Forensic News July 2015
Financial/Accounting Fraud
Toshiba inflated profits by $1.2 billion with top execs’ knowledge: investigation
Japan’s Toshiba Corp overstated its operating profit by 151.8 billion yen ($1.22 billion) over several years in accounting irregularities involving top management, an independent investigation said in a report. In the country’s biggest corporate scandal in years, the findings could lead to the restatement of earnings, a board overhaul and potentially hefty fines at the computers-to-nuclear conglomerate. Toshiba President and Chief Executive Hisao Tanaka and his predecessor, Vice Chairman Norio Sasaki, were aware of the overstatement of profits and delay in reporting losses in a corporate culture that “avoided going against superiors’ wishes,” the investigating committee said in a report filed by Toshiba to the Tokyo Stock Exchange. The overstatement was roughly triple Toshiba’s initial estimate. Sources have said Tanaka and Sasaki would resign in the coming months and most of the board would be replaced to take responsibility for the shortcomings. The report said Tanaka and Sasaki had set operating profit targets that the heads of divisions were required to meet, applying pressure by hinting at withdrawing from areas that underperformed. “Within Toshiba, there was a corporate culture in which one could not go against the wishes of superiors,” the report said. “Therefore, when top management presented ‘challenges’, division presidents, line managers and employees below them continually carried out inappropriate accounting practices to meet targets in line with the wishes of their superiors.” Sources said previously that one of the investigators’ theories was that top executives, worried about the impact of the 2011 Fukushima disaster on nuclear business, set unrealistic targets for new operations such as smart meters and electronic toll booths. The investigation comes as Prime Minister Shinzo Abe is trying to improve the country’s corporate governance in order to attract more foreign investors. This is Japan’s biggest business scandal since camera and medical equipment maker Olympus Corp’s 13-year cover-up of $1.7 billion in losses blew up in late 2011. The revelations shake one of the stalwarts of Japanese industry. Toshiba remains Japan’s 10th-biggest company by assets and market value despite its stock price falling 26 percent since the scandal surfaced in early April.
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N.Y. state senator found guilty of obstructing U.S. embezzlement probe
A New York state senator was convicted for seeking to obstruct a federal investigation into whether he had embezzled proceeds from sales of foreclosed properties, in one of a series of recent U.S. prosecutions of state lawmakers. John Sampson, 50, a Democrat who has represented southeastern Brooklyn, New York, since 1997, was found guilty by a federal jury in Brooklyn on three counts, including obstruction, but acquitted on six others. The case against Sampson, a former minority leader of the state Senate, was among a series of prosecutions of politicians based in New York’s capital of Albany, which in the last year has seen the leaders of both of its legislative chambers indicted for corruption. Federal prosecutors in Manhattan earlier this year brought charges against Assembly Speaker Sheldon Silver and Senate Majority Leader Dean Skelos, forcing both to leave their leadership posts, though they remain in office as senators. A federal jury in White Plains found Thomas Libous, the deputy majority leader of the Senate, guilty of lying to the Federal Bureau of Investigation during a public corruption probe. Prosecutors had initially charged Sampson in 2013 with embezzling $440,000 from escrow accounts related to Brooklyn properties that he controlled in his role as a court-appointed referee in foreclosure proceedings. He was accused of using the money to help pay expenses for an unsuccessful 2005 primary bid for Brooklyn district attorney. But U.S. District Judge Dora Irizarry dismissed the embezzlement charges in October on statute of limitations grounds, leaving prosecutors to take him to trial on charges that Sampson attempted to impede their investigation. Prosecutors said that in 2006, Sampson asked an associate in the real-estate industry, Edul Ahmad, for $188,500 to help repay some of the stolen money, out of fear it could subject him to prosecution. After Ahmad was indicted in 2011 as part of a mortgage-fraud scheme, Sampson attempted to prevent him from cooperating with authorities and sought information about that case from a paralegal in the Brooklyn U.S. Attorney’s office, Sam Noel. Both Ahmad and Noel ultimately pleaded guilty to federal charges and testified at trial against Sampson.
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New York state probes banks over FIFA-related accounts
New York state’s banking regulator has contacted more than six banks about how they may have handled money that U.S. prosecutors said was laundered through accounts related to world soccer’s governing body FIFA, according to a person familiar with the matter. Among the banks were Deutsche Bank, Credit Suisse,, Standard Chartered and Barclays Plc,, said the person, who requested anonymity because the investigation was not publicly announced. They said the New York Department of Financial Services was looking into whether the banks followed rules and regulations regarding anti-money laundering compliance. The person also said that it was too early to say whether there was any wrongdoing. Nine former and current officials of Zurich-based FIFA and five sports marketing or broadcasting executives were indicted in federal court in Brooklyn, New York on May 27 on bribery, money laundering and wire fraud charges dating back 24 years. Kelly T. Currie, the Acting U.S. Attorney for the Eastern District of New York, which is handling the case, said when the indictments were announced that bank actions would be reviewed to see if financial institutions knowingly facilitated bribes. The banks concerned were not accused of wrongdoing. Representatives of Deutsche Bank and Credit Suisse could not immediately be reached for comment. The New York state investigation was parallel to the federal probe, the person familiar with the matter said. Around the time the FIFA indictment was made public, banks began receiving formal requests for information about their ties to certain U.S. soccer promoters, said compliance officers at two banks named in the indictment. U.S. authorities also have continued to probe the banks, sources at some banks named in the indictment said. These requests, which Treasury’s anti-money laundering unit forwards to banks on behalf of law enforcement agencies, require banks to state whether they processed transactions for, and/or provided accounts to, the named targets.
