Forensic News January 2016
Financial/Accounting Fraud
Fraud Prosecutions Topped $1 Billion in 2015, KPMG Report Says
The total value of fraud cases that reached U.K. courts was more than 732 million pounds ($1.04 billion) in 2015, up 15 million pounds from the previous year, with society’s most poor and vulnerable persistently targeted by criminals, according to a published report. The average value of fraud per lawsuit was 2.4 million pounds, a slight increase on 2014’s average of 2 million, professional services firm KPMG said in its Fraud Barometer report, which looks at fraud cases with losses of 100,000 pounds or more that make it into U.K. courts. “These fraudsters are often respected individuals in a position of trust, who have the opportunity and means to commit the fraud, making it hard for companies to easily detect the same," Hitesh Patel, a KPMG U.K. forensic partner, said in a statement. Men were responsible for 85 percent of all fraud losses in 2015, with the majority perpetrated by males over the age of 45, the report said.
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The former controller of Allentown, Pennsylvania, was indicted on charges of conspiracy to commit fraud, joining a growing number of officials caught up in an alleged scheme to obtain campaign donations in exchange for city contracts. Mary Ellen Koval, 64, a Democrat who was elected controller in 2011 and served until her resignation on Jan. 5, is expected to enter in U.S. District Court in Allentown, according to local news reports that quoted her lawyer. She could receive up to 20 years in prison if convicted on the charge of conspiracy to commit "honest services" fraud. "She is a very strong, very old-school, classy lady who is, despite what has happened, doing the right thing by the city and the people in the city,” her lawyer, Eric Dowdle, told the Morning Call newspaper. Gary Strathearn, a former city finance director, pleaded guilty to a charge of conspiracy to commit mail and wire fraud as part of the same suspected scheme. Dale Wiles, a former assistant city solicitor, pleaded guilty in December to withholding documents from the FBI. Koval, who was also chairman of the Allentown Parking Authority, is accused of conspiring with a leading city official identified in the charging documents as “Public Official #3” to obtain campaign funds for that unnamed official in exchange for city contracts. “Public Official #3 ... made clear to certain vendors ... that providing campaign contributions ... was a necessary condition for receiving certain favorable treatment from the City of Allentown,” according to the charging documents. The unidentified official “agreed to take official action which would be favorable to three donors who had contributed campaign funds to Public Official #3,” the documents said. Allentown Mayor Ed Pawlowski has not been named in any of the indictments. The Democrat announced plans in 2015 to challenge Republican U.S. Senator Pat Toomey but ended his campaign after the announcement of the FBI investigation.
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Lost amid the intense scrutiny of emissions tests at Volkswagen AG and Renault SA is the fact that another European automotive powerhouse, Fiat Chrysler Automobiles NV, is also in a tight spot with regulators. Not for possible cheating. Far from it. FCA’s problem is that its emissions record in the U.S. is bad and time to fix it is running short. For the fourth consecutive year, the maker of Ram pickups and Jeep sport utility vehicles finished dead last in a 2014 Environmental Protection Agency ranking of carbon-dioxide emissions among big auto manufacturers. And the agency plans to accelerate its CO2 targets sharply beginning next year. To comply, FCA must improve faster than bigger and richer rivals who also are straining to cut emissions. Failing that, it might be forced to stop building some of the light-duty trucks Bloomberg Intelligence analyst Kevin Tynan says deliver 90 percent of its profit. Or, to keep making them, it could be forced into a merger. “FCA doesn’t have the resources to fulfill the emissions requirements,” said Maryann Keller, an independent auto-industry consultant in Stamford, Connecticut. “It’s not a company that can survive in its present form.” To fight global warming, the EPA will cap tailpipe CO2 as measured in real-world driving tests at an industry average of 223 grams per mile in 2025. FCA reported an average 428 grams per mile in 2014, compared with 302 for industry-leading Mazda Motor Corp. The London-based company also faces tougher fuel-economy targets by 2025. The regulations require automakers to boost average miles per gallon 50 percent to 54.5, or about 40 in real-world driving. Meanwhile, California requires as much as 15 percent of sales come from zero-emission vehicles powered by fuel cells or batteries. Chief Executive Officer Sergio Marchionne describes these mandates as both expensive and an existential threat. He has been saying since fall 2014 that automakers should face the challenges and boost chronically low profits by merging. General Motors Co., which he has mainly focused on, said no.
