center in Chaves County, Mimbres Memorial Hospital and Nursing Home in Luna County and Alta Vista Regional Medical Center in San Miguel County. Community Health, based in Franklin, Tennessee, manages more than 200 hospitals in 29 states. The subsidiary involved in the settlement is Community Health Systems Professional Services Corp.
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U.S. health insurer Anthem hit by massive cybersecurity breach
Hackers have stolen personal information relating to current and former customers and staff of no. 2 U.S. health insurer Anthem Inc., after breaching an IT system containing data on up to 80 million people, the company said. Anthem, which has nearly 40 million customers in the United States, said it had reported the attack to the FBI and cybersecurity firm FireEye Inc. said it had been hired to help Anthem investigate the attack. “We do confirm that this was done by an advanced group using custom malware,” said FireEye spokesman Vitor De Souza, noting that Anthem employees identified the breach, which was limited to a window of a few days. “We know across the board that when you do see something, you need to act fast”, which Anthem appears to have done, De Souza said. Anthem said in a statement that names, birthdays, Social Security numbers, street addresses, e-mail addresses and employment information, including income data, had been accessed in what it described as a “very sophisticated attack”. The breach did not appear to involve medical information or financial details such as credit card or bank account numbers, Anthem said, adding it immediately made every effort to close the security vulnerability, which was discovered last week. FireEye’s De Souza said the breached database contained information from about 80 million individuals, but the extent of stolen data is still unknown, as are the perpetrators and method of the cyberattack. “That information is a treasure trove for cybercriminals. It can easily be sold on underground markets within hours and used for a wide variety of identity fraud schemes,” said Stuart McClure, chief executive of cybersecurity firm Cylance Inc. Cybersecurity has become a major concern both for U.S. firms facing a barrage of attacks as well as insurers trying to figure out how much of that risk they can afford to underwrite. A high-profile attack against Sony Pictures Entertainment late last year brought the company headlines for everything from pay disparities among its employees to internal critiques about the studio’s own movies. Other attacks have spooked consumers, with retailers Target and Home Depot both reporting the theft of such personal data as credit card numbers in recent years. President Barack Obama’s recently proposed fiscal 2016 budget sets aside $14 billion to strengthen U.S. cybersecurity defenses, an increase of 10 percent. Cylance’s McClure, who has helped healthcare companies respond to previous breaches, said it typically costs health insurers at least $100 per stolen record to clean up this type of cyberattack. If 10 million records were stolen, the costs to respond would likely top $1 billion, he said. That includes costs for setting up a hotline to answer customer questions, providing credit monitoring services and meeting state and federal government disclosure requirements. Security experts say cybercriminals are increasingly targeting the $3 trillion U.S. healthcare industry, which has many companies still reliant on aging computer systems that do not use the latest security features. One of the largest U.S. hospital operators, Community Health Systems Inc, last year said Chinese hackers had broken into its computer network and stolen the information of 4.5 million patients. The percentage of healthcare organizations that have reported a criminal attack rose to 40 percent in 2013 from 20 percent in 2009, according to an annual survey by the Ponemon Institute think-tank on data protection policy.
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AstraZeneca to Pay $7.9 Million to Resolve Kickback Allegations
AstraZeneca LP, a pharmaceutical manufacturer based in Delaware, has agreed to pay the government $7.9 million to settle allegations that it engaged in a kickback scheme in violation of the False Claims Act, the Justice Department announced. AstraZeneca markets and sells pharmaceutical products in the United States, including a drug sold under the trade name Nexium. The settlement resolves allegations that AstraZeneca agreed to provide remuneration to Medco Health Solutions, a pharmacy benefit manager, in exchange for Medco maintaining Nexium’s “sole and exclusive” status on certain Medco formularies and through other marketing activities related to those Medco formularies. The United States alleged that AstraZeneca provided some or all of the remuneration to Medco through price concessions on drugs other than Nexium, namely on Prilosec, Toprol XL and Plendil. The United States contended that this kickback arrangement between AstraZeneca and Medco violated the Federal Anti-Kickback statute, and thereby caused the submission of false or fraudulent claims for Nexium to the Retiree Drug Subsidy Program. “By this agreement we are making important strides in holding drug manufacturers accountable not only in Delaware but nationwide,” said U.S. Attorney Charles M. Oberly III of the District of Delaware. “I am proud of the tireless work by this office to investigate this case.” “Pharmaceutical companies that pay kickbacks in order to boost profits will be held accountable for their improper conduct,” said Special Agent in Charge Nick DiGiulio of the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG). “We will continue to crack down on kickback arrangements, which can undermine drug choices for patients and corrode the public’s trust in the health care system.” This civil settlement resolves a lawsuit filed under the qui tam, or whistleblower, provision of the False Claims Act, which allows private citizens with knowledge of false claims to bring civil actions on behalf of the government and to share in any recovery. The lawsuit was filed by former AstraZeneca employees Paul DiMattia and F. Folger Tuggle, who will collectively receive $1,422,000.