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U.K. Accounting Watchdog Probes RSA’s Irish Scandal
The U.K. Financial Reporting Council is investigating former employees of RSA Insurance Group Plc’s Irish unit regarding accounting irregularities in 2012. “The FRC has decided to investigate the conduct of certain individual members,” the accounting and auditing authority said in a statement. The probe is “a result of the identification of issues within the claims and accounting functions announced by RSA” at the end of 2013. It didn’t name the individuals it will investigate. Philip Smith resigned as RSA’s Irish chief executive officer in November 2013 and two executives were fired after the insurer began investigating how the Dublin-based unit set aside reserves for insurance claims. Smith won a 1.25 million-euro ($1.37 million) award from an employment appeal tribunal last month after he brought a case saying he was made the “fall guy” for the accounting issues and that he was effectively ousted. RSA has appealed the judgment. The FCA isn’t investigating RSA, the London-based insurer said in a separate statement. The company said it will assist with the probe, if asked. “The FRC’s remit is over members and member firms of accountants, auditors and actuaries,” RSA said. “We understand that the investigation will, therefore, cover members of these professions who were employed by RSA at the time.” Deloitte Touche Tohmatsu audited RSA Ireland’s accounts in 2012. Claire Quinn, a spokeswoman for the firm in Dublin, said the FRC is not investigating Deloitte, or any of its employees involved in the audit. Ireland’s central bank has been carrying out an investigation into RSA Ireland’s claims-reserving practice since November 2013. RSA CEO Stephen Hester said last year he expected the company to get a fine, though it wouldn’t be “headline-making.” Under Irish laws introduced in 2013, the central bank can fine firms as much as 10 million euros, or 10 percent of revenue for regulatory breaches. It may fine individuals as much as 1 million euros.
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Vatican had more than a billion euros off its books before financial clean-up
Vatican departments had more than a billion euros that were not declared on an overall balance sheet before new accounting standards kicked in last year, a financial statement showed. The man appointed to clean up Vatican finances said last December that departments had “tucked away” million of euros and followed “long-established patterns” in jealously managing their affairs without reporting to any central accounting office. The statement showed that such funds totaled about 1.1 billion euros ($1.2 billion), the first time the Vatican has quantified the unreported funds discovered after Cardinal George Pell took up the newly created post of economy minister. Pope Francis picked Pell, an outsider from the English-speaking world, to oversee the Vatican’s often muddled finances after decades of control by Italians. Pell did not suggest any wrongdoing but said the departments had long had “an almost free hand” with their finances. The Vatican said at the time that Pell was not referring to any “illegal, illicit or badly administered funds”. The financial statement for 2014, issued after a meeting of the Vatican’s Council for the Economy, also showed that the Holy See, including most of its departments in Rome and embassies around the world, ran a budget deficit of 25.6 million euros, in line with the previous year. Vatican City State, which has a separate budget, ran a surplus of 63.5 million euros, almost twice the previous year’s, due to strong revenue from the Vatican Museums, which draw about six million paying visitors a year, and other cultural activities. Since the pope’s election in March, 2013, the Vatican has enacted major reforms to adhere to international financial standards and prevent money laundering and has closed many suspicious accounts at its scandal-rocked bank, the Institute for Works of Religion (IOR). Last year, the Vatican adopted International Public Sector Accounting Standards (IPSAS) and each department’s financial statements are now reviewed by an international auditing firm.
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‘I Am Not a Thief,’ Najib Says as Money Trail Probed
A Malaysian task force is investigating a money trail that allegedly showed funds ending up in Prime Minister Najib Razak’s bank accounts, a claim he says is political sabotage as some cabinet members voiced support. The Attorney-General said the task force obtained documents related to the apparent transfer of funds in its probe of a state investment company and during raids on three companies. Home Minister Ahmad Zahid Hamidi said attempts to undermine the government could be a threat to national security while Defense Minister Hishammuddin Hussein said it’s reckless to criticize Najib as the truth has not been determined. “I am not a thief,” Najib told reporters. “I am not a traitor and will not betray Malaysians and Malaysia” by misappropriating funds, he said. About $700 million may have moved through government agencies, banks and companies linked to state investment company 1Malaysia Development Bhd. before apparently appearing in Najib’s accounts, the Wall Street Journal reported, citing documents from a government probe. The Prime Minister’s Office said the claims were part of a “political sabotage” campaign by some individuals seeking to remove Najib from office. The scandal surrounding the alleged funds is the biggest crisis so far to engulf Najib, 61, since he came to power in 2009. It may threaten his ability to implement more economic reforms such as a new consumption tax and fuel subsidy cuts that Fitch Ratings cited when it affirmed Malaysia’s sovereign rating on June 30 and upgraded its outlook to stable. Najib said that the allegations against him are wild and malicious, and he is seeking legal advice on action to be taken against the Wall Street Journal. The Sarawak Report, a news web site set up by British investigative journalist Clare Rewcastle-Brown in 2010, reported on a similar money trail involving the companies raided by the task force as well as Malaysian lender AMMB Holdings Bhd., where there were allegedly accounts bearing Najib’s name. An AMMB spokesman said it’s unable to comment as the lender is guided by the Financial Services Act which governs client confidentiality.
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PetroVietnam ex-chairman held on suspected fraud-police
Police in Vietnam said they had detained the recently ousted chairman of state oil and gas company PetroVietnam on suspicion of fraud while he was leading the banking unit of conglomerate Ocean Group. The country’s economic police department said in a statement Nguyen Xuan Son, when general manager of Ocean Group’s Ocean Commercial Bank unit, had abused his position of power and “deliberately acted against state regulations of economic management and caused serious consequences”. Son was removed from the chairmanship of PetroVietnam by Prime Minister Nguyen Tan Dung, the government news web site said. Son’s detention comes after Vietnamese police in October detained Ocean Group founder and chairman Ha Van Tham on suspicion of financial irregularities. Unlisted Ocean Commercial Bank was taken over earlier this year by the State Bank of Vietnam, which said it had suffered serious financial losses and the acquisition would help ensure the safety of the banking system. Ocean Group shares have plunged around 80 percent since its founder’s arrest in October.