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Caesars Entertainment’s court-appointed examiner has told company officials and creditors’ lawyers he believes the company acted improperly when it transferred assets away from the hobbled casino prior to putting it into Chapter 11, The Post has learned. A report by the examiner, expected to be released next month, is likely to conclude there was a degree of civil fraud connected to the transfer, three sources with direct knowledge of the talks said. The examiner, Richard Davis, held the telephone briefings in recent weeks as he neared the completion of his report. Some creditors accused Caesars, controlled by Leon Black’s Apollo Global Management, of moving the gaming company’s best assets beyond their reach without paying adequate compensation. The transfers occurred shortly before January 2015 when Apollo put Caesars’ biggest unit into bankruptcy. “The examiner said he believes there were deficiencies in the transfer process,” a source close to the situation said. If Caesars does not reach a settlement before Davis’s report is issued, its board, including TPG Capital founder David Bonderman and Apollo founder Marc Rowan (both billionaires), as well as NFL star Lynn Swann, could be held personally liable for some claims, sources said. Additionally, a finding of fraud could prompt state gaming regulators to investigate Caesars, a third party close to the situation said. The transfer of assets came during a hectic period in Caesars’ nearly 80-year history. In 2013, with many gaming companies across the country hurting due to increased competition from new brick-and-mortar casinos and from online gaming operations, Apollo, in a bid to salvage its investment in Caesars, split the 49-casino chain into three companies. One new part included Caesars’ online assets and its Las Vegas’ Planet Hollywood. A second new piece contained Caesars most promising casinos, including the Horseshoe in Baltimore. The third remaining unit contained 28 of the company’s most troubled brick-and-mortar casinos, including Bally’s and Caesars in Atlantic City. That unit was placed in Chapter 11 reorganization. Creditors in the bankrupt unit have $18 billion in claims and some of them believe they received far too little for the assets that were transferred to the two new entities. Caesars has already offered creditors an additional $1.8 billion in cash and stock. Two creditors, David Tepper’s Appaloosa Management and Oaktree Capital Management, feel they are owed billions more.
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Few, if any, companies or government agencies store more sensitive personal information than the IRS, and consumers have virtually no insight into how that data is used and secured. But, as the results of a recent Justice Department investigation show, when you start poking around in those dark corners, you sometimes find very ugly things. Beginning in 2008, a small group of people–including an IRS employee who worked in the Taxpayer Advocate Service section–worked a simple and effective scam that involved fake tax returns, phony refunds, dozens of pre-loaded debit cards, and a web of lies. The scheme relied upon one key ingredient for its success: access to taxpayers’ personal information. And it brought the alleged perpetrators more than $1 million. The scam’s particulars are not unique. There have been a variety of similar operations that have come to light over the last few years, with IRS employees improperly accessing taxpayer records as part of a financial fraud or out of curiosity over what an athlete or actor makes. What sets this case apart is that the accused IRS employee, Nakeisha Hall, was tasked specifically with helping people who had been affected by some kind of tax-related identity theft or fraud. From that position, Hall allegedly tapped in to the personal files of an untold number of taxpayers and used the data she found there to file false tax returns in those victims’ names. The returns would be set up in such a way that the “taxpayers” would be due refunds. Hall typically would request that refunds be put on debit cards issued by Bancorp Bank or another bank, according to an indictment issued by the Department of Justice in December. The debit cards would be mailed to addresses that Hall had access to, and then Hall’s alleged co-conspirators Jimmie Goodman and Abdullah Coleman would pick up the cards. From there, the crew would take cards to ATMs and withdraw money, or use them in stores, the DoJ said. Hall, Goodman, and Coleman were arrested last month on a number of charges related to the scam, including mail fraud and conspiracy to commit bank fraud.