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Illinois Physician Pleads Guilty to Taking Kickbacks from Pharmaceutical Company and Agrees to Pay $3.79 Million to Settle Civil False Claims Act Case
The Department of Justice announced that an Illinois physician, Dr. Michael J. Reinstein, pleaded guilty to a federal crime for receiving illegal kickbacks and benefits totaling nearly $600,000 from two pharmaceutical companies in exchange for regularly prescribing an anti-psychotic drug – clozapine – to his patients. Reinstein also agreed to pay the United States and the state of Illinois $3.79 million to settle a parallel civil lawsuit alleging that, by prescribing clozapine in exchange for kickbacks, Reinstein caused the submission of false claims to Medicare and Medicaid for the clozapine he prescribed for thousands of elderly and indigent patients in at least 30 Chicago-area nursing homes and other facilities. “The Department of Justice is committed to ensuring that physicians who accept payments from pharmaceutical manufacturers to influence prescribing decisions are held accountable,” said Acting Assistant Attorney General Joyce R. Branda of the Justice Department’s Civil Division. “Schemes such as this one undermine the health care system and take advantage of elderly patients who are among the most vulnerable health care recipients.” “Physicians must prescribe medications for their patients solely on the basis of the patients’ best medical interests and not because those decisions were improperly influenced by kickbacks and other financial favors,” said U.S. Attorney Zachary T. Fardon of the Northern District of Illinois. Both the criminal and civil cases involve the promotion of generic clozapine, a rarely prescribed anti-psychotic drug that has serious potential side effects and is generally considered a drug of last resort, particularly for elderly patients. While clozapine has been shown to be effective for treatment-resistant forms of schizophrenia, it is also known to cause numerous side effects, including a potentially deadly decrease in white blood cells, seizures, inflammation of the heart muscle and increased mortality in elderly patients.
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SEC Regulatory Actions
SEC Announces Half-Million Dollar Clawback from CFOs of Silicon Valley Company That Committed Accounting Fraud
The Securities and Exchange Commission announced that two former CFOs have agreed to return nearly a half-million dollars in bonuses and stock sale profits they received while their Silicon Valley software company was committing accounting fraud. According to the SEC’s order instituting a settled administrative proceeding, William Slater and Peter E. Williams III received $337,375 and $141,992 respectively during time periods when Saba Software presented materially false and misleading financial statements. While not personally charged with the company’s misconduct, Slater and Williams are still required under Section 304 of the Sarbanes-Oxley Act to reimburse the company for bonuses and stock sale profits received while the fraud occurred. Saba Software overstated its pre-tax earnings and made material misstatements about its revenue recognition practices while Slater served as CFO from December 2008 to October 2011 and while Williams served as CFO from October 2011 to January 2012. “During any period when a company materially misrepresents its financial results, even executives who were not complicit in the fraud have an obligation to return their bonuses and stock sale profits to the company for the benefit of the shareholders who were misled,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office. Last year, the SEC charged Saba Software and two former executives responsible for the accounting fraud in which timesheets were falsified to hit quarterly financial targets. As part of that settlement, the SEC similarly reached an agreement with the former CEO to reimburse the company $2.5 million in bonuses and stock profits that he received while the accounting fraud was occurring, even though he was not charged with misconduct. Slater and Williams each consented to the entry of the SEC’s order without admitting or denying the finding that they violated Section 304 of the Sarbanes-Oxley Act.
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SEC Proposes Rules for Hedging Disclosure
The Securities and Exchange Commission announced it has approved the issuance of proposed rules that would enhance corporate disclosure of company hedging policies for directors and employees, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposal would require disclosure about whether directors, officers and other employees are permitted to hedge or offset any decrease in the market value of equity securities granted by the company as compensation or held, directly or indirectly, by employees or directors. “The proposed rules would provide investors with additional information about the governance practices of the companies in which they invest,” said SEC Chair Mary Jo White. “Increasing transparency into hedging policies will help investors better understand the alignment of the interests of employees and directors with their own.” The proposed rules would require disclosure in proxy and information statements for the election of directors and apply to companies subject to the federal proxy rules, including smaller reporting companies, emerging growth companies, business development companies, and registered closed-end investment companies with shares listed and registered on a national securities exchange. The proposal specifies that disclosure would apply to equity securities of the company, its parent, subsidiary, or any subsidiary of any parent of the company that is registered under Section 12 of the Exchange Act. Section 955 of the Dodd-Frank Act amended Exchange Act Section 14 to add paragraph (j), which requires annual meeting proxy statement disclosure of whether employees or members of the board of directors are permitted to purchase financial instruments, including prepaid variable forward contracts, equity swaps, collars, and exchange funds that are designed to hedge or offset any decrease in the market value of company equity securities.
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Archived Forensic News
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