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After Toshiba scandal, foreign investors want tougher Japan governance steps
Japan needs bolder measures such as harsher criminal sanctions for fraud and whistleblower protections to improve corporate transparency and prevent a repeat of the accounting scandal seen at Toshiba Corp, foreign investors and governance experts said. Toshiba’s chief executive Hisao Tanaka and a string of other senior officials resigned after an independent inquiry found he had been aware the company had inflated its profits by $1.2 billion over several years. The scandal is a major setback for the government of Prime Minister Shinzo Abe, who has made improving corporate governance a central theme in his bid to reinvigorate Japan’s economy and entice more foreign capital. “This is a negative headline in what’s been 18 months of positive momentum in Japan,” said Singapore-based David Smith, head of corporate governance at Aberdeen Asset Management, which owns Japan stocks. An Aberdeen affiliate had a very small equity holding in Toshiba as of end-May, Reuters data shows. “This is a black mark for corporate Japan in the face of positive news and strong markets. The government may want to act tough,” said Smith, who helps manage about $115 billion in Asia. Japan’s listed companies have long-had tense relations with their foreign shareholders, who have frequently blamed long-term insiders’ dominance of corporate boards for low returns and weak oversight. In response to this criticism, the Abe government last month introduced new rules requiring listed company boards to appoint at least two outside independent directors, but investors said this did not go far enough – Toshiba already had four independent directors as part of its 16-person board. “The Toshiba scandal further underlines the need for board training as well as a robust whistleblower protection system,” said Seth Fischer, chief investment officer at Hong Kong-based hedge fund Oasis Management and a corporate governance activist who successfully pushed for reforms at Nintendo Co Ltd. “Whistleblowers are ultimately performing a service to the company, its executives and the company’s overall mission – which is integrity of financial statements. They need to be rewarded as such,” he said. This week’s revelations come four years after a similar scandal in which camera-maker Olympus Corp concealed nearly $1.7 billion in losses from shareholders. Both scandals also raise questions about the quality of Japan company audits, which rate poorly compared with developed market peers, according to data compiled by Hong Kong-based GMT Research.
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Citigroup’s Mexico Unit Faces Widening U.S. Money-Laundering Probe
The U.S. Justice Department is investigating whether Citigroup Inc. let customers move illicit cash through its Mexico unit, setting the bank’s biggest international operation in the path of an expanding money-laundering probe. The Justice Department subpoenaed Banco Nacional de Mexico, known as Banamex, demanding information about its anti-money-laundering controls and seeking documents about its due diligence on operations involving hundreds of clients, according to documents reviewed by Bloomberg. The subpoena, which was sent in January but hasn’t been reported or disclosed by the bank, expands a Justice Department investigation previously known to focus only on a small U.S. unit. It shows investigators are looking into a Mexico operation that accounts for about 10 percent of the New York-based company’s core revenue, and has about 1,500 branches – almost twice as many as Citigroup has in the U.S. Banamex, which is wholly owned by Citigroup, is already under U.S. investigation over alleged loan fraud against the bank. Citigroup separately said it shut down a unit of Banamex security guards last year after uncovering fraud there. The investigation further threatens the legacy of Manuel Medina-Mora, who has been a face of Banamex for nearly two decades. He led Banamex when Citigroup acquired it in 2001, later advancing to run Citigroup’s Latin American consumer operations and ultimately its global consumer bank. Medina-Mora, who stepped down as Citigroup’s co-president last month, retains the title of non-executive chairman of Banamex. Neither Citigroup nor Medina-Mora have been accused of wrongdoing. Molly Millerwise Meiners, a Citigroup spokeswoman, declined to make Medina-Mora available for comment. Peter Carr, a Justice Department spokesman, declined to comment. Citigroup disclosed last year that the U.S. Attorney’s Office in Boston was looking into money-laundering controls at Citigroup and related parties. Meiners declined to comment on any probe, referring to Citigroup’s most recent disclosure of the investigation, in March, which said the bank is cooperating. The disclosures named a California unit, Banamex USA, but not the Mexico unit.
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Las Vegas executive bilked Japanese victims in $1.5 billion Ponzi scheme
A Las Vegas executive and two associates from Tokyo were indicted by a federal grand jury for running an alleged $1.5 billion Ponzi scheme that bilked thousands of Japanese victims, the U.S. Department of Justice said. The indictment charged Edwin Fujinaga, 68, who once ran MRI International Inc in Las Vegas, with eight counts of mail fraud, nine counts of wire fraud and three counts of money laundering. Junzo Suzuki, 66, and Paul Suzuki, 36, both of Tokyo, were each also charged with the 17 mail and wire fraud counts. Fujinaga and MRI were previously found liable for fraud in a related U.S. Securities and Exchange Commission civil case, and are appealing a $584.4 million judgment imposed on Jan. 27 by U.S. District Judge James Mahan in Las Vegas. The alleged scheme centered on accounts receivable, which is money owed for goods or services already delivered. U.S. prosecutors said the defendants solicited more than $1.5 billion, mainly from Japanese residents, from 2009 to 2013 by promising to buy accounts receivable from medical companies at a discount and recoup the full value later from insurers. Instead, the defendants allegedly used new investor money to repay earlier investors and diverted some funds to pay themselves sales commissions, subsidize gambling habits and cover luxuries such as private jet travel. Junzo Suzuki was executive vice president of MRI’s Asia-Pacific operations, and Paul Suzuki was general manager of its Japan operations. Fujinaga is a U.S. citizen. Junzo Suzuki a Japanese citizen, and Paul Suzuki a dual citizen, the indictment said. The charges show the U.S. government’s willingness to pursue “not only those who victimize American citizens, but also those who use the U.S. as a home base to defraud victims abroad,” Leslie Caldwell, assistant attorney general of the Justice Department’s criminal division, said in a statement. The SEC previously accused Fujinaga of using fraud proceeds to pay for luxury cars, credit card bills, alimony, child support, and homes in Las Vegas, Hawaii and Beverly Hills, California. It said some of his investors also came from Canada, Malaysia and New Zealand.