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Volkswagen’s (VOWG_p.DE) development of software to cheat diesel-emissions tests was an open secret in its engine development department, Germany’s Sueddeutsche Zeitung newspaper said, citing results from VW’s internal investigation. Many managers and staff dealing with emissions problems in the department knew of or were involved in developing the "defeat devices", said the newspaper, which researched the matter with regional broadcasters NDR and WDR. A culture of collective secrecy prevailed within the department, where the installation of the defeat software that would cause the carmaker’s biggest ever corporate crisis was openly discussed as long ago as 2006, Sueddeutsche said. But it said there were exceptions: a whistleblower, who was himself involved in the deception and has been giving evidence to investigators hired by Volkswagen, alerted a senior manager outside the department in 2011. Staff members in engine development felt pressure from the management board to find a cost effective solution to develop clean diesel engines for the U.S. market. Rather than telling Volkswagen’s management board the rules could not be adhered to, staff members in engine development decided to push ahead with manipulation, Sueddeutsche reported. "Within the company there was a culture of ‘we can do everything’, so to say something cannot be done, was not acceptable," Sueddeutsche Zeitung said, quoting the VW internal report which included testimony from a staff member who took part in the fraud."Instead of coming clean to the management board that it cannot be done, it was decided to commit fraud," Sueddeutsche reported. Staff in engine development took comfort from the fact that regulators would not be able to detect the fraud using conventional examination techniques, the paper further said. Engine management software delivered by Bosch was then manipulated in Wolfsburg, where Volkswagen has its headquarters, Sueddeutsche Zeitung said. Manipulation started in November 2006, Sueddeutsche Zeitung said. Volkswagen has said that to the best of its knowledge only a small circle of people knew about the manipulation, which Europe’s biggest carmaker admitted to U.S. environmental authorities in September last year. It has said it is not aware of any involvement by top management or supervisory board members in the affair, which toppled its chief executive last year and is likely to cost billions of dollars for recalls, technical fixes and lawsuits.
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On top of less than stellar holiday sales, retailers also are expected to see return fraud grow from $1.9 billion in the 2014 holiday cycle to $2.2 billion this year, according to the National Retail Federation. The industry estimates that 3.5 percent or $9.1 billion of their holiday returns processed this year will be fraudulent, up slightly from the estimated 3 percent reported last year. Holiday sales in 2015 were lukewarm overall according to the early estimates with its share of winners like J.C. Penney (3.9 percent comps) and losers like Macy’s (-5.2 percent comps) who each reported a change in fortune in the 2015 holiday season. “Return fraud remains a critical issue for retailers with the impact spanning far and wide, in-store and online,” NRF Vice President of Loss Prevention Bob Moraca recently noted in a statement. “While technology has played a significant role in deterring many in-person fraudulent transactions that would have otherwise gone unseen, there is little that can be done to prevent a determined criminal who will find a loophole one way or another. When it comes to retail fraud, retailers can build taller walls, but criminals continue to find taller ladders.” The fraud concern voiced by 91.9 percent of retailers surveyed relates to the return of stolen merchandise. Wardrobing, or the return of used, non-defective merchandise, also presents a challenge for retailers with 72.6 percent of those polled having experienced wardrobing in past year, on par with last year’s 72.7 percent, according to the NRF release. With the growing use of e-receipts by retailers there is a rise in fraud in this area. The survey found 33.9 percent of those polled said they have experienced return fraud with use of e-receipts, up from 18.2 percent last year. “Retailers have the difficult task of providing superior customer service by always giving the benefit of the doubt to their shoppers when it comes to returns, while simultaneously working to make sure they protect their business assets,” Moraca said. “We expect retailers to continue their tried and true ways of combating fraud through increased usage of identification verification, as well as seeking new and innovative approaches on the back end.” The survey also found that 85.2 percent of respondents require identification when making a return without a receipt. Retailers said they estimate 10 percent of returns made without a receipt are fraudulent, this is up from 5 percent who said so last year. It’s interesting to note that just 1 percent of purchases made online and returned to stores are suspected to be fraudulent, according to the report.
