Forensic News July 2016
Financial/Accounting Fraud
Fiat Chrysler Automobiles NV is under investigation by U.S. authorities over how it reports sales, the company said. Fiat Chrysler is cooperating with investigations by the Justice Department and the Securities and Exchange Commission into the reporting of vehicle sales to customers in the U.S., the company said in a statement Monday. Bloomberg News reported earlier that prosecutors had opened a criminal investigation into potential securities fraud, according to people familiar with the matter. The Justice Department inquiry is in an early stage, according to two people, who asked not to be identified because the investigation is confidential. The federal investigation follows civil lawsuits that challenged the company’s sales numbers. In a suit filed in January, a Chicago-area dealer alleged the company inflated its U.S. car sales by paying dealers to report selling more vehicles than they actually did. “In its annual and quarterly financial statements, FCA records revenues based on shipments to dealers and customers and not on reported vehicle unit sales to end customers,” Fiat Chrysler said in the statement. A Justice Department spokesman and an SEC spokeswoman declined to comment. Fiat Chrysler shares in the U.S. fell more than 5 percent in intraday trading after the initial report of the probe. The shares recovered after the Fiat Chrysler announcement, rising less than 1 percent to $6.76 at 3:14 p.m. in New York. Investigators from the Federal Bureau of Investigation and the SEC visited Fiat Chrysler offices and the homes of current and former employees in Michigan, Orlando, Dallas and California on July 11, according to a report Monday by Automotive News, citing an unnamed person.
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The former chief executive of Kit Digital Inc was extradited on Thursday from Colombia to face U.S. charges that he engaged in a wide-ranging market manipulation and accounting fraud scheme at the now-bankrupt technology company, prosecutors said. The extradition of Kaleil Isaza Tuzman, a former Goldman Sachs analyst who achieved brief fame as an internet entrepreneur, came a day after prosecutors announced charges against three other people connected to Kit Digital. Those newly announced defendants include Omar Amanat, an investor in media, finance and technology companies, who authorities say participated in fraudulent schemes involving Kit Digital. He pleaded not guilty. Tuzman, 44, arrived in the United States on Thursday afternoon, according to a spokeswoman for Manhattan U.S. Attorney Preet Bharara. Lawyers for Tuzman did not respond to requests for comment. Tuzman was arrested in September in Colombia, where he had been working on a luxury hotel project, at the request of U.S. authorities. Tuzman was then detained in conditions that at times drew his lawyers’ complaints. His arrest came after he was indicted along with Robin Smyth, Kit Digital’s former chief financial officer, for engaging in a scheme from 2010 to 2012 to deceive investors and regulators about the company’s financial health. Prosecutors also alleged that Tuzman, as CEO of the digital video company, helped run a scheme with a hedge fund manager from 2008 to 2011 to artificially inflate Kit Digital’s share price and trading volume. After Tuzman and Smyth resigned in 2012, the company that November announced it would restate financial results going back to 2009. The company was later delisted and ultimately filed for bankruptcy in April 2013.
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When David Green was appointed head of Britain’s Serious Fraud Office (SFO) in 2012 he predicted he would be judged by how he fared prosecuting allegations of global interest rate rigging, a symbol of banker greed during the financial crisis. Six months ago, he had just one conviction under his belt after six former brokers were acquitted of manipulating the benchmark Libor rate. But the convictions of three former Barclays traders and a guilty plea from another in London’s third Libor trial, after a bitterly-fought case, will help to silence critics ahead of the agency’s next benchmark rate rigging trial, scheduled for 2017. The SFO, set up to deal with the most serious and complex fraud cases, has had a chequered record in securing white collar convictions over its 28-year history. “These results will buoy up the SFO, but they were desperately needed to save its reputation after the not guilty verdicts in the second Libor trial,” David Corker, a partner at law firm Corker Binning, said. In January, an English jury swiftly acquitted six former brokers of conspiring with convicted trader Tom Hayes to manipulate Libor. Hayes, a former star trader, had been unanimously convicted on much the same evidence in the world’s first Libor rigging trial last August. Two months after the six brokers walked free, the SFO surprised the financial services industry by dropping an investigation into allegations of rigging in the $5.3 trillion per day foreign exchange market. But it robustly dismissed suggestions at the time that this showed it had lost its appetite for risk.
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The Securities and Exchange Commission on Thursday accused the litigation financier RD Legal Capital and its founder, New Jersey lawyer Roni Dersovitz, of deceiving investors in the $170 million fund about where their money was being deployed. By 2015, as The Wall Street Journal was the first to report, Dersovitz’s interrelated funds were heavily concentrated in an anti-terror case accusing Iran of responsibility for the 1983 bombing of Marine barracks in Beirut. But even though more than $100 million of RD Legal’s capital was tied up in the litigation against Iran, according to the SEC order instituting an administrative proceeding against the funds, RD principals allegedly told investors repeatedly that their exposure to the case was limited and that the funds’ primary strategy was buying legal fee receivables in cases that had already been settled. Promising an annual return of 13.5 percent, RD Legal, according to the SEC, touted the legal fee receivables as a very low risk investment, since it was purportedly buying law firms’ contingency fee claims in cases the firms had already settled. Those were deceptive representations, according to the SEC, because the lion’s share of RD’s capital was actually invested in the much riskier Iran litigation. Ironically, RD Legal’s bet on the Iran case may turn out to be prescient. The funder, according to the SEC order, sank nearly $10 million into contingency fee receivables for two of the law firms attempting to enforce default judgments against Iran and RD subsequently invested tens of millions of dollars buying judgments from families of Marines killed in the 1983 attack, who were plaintiffs in the case. This spring, the U.S. Supreme Court upheld the constitutionality of a law that effectively allows plaintiffs holding judgments against Iran to seize nearly $2 billion in frozen assets. Depending on how those assets are divided among plaintiffs, it would seem that RD Legal has a shot at making money from its stake in the case.