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Foreign Corrupt Practices Act (FCPA)
Louis Berger International Resolves Foreign Bribery Charges
Louis Berger International Inc. (LBI), a New Jersey-based construction management company admitted to violations of the Foreign Corrupt Practices Act (FCPA) and agreed to pay a $17.1 million criminal penalty to resolve charges that it bribed foreign officials in India, Indonesia, Vietnam and Kuwait to secure government construction management contracts. Two of the company’s former executives also pleaded guilty to conspiracy and FCPA charges in connection with the scheme. LBI entered into a deferred prosecution agreement (DPA) and admitted its criminal conduct, including its conspiracy to violate the anti-bribery provisions of the FCPA. Pursuant to the DPA, LBI has agreed to pay a $17.1 million criminal penalty, to implement rigorous internal controls, to continue to cooperate fully with the department and to retain a compliance monitor for at least three years. Richard Hirsch, 61, of Makaati, Philippines, and James McClung, 59, of Dubai, United Arab Emirates, each pleaded guilty to one count of conspiracy to violate the FCPA and one substantive count of violating the FCPA. Hirsch previously served as the Senior Vice President responsible for the company’s operations in Indonesia, Thailand, the Philippines and Vietnam. McClung previously served as the Senior Vice President responsible for the company’s operations in India and, subsequent to Hirsch, in Vietnam. The sentencing hearings for Hirsch and McClung are scheduled for Nov. 5, 2015. According to admissions in the DPA and statements in the charging documents, from 1998 through 2010, the company and its employees, including Hirsch and McClung, orchestrated $3.9 million in bribe payments to foreign officials in various countries in order to secure government contracts. To conceal the payments, the co-conspirators made payments under the guise of “commitment fees,” “counterpart per diems,” and other payments to third-party vendors. In reality, the payments were intended to fund bribes to foreign officials who had awarded contracts to LBI or who supervised LBI’s work on contracts.
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U.S. Seeks to Recover $12.5 Million Obtained from High-Level Corruption in the Philippines
The Department of Justice filed a civil forfeiture complaint seeking to recover approximately $12.5 million in assets found in the United States that derive from bribery and kickback schemes in the Philippines spanning nearly a decade. As alleged in the complaint, from approximately 2004 to 2012, Philippine businesswoman Janet Napoles, 51, paid tens of millions of dollars in bribes and kickbacks to Philippine politicians and other government officials in exchange for over $200 million in funding for purported development assistance and disaster relief. Napoles’ non-governmental organizations (NGOs), however, then either failed to provide, or under-delivered on, the promised support. The complaint further alleges that Napoles also diverted NGO funds for her own personal use and benefit, often draining accounts within days of government disbursements. For this conduct, the Philippines’ Office of the Ombudsman has charged Napoles, two of her children and numerous current and former Philippine politicians and other government officials in connection with what has been nicknamed the “pork barrel scam.” The complaint alleges that Napoles transferred over $12 million in Philippine government-awarded funds to bank accounts in the United States in the names of, or controlled by, her family members. According the complaint, Napoles used the money to purchase numerous assets, including a condominium at the Ritz-Carlton in Los Angeles for her 21-year-old daughter. The complaint seeks to forfeit the proceeds from the sale of the Los Angeles condominium, along with several other assets, including a motel near Disneyland in Anaheim, California; properties in Covina and Irvine, California; a 19 percent stake in a California-based consulting company; and a Porsche Boxster that was purchased for another daughter. Napoles is currently serving a sentence of life in prison in the Philippines for her role in the kidnapping and detention of her cousin, Benhur Luy, who served as Napoles’s finance officer and tracked her schemes.
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In Land of White Collar Wrist-Slapping, A Milestone Ruling
In a milestone day for Brazil’s biggest-ever corruption investigation, a judge handed down the first punishments to former executives at a building company and a top CEO was indicted. Judge Sergio Moro sentenced Camargo Correa SA’s ex-President Dalton Avancini along with Eduardo Leite, the conglomerate’s former vice president, to 15 years and 10 months for corruption, money laundering and organized criminal activity. Both had previously turned state’s witness, and will serve part of their sentences under house arrest. Federal police also indicted Marcelo Odebrecht, head of Odebrecht SA holding company that owns Latin America’s largest builder, and other company executives. In a nation where white-collar criminals are rarely punished, the sentences and indictments mark a new phase in the investigation of inflated contracts at state-run oil giant Petroleo Brasileiro SA that began last year. The probe has hobbled the economy by slowing infrastructure works and created political turmoil as state witnesses accuse lawmakers of allegedly benefiting from the kickback scheme. “The 20th of July may be remembered as an important day where a lot of things sort of slammed together,” David Fleischer, an emeritus professor of political science at the University of Brasilia, said by phone. “This is the first time in the history of the republic that you have these very powerful business people – Odebrecht is one of the largest private firms in Brazil – being arrested, put in prison for over a month, and then indicted. That’s a really big first.” Camargo Correa paid 50 million reais ($16 million) in kickbacks for two contracts to executives in Petrobras’s supply division including former director Paulo Roberto Costa, according to Moro’s decision. Moro also sentenced Joao Ricardo Auler, a former chairman, to nine years and six months for the same offenses as Avancini and Leite. Since it first learned of the investigations, Camargo Correa has worked to identify and clear up irregularities, and reinforced its corporate governance and control systems, the company said in an e-mail in response to questions about the sentences.
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Litigation Matters
BP’s $18.7 Billion Oil-Spill Deal Still Leaves Lesser Messes
BP Plc’s record $18.7 billion settlement ended government claims over the 2010 Gulf of Mexico oil spill, leaving numerous smaller private lawsuits to be mopped up. While investors, residents and businesses that didn’t join a 2012 settlement still demand billions, BP’s biggest threats are gone, said Anthony Sabino, a law professor at St. John’s University in New York who specializes in complex litigation. The U.S. and the states, partly because of political motivations, “were, by far, the most tenacious adversaries,” he said in an e-mail. “Private parties think only in terms of cold hard, cash,” so the remaining claims will be easier to resolve, Sabino said. “Put enough on the table and they go away.” The Macondo well exploded in April 2010, burning and sinking the Deepwater Horizon drilling rig and setting off the biggest offshore spill in U.S. history. Eleven men died aboard the rig and crude spewed from the sea floor for weeks. The accident sparked thousands of lawsuits against BP, as well as Transocean Ltd., the rig’s owner, and Halliburton Co., which provided cementing services for the project. BP’s predicament got worse as falling oil prices cut first-quarter revenue by 41 percent from a year earlier, to $54.2 billion. The settlement was the largest of BP’s agreements since the spill. The London-based company agreed in 2012 to plead guilty and pay the government $4 billion to resolve a criminal case. BP also agreed that year to pay another $525 million over allegations it initially understated the size of the spill. Also in 2012, the company reached an estimated $10.3 billion settlement with most Gulf area residents and businesses harmed by the spill. That deal will probably cost “significantly” more because it doesn’t reflect claims that haven’t been fully processed, the company said in an April regulatory filing. The settlement didn’t cover banks, casinos, insurance companies and businesses or residents in large swaths of Texas and Florida. It also didn’t include shareholders or businesses blaming BP for the Obama administration’s moratorium on deep-water drilling in the gulf after the spill. Those claims remain, as do the suits by residents and businesses that opted out of the 2012 settlement.