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A landmark fraud trial opened for Spain’s Princess Cristina, accused of helping bankroll a lavish lifestyle with funds her husband received from an alleged scheme to embezzle about 6 million euros ($6.5 million) in public contracts for conferences and sporting events. Cristina and her husband, Inaki Urdangarin, said nothing to dozens of reporters as they entered a makeshift courthouse amid tight police security aimed at keeping anti-monarchy protesters away from the scene. The two then sat silently among a group of 16 other defendants as a judge read out the charges for the historic trial, which marks the first time that a member of Spain’s royal family has faced criminal charges since the monarchy was restored in 1975. The 50-year-old Cristina faces two counts of tax fraud carrying a maximum prison sentence of eight years for allegedly failing to declare taxes on personal expenses paid by a real estate company she owned with Urdangarin, an Olympic handball medalist turned businessman. He faces more serious charges of using his former Duke of Palma title to embezzle about 6 million euros ($6.5 million) in public contracts through the nonprofit Noos Institute he ran with an associate. Security was tight around the building after thousands of anti-monarchy protesters in 2014 staged noisy demonstrations while Cristina answered questions about the case posed by an investigative judge. Authorities detained one protester with an anti-monarchy flag a short time before Cristina showed up at the court inside a sedan with dark tinted windows.
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The head of a New York-based foundation pleaded guilty to participating in a scheme to bribe a former U.N. General Assembly president to advance various business interests, becoming the second defendant to admit wrongdoing in the case. Sheri Yan, who was Global Sustainability Foundation’s chief executive, pleaded guilty in federal court in Manhattan to one count of bribery in connection with illicit payments made to John Ashe, the former General Assembly president. Choking back tears, Yan admitted that beginning in 2012, she agreed with others to pay money to Ashe, who was also the U.N. ambassador from Antigua and Barbuda, to influence officials in Antigua and the United Nations to support business interests. "While I was doing these things, I knew that they were wrong," Yan said through a Mandarin interpreter. The plea by Yan, 60, a U.S. citizen, comes less than a week after the former finance director at the foundation, Heidi Hong Piao, pleaded guilty and agreed to cooperate with authorities in their continuing investigation. Both women were arrested in October by the Federal Bureau of Investigation as prosecutors unveiled charges over a multi-year scheme to pay more than $1.3 million in bribes to Ashe. Unlike Piao, though, Yan’s plea came without any agreement to cooperate with authorities. Under a plea agreement, Yan, who also is known as Shiwei Yan, agreed not to appeal any sentence of 7-1/4 years in prison. Her sentencing is set for April 29. Prosecutors allege that Ashe, the U.N. General Assembly president from 2013 to 2014, accepted $1.3 million of bribes from Chinese businessmen to support their interests within the United Nations and Antigua. Those bribes included over $800,000 from three businessmen that were arranged through Yan and Piao, prosecutors said. In court, Yan said she and others paid Ashe to persuade officials in Antigua to enter into contracts with foreign companies, and to use his U.N. position help her and others promote business ventures from which we intended to profit. Prosecutors have also charged Ng Lap Seng, a billionaire developer from the Chinese territory of Macau who allegedly paid $500,000 in bribes to Ashe through intermediaries. Those intermediaries included Francis Lorenzo, a now-suspended deputy U.N. ambassador from the Dominican Republic, and Jeff Yin, Ng’s assistant, prosecutors said.