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Gulf Coast contractor to pay $20 mln to settle labor suits
Signal International will pay $20 million to settle lawsuits alleging fraud and labor trafficking by the Alabama oil rig repair company, which brought hundreds of Indian men to work on the Gulf Coast after Hurricane Katrina, attorneys for the plaintiffs said. The settlement, which included an apology by the company to about 200 guest workers involved in the suits, must win the approval by a bankruptcy court in Delaware, where Signal filed for Chapter 11 protection. “These workers have waited seven long years for justice,” Jim Knoepp, deputy legal director for the Southern Poverty Law Center, said in a prepared statement, noting that the Southern Poverty Law Center spearheaded the litigation. “This agreement and apology from the company will allow the workers to finally move on with their lives,” he said. The settlement enables the company to resolve 11 lawsuits still pending after the first five plaintiffs in the litigation won a federal verdict from Signal in February. The jury in that case awarded $14 million in damages to the Indian guest workers. All the plaintiffs, including the initial five, will share in $20 million settlement in lieu of the earlier damage award, a spokeswoman for the plaintiffs said.After the four-week trial in New Orleans in February, the jury found that Signal had recruited hundreds of Indian men under the U.S. guest worker program to repair oil rigs and facilities damaged by Hurricane Katrina in 2005. The workers paid $10,000 apiece to recruiters and were promised good jobs and permanent U.S. residency for their families. After arriving at Signal shipyards in Pascagoula, Mississippi, they discovered that they would not receive promised residency documents. Signal also charged the men $1,050 a month to live in guarded labor camps in inhumane conditions, the jury found. An economist who reviewed Signal’s records for the plaintiffs estimated the company saved more than $8 million by hiring the Indian workers. “This agreement will ensure some compensation for these workers who only sought a better life when they took these jobs,” said attorney Alan Howard, SPLC board chairman.
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Justice Department Files Antitrust Lawsuit to Stop Electrolux from Buying General Electric’s Appliance Business
The Department of Justice filed a civil antitrust lawsuit seeking to block the acquisition of General Electric Company’s appliance business by AB Electrolux and Electrolux North America Inc., whose brands include Frigidaire. The department said that the $3.3 billion acquisition would combine two of the leading manufacturers of ranges, cooktops and wall ovens sold in the United States, eliminating competition that has benefited American consumers through lower prices and more options. According to the department’s complaint, purchasers in the United States spent over $4 billion on these major cooking appliances in 2014. “Electrolux’s proposed acquisition of General Electric’s appliance business would leave millions of Americans vulnerable to price increases for ranges, cooktops and wall ovens, products that serve an important role in family life and represent large purchases for many households,” said Deputy Assistant Attorney General Leslie C. Overton of the Justice Department’s Antitrust Division. “This lawsuit also seeks to prevent a duopoly in the sale of these major cooking appliances to builders and other commercial purchasers, who often pass on price increases to home buyers or renters.”
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TD Bank to pay $20 mln to settle Ponzi scheme lawsuit – attorney
TD Bank has agreed to pay $20 million to settle a class action lawsuit accusing it of aiding a Ponzi scheme that allegedly bilked over a thousand European investors of more than $223 million, a lawyer for the investors said. The preliminary settlement, subject to court approval, resolves accusations that TD Bank, part of Canada’s Toronto-Dominion Bank, failed to properly monitor trust accounts that held investors’ money and ignored its duty to investigate suspicious activities under U.S. anti-money laundering rules. In court filings, lawyers for TD Bank said investors failed to show the bank had actual knowledge of misconduct. The bank provided routine banking services, which did not constitute substantial assistance to the alleged scheme, the lawyers said. Filed in 2014, the lawsuit sought damages for investors in Belgium, the Netherlands and Spain who bought so-called life settlements marketed through Quality Investments, a Dutch company with offices at the World Trade Center Amsterdam. Life settlements are life insurance policies sold to investors who receive proceeds from death benefits when the insured person dies. Dutch authorities in 2011 arrested four people suspected of running a Ponzi scheme through Quality Investments involving the sale of U.S. life insurance policies. The settlement is the second in less than two years involving allegations that TD Bank failed to report suspicious activity in accounts allegedly used for a Ponzi scheme. In September 2013, it agreed to pay $52.5 million to settle U.S. civil regulatory charges that it failed to uncover and report suspicious activities by Florida lawyer Scott Rothstein, who was sentenced to a 50-year prison term for a $1.2 billion fraud. The latest lawsuit, filed in a South Florida federal court, said investors were assured their money and the insurance policies they invested in would be held in attorney trust accounts at TD Bank. Instead of being safeguarded, new investor funds were diverted to pay premiums on policies held for earlier investors, the lawsuit said. The lawsuit said TD Bank failed to report suspicious activity in the accounts, including wire transfers of tens of millions of dollars to Cyprus, Turkey and other known money-laundering destinations.
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The 7th Circuit just made it a lot easier to sue over data breaches
One of the truisms of big litigation is that plaintiffs lawyers are adaptive folks. That’s certainly been borne out over the last couple of years in class actions against corporations whose customer or employee information has been compromised in hacker attacks. Federal judges in district courts dismissed those cases in waves after the U.S. Supreme Court clarified in its 2013 decision in Clapper v. Amnesty International that to meet constitutional requirements to sue in federal court, plaintiffs have to allege they are at imminent risk of suffering a concrete injury. Class action lawyers eventually figured out how to get around Clapper by suing in the name of lead plaintiffs who had allegedly suffered a concrete injury. In a big data breach case against Target, for instance, the trial judge ruled last year that customers had standing to bring a class action because they were temporarily unable to access money in their accounts. And earlier this year, Sony employees were permitted to move forward with their suit against the company because hackers had posted their personal information on Internet sites frequented by identity thieves, making their potential injury concrete. If Clapper was a silver bullet for data breach defendants, artful drafting could at least give plaintiffs lawyers a way to deflect it. Now they don’t need to deflect, at least not in the 7th U.S. Circuit Court of Appeals. A 7th Circuit panel reinstated a data breach class action against the retailer Neiman Marcus, holding that the theft of customers’ financial information was enough to satisfy constitutional standing requirements, even after Clapper. This is a really consequential decision. It’s the first time a federal appeals court has looked at a data breach class action that was dismissed because the trial judge said it fell short of Clapper standing requirements. The 7th Circuit said flatly that Clapper “does not, as the district court thought, foreclose any use whatsoever of future injuries to support Article III standing.” Sometimes, the opinion said – quoting a footnote from the Clapper opinion – standing can be established when there is a “substantial risk” of harm and plaintiffs “reasonably incur costs to mitigate or avoid that harm.” According to the 7th Circuit, Neiman Marcus customers have standing to sue because are at substantial risk of fraudulent charges or identity theft. Like Neiman Marcus customers in their brief to the 7th Circuit, the panel opinion cited a 2014 ruling by U.S. District Judge Lucy Koh in In re Adobe Systems Privacy Litigation, which said the test for standing in the 9th Circuit, even after Clapper, remains “a credible threat of real and immediate harm,” as established in the 2010 decision in Krottner v. Starbucks. Judge Wood’s opinion also said the Neiman Marcus customers have standing because some plaintiffs paid for credit monitoring services. In Clapper, the Supreme Court said plaintiffs can’t establish constitutional standing by spending money to ward off speculative harm. But when a data breach has occurred, the 7th Circuit said, the harm is not speculative – as Neiman Marcus implicitly acknowledged by offering customers credit monitoring. Finally, the 7th Circuit sided with customers on two additional standing requirements, finding that their alleged injuries were traceable to Neiman Marcus and that their alleged harm could be redressed in the litigation. Neiman Marcus’ lawyers at Sidley Austin had argued against both points in the company’s appellate brief. It said customers didn’t know for sure that hackers obtained their credit information from Neiman Marcus’ systems because other retailers, including Target, experienced breaches at around the same time as the Neiman hack. It also argued that all of the fraudulent purchases cited by the name plaintiffs had been reimbursed by their credit card companies. But the appeals court said Neiman Marcus’ own “admissions and actions” – notifying customers that as many as 350,000 cards might have been exposed to hackers – backed plaintiffs’ allegations that their injuries were traceable to the retailer. And although fraudulent charges have so far been reimbursed, the 7th Circuit said, that “is not true for the mitigation expenses or the future injuries.”
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China Market
China police seek to formally charge Trafigura employee
Chinese police will seek to formally charge an employee of Swiss trading giant Trafigura, according to sources familiar with the probe, in a step that could escalate a closely watched 11-month stand-off over alleged fraudulent oil trading. Police will ask prosecutors to charge Tian Meng, Trafigura’s Beijing-based oil marketer, with contract fraud and fraudulently obtaining letters of credit, one of the sources who is in law enforcement said. It isn’t clear if prosecutors will follow through. They have turned down two previous attempts to lay charges against Tian. Under Chinese law this is the final request that will be considered. Prosecutors could not be reached for comment, but sources close to Trafigura said the earlier requests by police to file charges had been turned down due to a lack of evidence. The source in law enforcement said it was not unusual for prosecutors to turn down initial requests before charges are filed. Senior sources at Trafigura, one of the world’s leading oil and metals trading houses, view the investigation as a test of the rule of law in China and stress the matter is a commercial dispute and should not involve police or state prosecutors. Investigators in the city of Cangzhou detained Tian last August after private Chinese trader Qingdao United Energy filed a complaint to police, alleging it had lost $32 million via trade financing deals arranged without its knowledge between Tian and local trader Zhang Wei. Reuters has been unable to reach Tian and Zhang for comment. Li Yixin, founder of Qingdao United Energy, said he expected “the truth to be revealed and justice done.” The pressure on Trafigura in China has grown after a second employee, the head of its Beijing operations, Li Bo, was arrested on June 1. Senior sources at Trafigura said they do not believe that Li was involved in any of Tian’s transactions and are unclear on what the grounds are for his detention. Deals involving using commodities as collateral to raise money have become more sensitive in China after a billion-dollar scandal at Qingdao Port, where a private trading firm has been accused of duplicating warehouse certificates to secure bank loans. The source in law enforcement said freezes imposed on two bank accounts held by Trafigura in China will be extended for another six months, after the first freeze expires at the end of this month.
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One Driver Explains How He Is Helping to Rip Off Uber in China
James Li was unhappy with his pay as a security guard in Shanghai, so he started driving on weekends for Uber Technologies Inc. He’s almost tripled his pay – in part by scamming the company. Li, an alias since he feared retribution if his real name was made public, is taking advantage of Uber’s efforts to break into the China market. The U.S. car-booking company is spending millions on free rides and driver bonuses, betting the cash will help train China drivers and market Uber services to customers. Instead, people like Li have figured out how to cash in on Uber’s largesse without giving anyone a ride. He’s part of a cottage industry that has developed so drivers can use modified smartphones and software to place fake bookings and trick Uber into paying out cash for phantom trips. While there are no reliable estimates on how prevalent the scams are, interviews with Uber drivers, equipment vendors and reviews of postings on dedicated online forums suggest at least some of the $1 billion that Uber has pledged to spend to expand the service in China this year is being siphoned off by fake bookings. The scams may be counted among the number of trips Uber claims in China, a figure the company said reached almost 1 million per day in a letter this month to shareholders. “That number is definitely exaggerated,” Zhang Xu, an analyst at researcher Analysys International, said of Uber’s trip bookings. “It is well known that Uber has the problem of false bookings.” Uber has to balance between giving out incentives to build its pool of drivers and clamping down on fraud, as it chases market leader Didi Kuaidi. The company backed by Alibaba Group Holding Ltd. and Tencent Holdings Ltd. dominates China’s car-hailing market with 78 percent of ride bookings, versus about 11 percent for Uber, according to Analysys. Chief Executive Officer Travis Kalanick, who is in China to lead fundraising for its operations, said in the investor letter that the country may surpass the U.S. as its biggest market before the end of this year. Fraud accounts for less than 10 percent of bookings in China, Uber said, “much lower” than competitors and similar to other markets in the initial phase of service. Uber expects to manage fraud down to “sustainable levels below 0.5 percent in short order,” according to an e-mail response from the company.