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Professional tennis’s anti-corruption unit, accused of failing to pursue allegations of match-fixing by leading past and current players, insists that it has both the ability and the determination to nail miscreants big and small. Yet its list of catches is very modest for a global sport that one study says is the third most vulnerable to betting fraud through match-fixing, because of the proliferation of low-level tournaments and the difficulty of proving that any player has lost deliberately. The London-based Tennis Integrity Unit (TIU) was set up in 2008 by all the sport’s four governing bodies - the men’s ATP, women’s WTA, the International Tennis Federation (ITF) and the Grand Slam Board - to address concerns that the betting frauds besetting cricket and soccer were also targeting tennis. The ATP had convened an independent review after a match between Russian former world number three Nikolay Davydenko and Argentina’s Martin Vassallo Arguello in 2007 in Poland raised suspicions. Although neither player was found to have committed an offense, the online bookmaker Betfair was forced to void all bets. Since then, the work of the TIU’s five full-time investigators and one data analyst has led to 17 professionals and one official, almost all from the lower rungs of the tennis ladder, being banned for corruption, some of them for life. But the revelations from secret files obtained by the BBC and online BuzzFeed News suggest match-fixing exists higher up the food chain, including at Wimbledon, and could involve players currently competing at the Australian Open in Melbourne. The report did not present any evidence of match-rigging. However, it said 16 players who had been ranked in the top 50 had been repeatedly flagged to the TIU over suspicions that they had thrown matches in the past decade, but that none had been suspended, let alone banned. A source within the TIU said the article was based on "innuendo", and ATP chief Chris Kermode, who sits on the TIU’s board, told a news conference in Melbourne: “No player or official is immune from investigation, regardless of their status or position in the sport. Investigations follow where evidence leads.”
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Viacom Inc (VIAB.O) was sued by a former vice president who said the media company fired her in retaliation for opposing its alleged plan to illegally avoid paying U.S. taxes on the international licensing rights for Teenage Mutant Ninja Turtles. In a complaint filed in Manhattan federal court, Nataki Williams said she was fired in April 2014 while on maternity leave, after Viacom ignored her objections to its plan the prior year to transfer Ninja Turtles rights to a Netherlands-based entity solely to avoid the U.S. tax burden. Williams said the licensing work was handled in New York, but Viacom arranged for minor work to be done in the Netherlands to make it appear as though the contracts were handled there. The Irvington, New Jersey resident also said Viacom planned for the Netherlands entity to buy rights to other children’s characters like Dora the Explorer and SpongeBob SquarePants, in a scheme that her bosses allegedly said could save millions of dollars. Williams said she was fired as vice president for financial planning and analysis, ending more than six years of employment at Viacom, on the pretext that her benefits paperwork wrongly listed her child’s father, also named Williams, as a spouse. She said Viacom caused the error, and that she held herself out as single. "Ms. Williams was actually fired in retaliation for her internal whistleblowing of an unlawful tax avoidance scheme that would have saved Viacom millions, and that Ms. Williams reasonably believed was fraudulent," the complaint said. In a statement, Viacom said Williams was fired for "fraudulently claiming company benefits to which she was not entitled. Her legal claims are completely without merit, and we will vigorously defend against these claims in court." The New York-based company’s brands include Comedy Central, MTV, Nickelodeon, Paramount Pictures and VH1, among others. Williams sued under the federal Sarbanes-Oxley and Dodd-Frank laws. She is seeking reinstatement and back pay, as well as additional pay if she is not reinstated.
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A group of 11 banks agreed to pay more than $63 million to settle allegations that they misled the Commonwealth of Virginia and its retirement system about residential mortgage backed-securities, Attorney General Mark R. Herring said on. The banks, which include Bank of America Corp’s Merrill Lynch unit, Morgan Stanley and a unit of the Royal Bank of Scotland Group PLC, defrauded the state’s retirement fund by selling it shoddy mortgage bonds in the run-up to the financial crisis, Virginia’s attorney general said in a 2014 lawsuit. None of banks admitted liability in the settlement, Herring said. The $63 million pact is the largest non-health care-related sum ever obtained in a suit brought under a Virginia law aimed at curbing fraud against the commonwealth’s taxpayers, Herring said in a statement. In the lawsuit, Herring said an analysis showed nearly 40 percent of the mortgages that backed 220 securities purchased by Virginia’s retirement fund were fraudulently represented as posing a lower risk of default than they actually did. The fund, which bought the securities between 2004 and 2010, lost $383 million when it was forced to sell the securities, the lawsuit said. Herring had originally sought $1.15 billion in damages from the banks. Other banks named in the settlement include units of Credit Suisse AG, Goldman Sachs Group Inc, Deutsche Bank AG, HSBC Holdings plc, and JPMorgan Chase & Co.