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Healthcare Industry
Walgreen to pay $22.4 million in N.Y. Medicaid improper billing case
Walgreen Co has reached a $22.4 million settlement with the New York attorney general resolving claims that a unit improperly billed the government for reimbursement for a pediatric drug. The settlement, disclosed in court papers filed in Manhattan federal court, resolves claims first asserted in 2009 by a whistleblower in a lawsuit against Trinity Homecare LLC, a pharmacy primarily owned by Walgreen. The settlement marked the second in less than two weeks by the New York attorney general and Walgreen over improper conduct and billings by Trinity, after an earlier $2.55 million accord on June 29. Walgreen agreed to the settlement to avoid delay and expense and did so without any admission of liability, said spokesman James Cohn. The latest settlement concerned an injectable respiratory drug called Synagis, a brand name drug sold by AstraZeneca Plc that is intended for at-risk premature infants. According to the whistleblower lawsuit filed by a hospital physician, Susan Vierczhalek, Trinity promoted the off-label use of the drug and caused false claims to be submitted to the government. In a statement, New York Attorney General Eric Schneiderman said the pharmacy “did not always have a prescription for that drug, but billed Medicaid for it anyway.” “Of greater concern than the improper billing, is the possibility that infants could have received injections which were not properly prescribed to them,” he said. The federal government will receive some of the settlement, while New York will receive $12.23 million, Schneiderman’s office said. New York in turn will pay Vierczhalek $4 million as her share of the settlement, according to court papers. Barbara Hart, Vierczhalek’s lawyer, called the settlement “a great fraud recovery for Medicaid and gratifying in all respects.” Walgreen is part of Walgreens Boots Alliance Inc, and this year sold a majority stake in Trinity’s parent Walgreens Infusion Services to private equity firm Madison Dearborn Partners. That business is now known as Option Care.
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AstraZeneca and Cephalon to Pay $46.5 Million and $7.5 Million, Respectively, for Allegedly Underpaying Rebates
AstraZeneca LP has agreed to pay the United States and participating states a total of $46.5 million, plus interest, to resolve allegations that it knowingly underpaid rebates owed under the Medicaid Drug Rebate Program. Of that amount, AstraZeneca will pay roughly $26.7 million, plus interest, to the United States, and the remainder to states participating in the settlement. In a separate settlement arising out of the same case, Cephalon Inc. has agreed to pay the United States and participating states a total of $7.5 million, plus interest, to resolve similar allegations. Of that amount, Cephalon will pay roughly $4.3 million, plus interest, to the United States, and the remainder to states participating in the settlement. Pursuant to the Medicaid Drug Rebate Program, drug manufacturers are required to pay quarterly rebates to state Medicaid programs in exchange for Medicaid’s coverage of the manufacturers’ drugs. The quarterly rebates are based, in part, on the Average Manufacturer Prices (AMPs) that the manufacturers report to the government for each of their covered drugs. Generally, the higher the reported AMP for a drug, the greater the rebate the manufacturer pays to state Medicaid programs for the drug. These settlements resolve allegations that AstraZeneca and Cephalon underreported AMPs for a number of their drugs by improperly reducing the reported AMPs for service fees they paid to wholesalers. As a result, the government contends that AstraZeneca and Cephalon underpaid quarterly rebates owed to the states and caused the United States to be overcharged for its payments to the states for the Medicaid program. The two settlements partially resolve a lawsuit filed under the qui tam, or whistleblower, provisions of the False Claims Act, which permit private individuals to sue on behalf of the government for false claims and to share in any recovery. The amounts to be received by the whistleblower in this suit, Ronald J. Streck, a pharmacist, have not yet been determined.
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U.S. Seeks $3.3 Billion From Novartis in Drug Kickback Suit
The U.S. is seeking as much as $3.3 billion from Novartis AG in a suit claiming the company paid kickbacks to increase sales of two prescription drugs. The government claims a group of specialty pharmacies submitted thousands of fraud-tainted reimbursement claims to Medicare and Medicaid for the two drugs, Exjade and Myfortic. It’s seeking damages and civil fines against the drugmaker in a case set to be tried in New York in November. The U.S. disclosed the amount of its demand in a court filing. The U.S. claims Novartis referred patients to the specialty pharmacies and paid kickbacks in the form of rebates to get the pharmacies to recommend the drugs to patients and to increase sales. The scheme violated the False Claims Act and Anti-Kickback Statute, according to the government. The suit was filed in 2012 as a whistle-blower claim by David Kester, a former Novartis employee. The U.S. is joined in the claims involving Exjade by 11 states that intervened in the suit. It’s seeking as much as $11,000 in fines for each of 161,011 Exjade and Myfortic claims submitted by the pharmacies to the government health care programs. It’s also seeking triple damages based on the $507.5 million they received in reimbursements. Novartis, based in Basel, Switzerland, said in the court filing that it provided legitimate rebates to the pharmacies. The company denies violating any laws in its sale of Exjade, which removes excess iron from the blood of patients who receive blood transfusions, and Myfortic, which is given to prevent rejection of kidney transplants.