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The first federal trial over General Motors Co’s massive ignition switch recall came to an early end as the parties said the case had been dismissed, in the wake of allegations that the plaintiff had given misleading testimony. According to a filing in Manhattan federal court, the plaintiff Robert Scheuer agreed to voluntarily dismiss his claims against the automaker with prejudice, meaning they cannot be refiled. Scheuer agreed to take no payment from GM for his claims. "I really do commend you for doing the right and sensible thing," U.S. District Judge Jesse Furman told lawyers for both sides during a brief hearing, before excusing the 12 jurors hearing the case. The abrupt dismissal of Scheuer’s trial, which began on Jan. 12, is unlikely to affect other switch lawsuits, but is a temporary setback for efforts to gauge the value of similar claims in the litigation. The filing came in the wake of allegations that the plaintiff and his wife had given misleading testimony about his physical and financial condition. Furman, who oversees nationwide litigation over the defect, had urged GM and Scheuer to consider ending the trial, and for the automaker to focus on preparations for a second "bellwether" trial set for March. Bellwether, or test, trials are sometimes used in product liability litigation in which many people have similar claims. They are meant to guide settlement discussions. Scheuer had accused GM of concealing an ignition switch defect that prevented air bags in his 2003 Saturn Ion from deploying in a May 2014 crash, shortly after the automaker began a recall of 2.6 million vehicles with the defect. An ignition switch defect on Ions, Chevrolet Cobalts and other GM vehicles could cause engines to stall and prevent airbags from deploying in crashes. The problem has since been linked to nearly 400 injuries and deaths. GM has already paid roughly $2 billion in settlements and penalties after admitting that certain employees knew of switch problems for many years prior to the recall. Several hundred lawsuits remain unresolved, including claims for injuries, deaths and lost vehicle value over the switch. GM told Furman it had learned of new evidence to show that Scheuer and his wife gave misleading testimony about the link between the crash and their later eviction from their "dream house," among other things. A spokesman for GM, Jim Cain, said in a statement that the "apparent lies of the plaintiff and his wife told the jury ended the trial early." GM had argued that the ignition-switch defect had nothing to do with the neck and back pain Scheuer blamed on the car accident.
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A surge in socially responsible investments to $59 trillion globally over the past decade is nudging Asian firms to change a notoriously insular management style to one that actively addresses corporate governance concerns. As earnings growth and China’s economy slow, corporate executives are becoming more receptive to the investment messages from funds committed to Environmental, Social and Governance (ESG) principles. That commitment can be measured in trillions of investment dollars - global investors who have signed the United Nations Principles for Responsible Investing (PRI) now own or manage $59 trillion, a surge from a mere $4 trillion in 2006, reflecting growing evidence that responsible investments translate to higher long-term returns. Companies in Asia are beginning to take heed as boardroom indifference to issues like minority shareholder rights and the environment is giving way to stronger corporate governance that seeks to satisfy all stakeholders. Asian firms now make up more than half of the Dow Jones Sustainability Emerging Markets Index, a benchmark for environmental, social and governance performance. Seven of the 13 additions to the index last year were from Asia. "A company’s willingness and ability to address ESG issues relevant to its business can be a material driver of the company’s performance and valuation," said Arthur Lau, head of Asia ex-Japan fixed income at PineBridge Investments, a signatory to the U.N. PRI.
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The Agricultural Bank of China Ltd (AgBank) may lose 3.8 billion yuan ($578 million) from a bills of exchange scam allegedly carried out by two employees, the influential financial publication Caixin reported. The report, quoting unnamed sources, said the employees had illegally sold the bills of exchange to an unnamed third-party, and then used the proceeds to invest in the stock market, which has slumped since the middle of last year. The report said the employees, who worked at a Beijing branch, were now under investigation, but did not specify by whom. It said the Ministry of Public Security and the China Banking Regulatory Commission had also reported the case to the cabinet. Officials at Agbank, China’s third largest lender, did not respond to repeated attempts for comment. China’s banks have been dogged by accusations of corruption, with a recent crackdown on the financial industry netting senior executives for bribery, including the former vice president of AgBank who was sentenced to life imprisonment last year for accepting bribes.
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Chinese authorities are planning to tighten regulation of its fast-growing internet finance industry and crack down on illicit transactions, state media reported, as the country works to rein in fraud on its online lending platforms. China’s unregulated online peer-to-peer (P2P) industry has been dogged by reports of fraud in recent years, underscoring growing financial risks and increasing the potential for social unrest. More than 1,200 P2P firms operating in the sector are in trouble, either running away with investors’ money or closed down, according to industry data provider Wangdaizhijia. The country has almost 3,800 such firms, who do 133.1 billion yuan ($21 billion) worth of business. Chinese police have detained suspects at Ezubao, the country’s largest P2P platform by lending figures, law enforcement authorities said in December. Ezubao could not be reached by telephone for comment. Authorities will work with bank regulators to set up a warning system for financial risks and facilitate sharing of information between regions and departments, the official news agency Xinhua reported, citing a statement from a government conference on political and legal work. Loans, investments and other financial services done online qualify as internet finance, Xinhua said. Authorities will crack down on law-breakers and work to better educate the public of risks, the newswire said.
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The U.S. Federal Trade Commission is investigating Turing Pharmaceuticals for possible antitrust violations in connection with the company’s decision to hike the price of a life-saving drug by more than 5,000 percent, a lawyer for former Chief Executive Officer Martin Shkreli wrote. The probe was disclosed in a letter to the U.S. House of Representatives’ Committee on Oversight and Government Reform from Baruch Weiss, Shkreli’s lawyer, as grounds for why his client would not answer questions about drug prices at a Jan. 26 hearing. The committee had subpoenaed Shkreli, who has been indicted separately on securities fraud charges, to appear to discuss why, as Turing’s CEO, he decided to raise the price of Daraprim to $750 a tablet from $13.50. The drug, which was acquired by the company, is used to treat toxoplasmosis, a parasitic infection especially dangerous to AIDS patients and others with compromised immune systems. In a letter, Weiss said Shkreli would "gladly cooperate" with the committee and produce documents if it granted immunity to the controversial 32-year-old former drug executive. But even if that happened, it would not occur before the hearing, "so there is no reason on that account for Mr. Shkreli to appear" at it, Weiss wrote in the letter. In light of government probes involving Shkreli, Weiss said his client would otherwise refuse to answer questions under his constitutional right not to incriminate himself. The probes include a FTC investigation concerning Daraprim that had not been previously public. It mirrors another antitrust investigation cited by Weiss by the New York state attorney general. Weiss wrote that the "same facts that would support liability under civil antitrust violations would support criminal antitrust charges," and that as a result, any statements by Shkreli about Daraprim could be used against him.
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Five people, including two former GlaxoSmithKline (GSK.L) researchers, were charged with a scheme to steal trade secrets from the British drugmaker for potential sale in China, according to indictments announced by the U.S. Attorney’s Office in Philadelphia. The indictments include charges of conspiracy to steal trade secrets, conspiracy to commit wire fraud, conspiracy to commit money laundering, theft of trade secrets, and wire fraud. The stolen information on drugs for cancer and other serious diseases "potentially could be sold for millions of dollars to rival pharmaceutical companies and it would also be useful information for a start-up pharmaceutical company," the complaint said. The alleged conspirators established three corporations, one incorporated in Delaware, and two likely in China, all using the name Renopharma, to sell the stolen information that could be used to reproduce Glaxo products and drugs in development, to competitors in China, according to the complaint. One of the five, Yu Xue, was a senior-level manager and biotechnology expert at a Glaxo research facility in Pennsylvania with access to a wide array of secret information. She was fired Jan. 6, Glaxo said. She is accused of sending confidential information related to a dozen or more products to fellow "conspirators and others," and also downloading a substantial amount of Glaxo intellectual property to pass along as part of the alleged scheme. A motion aimed at keeping Yu Xue detained that was filed earlier this month said she "stole millions, perhaps billions, of dollars’ worth of trade secret and other confidential information from her employer, GlaxoSmithKline, to resell in China." "Ms. Xue denies these allegations. She has pled not guilty and intends to contest these charges vigorously in court," her attorney Peter Zeidenberg of Arent Fox said in an e-mailed statement. The others named were Lucy Xi, a Glaxo scientist who left the company in November, Tao Li, Yan Mei and Tian Xue, who is Yu Xue’s twin sister. The sister was used to hide proceeds of the crime, according to the complaint.