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Menendez Donor Melgen Secures $18 Million Bond in Fraud Case
A Florida eye doctor charged with bribing U.S. Senator Robert Menendez secured his release from jail in a separate Medicare-fraud case by agreeing to post assets worth $18 million. Salomon Melgen, 60, won a judge’s approval of a bail package that includes a $3 million corporate surety bond and a $15 million personal surety bond. Melgen has been in jail since his arrest April 14 on charges that he bilked Medicare out of a “substantial portion” of $105 million in reimbursements. “We are grateful that the court agreed with our position and released Dr. Melgen this afternoon,” defense attorney Kirk Ogrosky said in a statement. “Dr. Melgen is looking forward to his day in court and is not going anywhere.” Ogrosky argued in court papers on June 24 that prosecutors vastly overstated the alleged Medicare fraud, accusing him of “billing tens of millions of dollars for unnecessary and unreasonable procedures.” Rather, Ogrosky said, the indictment actually charges healthcare fraud concerning Medicare payments of $110,000 for 30 patients. In the corruption case, U.S. prosecutors separately accuse Melgen of lavishing almost $1 million in luxury travel and campaign donations on Menendez, a New Jersey Democrat who sought to help him in personal and business matters. Menendez was indicted with him in that case. Both pleaded not guilty. Prosecutors say Menendez helped Melgen in a Medicare overbilling claim, in a contract dispute with the Dominican government and with visa applications for three girlfriends. Menendez said the U.S. is prosecuting a 20-year friendship. U.S. Magistrate Judge James Hopkins’s approval of Melgen’s bail followed his ruling soon after the doctor’s arrest that he was a “serious risk” to flee to his native Dominican Republic. Melgen hired new lawyers who appealed to a higher-ranking district judge. That judge ruled June 5 that Melgen deserves home detention with electronic monitoring and told Hopkins to set financial terms. Hopkins held several days of hearings on the state of Melgen’s finances, and his many bank accounts and properties in the U.S. and the Dominican Republic. The complex bail package requires Melgen and several family members to post properties in Florida and the Dominican Republic if he doesn’t show up for trial.
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SEC Regulatory Actions
SEC Pays More Than $3 Million to Whistleblower
The Securities and Exchange Commission announced a whistleblower award of more than $3 million to a company insider whose information helped the SEC crack a complex fraud. The multi-million dollar payout is the third highest award to date under the SEC’s whistleblower program. The whistleblower’s specific and detailed information comprehensively laid out the fraudulent scheme which otherwise would have been very difficult for investigators to detect. The whistleblower’s initial tip also led to related actions that increased the whistleblower’s award. “Insiders may hold the key to helping our investigators unlock intricate fraudulent schemes,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement. “By providing significant financial incentives for people to come forward, the SEC’s whistleblower program continues to be profoundly effective in helping us protect investors and hold wrongdoers accountable.” Whistleblowers who provide the SEC with unique and useful information that contributes to a successful enforcement action are eligible for awards that can range from 10 percent to 30 percent of the money collected when financial sanctions exceed $1 million. 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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SEC Charges Deloitte & Touche With Violating Auditor Independence Rules
The Securities and Exchange Commission charged Deloitte & Touche LLP with violating auditor independence rules when its consulting affiliate maintained a business relationship with a trustee serving on the boards and audit committees of three funds it audited. Deloitte agreed to pay more than $1 million to settle the charges. The SEC charged the trustee Andrew C. Boynton with causing related reporting violations by the funds, and charged the funds’ administrator ALPS Fund Services with causing related compliance violations. They also agreed to settle the charges. Auditor independence rules require outside auditors to remain independent from their clients to ensure there is not even the appearance of a firm compromising its objectivity and impartiality when auditing financial statements. According to the SEC’s order instituting a settled administrative proceeding, Deloitte violated the rules with respect to the appearance of independence by failing to follow its own policies and conduct an independence consultation prior to entering into a new business relationship with Boynton. Deloitte failed to discover that the required initial independence consultation was not performed until nearly five years after the independence-impairing relationship had been established between Deloitte Consulting LLP and Boynton, who was paid consulting fees for his external client work. Meanwhile, Deloitte represented in audit reports that it was independent of the three funds while Boynton simultaneously served on their boards and audit committees.
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SEC Proposes Rules Requiring Companies to Adopt Clawback Policies on Executive Compensation
The Securities and Exchange Commission proposed rules directing national securities exchanges and associations to establish listing standards requiring companies to adopt policies that require executive officers to pay back incentive-based compensation that they were awarded erroneously. With this proposal, the Commission has completed proposals on all executive compensation rules required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the proposed new Rule 10D-1, listed companies would be required to develop and enforce recovery policies that in the event of an accounting restatement, “claw back” from current and former executive officers incentive-based compensation they would not have received based on the restatement. Recovery would be required without regard to fault. The proposed rules would also require disclosure of listed companies’ recovery policies, and their actions under those policies. “These listing standards will require executive officers to return incentive-based compensation that was not earned,” said SEC Chair Mary Jo White. “The proposed rules would result in increased accountability and greater focus on the quality of financial reporting, which will benefit investors and the markets.” Under the proposed rules, the listing standards would apply to incentive-based compensation that is tied to accounting-related metrics, stock price or total shareholder return. Recovery would apply to excess incentive-based compensation received by executive officers in the three fiscal years preceding the date a listed company is required to prepare an accounting restatement.
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SEC Charges Hedge Fund Advisory Firm With Conducting Fraudulent Fund Valuation Scheme
The Securities and Exchange Commission charged a Greenwich, Conn.-based investment advisory firm and its two owners with fraudulently inflating the prices of securities in hedge fund portfolios they managed. An SEC investigation found that AlphaBridge Capital Management told investors and its auditor that it obtained independent price quotes from broker-dealers for certain unlisted, thinly-traded residential mortgage-backed securities. AlphaBridge instead gave internally-derived valuations to broker-dealer representatives to pass off as their own. The inflated valuation of these assets caused the funds to pay higher management and performance fees to AlphaBridge. AlphaBridge and its owners Thomas T. Kutzen and Michael J. Carino agreed to pay $5 million combined to settle the charges. “The integrity of the portfolio valuation process is critical to fund investors, especially when it involves illiquid securities,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “AlphaBridge claimed to use market-grounded price quotes from brokers when in fact it relied on its own rosy view of market conditions to price its portfolio.” The SEC separately charged Richard L. Evans, who lives in Houston, for assisting in the pricing scheme while working as a broker-dealer representative. Evans, who cooperated with the SEC’s investigation, agreed to pay a $15,000 penalty and be barred from working in the securities industry for at least one year to settle charges that he aided and abetted and caused violations by AlphaBridge. Evans neither admitted nor denied the findings. According to the SEC’s orders instituting settled administrative proceedings, AlphaBridge also misled the funds’ auditor during two year-end audits by suggesting that Evans independently generated data to support AlphaBridge’s prices. Carino actually developed the data himself.
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