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The Securities and Exchange Commission announced that Ocwen Financial Corp. has agreed to settle charges that it misstated financial results by using a flawed, undisclosed methodology to value complex mortgage assets. Ocwen agreed to pay a $2 million penalty after an SEC investigation found that the company inaccurately disclosed to investors that it independently valued these assets at fair value under U.S. Generally Accepted Accounting Principles (GAAP). In fact, Ocwen merely used the valuation performed by a related party to which it sold the rights to service certain mortgages that remained a financing liability in Ocwen’s accounting. Ocwen’s audit committee failed to review the methodology with company management or its outside auditor, and the related party’s valuation deviated from fair value measures. Ocwen consequently misstated its net income for the last three quarters of 2013 and the first quarter of 2014. According to the SEC’s order instituting a settled administrative proceeding, Ocwen’s internal controls also failed to prevent conflicts of interest involving Ocwen’s executive chairman, who played a dual role in many related party transactions. Ocwen disclosed to investors that its executive chairman was required to recuse himself from transactions with related companies where he also served in a leadership position. But Ocwen had no written policies or procedures on recusals for related party transactions, and the recusal practice that existed was flawed, inconsistent, and ad hoc. Therefore, Ocwen’s executive chairman was able to approve transactions from both sides, including a $75 million bridge loan to Ocwen from a company where he also served as chairman of the board.
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The Securities and Exchange Commission announced a whistleblower award of more than $700,000 to a company outsider who conducted a detailed analysis that led to a successful SEC enforcement action. “The voluntary submission of high-quality analysis by industry experts can be every bit as valuable as first-hand knowledge of wrongdoing by company insiders,” said Andrew Ceresney, Director of the SEC’s Enforcement Division. “We will continue to leverage all forms of information and analysis we receive from whistleblowers to help better detect and prosecute federal securities law violations.” Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower, added, “This award demonstrates the Commission’s commitment to awarding those who voluntarily provide independent analysis as well as independent knowledge of securities law violations to the agency. We welcome analytical information from those with in-depth market knowledge and experience that may provide the springboard for an investigation.” The SEC’s whistleblower program has paid more than $55 million to 23 whistleblowers since the program’s inception in 2011. Whistleblowers who voluntarily provide the SEC with unique and useful information that leads to a successful enforcement action may be eligible for an award. Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money is taken or withheld from harmed investors to pay whistleblower awards. By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.
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The Securities and Exchange Commission announced fraud charges against 11 former executives and board members at Superior Bank and its holding company involved in various schemes to conceal the extent of loan losses as the bank was faltering in the wake of the financial crisis. The SEC alleges the high-ranking officers and directors schemed to mislead investors and bank regulators by propping up Superior Bank’s financial condition through straw borrowers, bogus appraisals, and insider deals. Specifically they improperly extended, renewed, and rolled over bad loans to avoid impairment and the need to report ever-increasing allowances for loan and lease losses (ALLL) in its financial accounting. As a result, Superior Bank overstated its net income in public filings by approximately 99 percent for 2009 and 50 percent for 2010. The Birmingham, Ala.-based bank failed in 2011. According to the SEC’s complaint, the fraud involved many of the largest loans in Superior Bank’s portfolio. Among the lending schemes they used to materially understate the bank’s ALLL in public filings and conceal the loan problems: They engaged in non-recourse loans in which they replaced the borrowers of record for a severely delinquent loan with alternative borrowers who typically were in default on multiple other loans from Superior Bank. They agreed to the additional loan relationship as an explicit accommodation to avoid foreclosure or collection efforts on prior loans and understood they were not obligated to repay Superior Bank under the new loans.
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