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U.S. investigations have exposed bribery and fraud in Syrian aid programs, the United States Agency for International Development (USAID) said, raising concern about profiteering in the humanitarian sector. In a statement to a U.S. House of Representatives committee on Thursday, USAID Inspector General Ann Calvaresi Barr said investigations, some ongoing, raised worries about USAID’s oversight. The United States has contributed billions of dollars in aid to the Syria crisis. The most common fraud involved collusion between companies selling humanitarian supplies and staff of USAID’s local partners who accepted bribes or kickbacks in exchange for help in winning a contract, investigations found. There were also cases when aid items were substituted for cheaper alternatives, resulting in inflated billing. In one case, a Turkish vendor delivered food ration kits with salt instead of lentils. Because of the urgency to deliver aid to people in Syria, some of USAID’s partners used “less than full and open competition to carry out large-scale procurements of food and non-food items”, Barr said. They also failed to properly inspect deliveries, she said, citing a case where the partner accepted food packages based on weight, not content, only to find some cheaper quality food had been substituted. Since February 2015, USAID has received 116 allegations of procurement fraud, theft and bribery, a significant increase on the number of complaints made the year before. So far, six USAID programs have been suspended, ten people working for its partners have been fired and 15 people or companies involved in bidding schemes have been suspended or disbarred, Barr said, leading to more than $11.5 million in savings.
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Columbia University will pay $9.5 million to resolve claims by the U.S. government that it improperly sought excessive cost recovery in connection with federal research grants, authorities announced on Thursday. The settlement, announced by U.S. Attorney for Manhattan Preet Bharara, came after the U.S. government intervened in a civil fraud lawsuit filed under seal in 2013 by a purported whistleblower against Columbia. According to the government’s lawsuit, from 2003 to 2015, Columbia impermissibly sought recoveries for 423 National Institutes of Health research grants by applying an “on-campus” indirect cost rate, rather than a much lower “off-campus” rate. Columbia did so even though the research was primarily performed at off-campus facilities owned and operated by New York state and New York City, which the university failed to disclose were not its own. “All institutions that receive federal grant money must abide by applicable rules and regulations governing the use of the funds and the extent to which costs incurred by the institution are reimbursable,” Bharara said. As part of the settlement, Columbia will pay $9.5 million and agreed to admit that it engaged in various conduct at issue in the case, Bharara’s office said. Columbia in a statement said it believed in good faith that applying the “on-campus” rate had been appropriate, but that the government had disagreed with its approach.
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Michael Coscia, the first person convicted of spoofing after it was made a crime under the Dodd-Frank Act, was sentenced to less than half the prison time sought by federal prosecutors. Coscia, 54, who had argued for probation, was sentenced Wednesday to three years in prison by U.S. District Judge Harry LeinenWeber in Chicago. The only explanation for Coscia engaging in fraud while he was making $150,000 a month trading futures and had a net worth of $15 million was greed, the judge said. “This is a serious crime with serious consequences,” LeinenWeber said before handing down the sentence. He noted that spoofing has been going on for a long time. Spoofing, which became illegal under the Dodd-Frank Act, carries a maximum of 10 years in prison. The practice typically consists of systematically placing orders without intending to execute them to trick the market into thinking there’s interest in buying or selling that doesn’t actually exist. Coscia was convicted by a jury in November of manipulating futures markets by placing unusually large orders he didn’t intend to execute and then filling smaller trades on the opposite side. Prosecutors said it was a bait and switch scheme that yielded Coscia, the head of Panther Energy Trading LLC, more than $1 million over 2 1/2 months in 2011. The scheme resulted in losses to high frequency trading houses that were placing and executing orders at the same time.
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Brazilian congressman Eduardo Cunha, who led the drive to impeach Dilma Rousseff, stepped down as lower house speaker on Thursday following allegations of corruption. He announced his decision in a press conference in Brasilia, at times choking up with emotion, saying his decision would help ease the political instability that has rocked Latin America’s largest economy for the past year. His resignation will allow the lower house to hold elections for a new speaker as soon as next week. The Supreme Court had already suspended Cunha as speaker after it opened a criminal case against him earlier this year on charges of accepting kickbacks. A congressional ethics committee in mid-June recommended the lower house remove him from office following allegations that he lied about the presence of a Swiss bank account used to hide dirty money. The full chamber hasn’t yet held a vote on the matter. Cunha is still a member of Congress, which means only the Supreme Court – not a federal judge – can charge him. That could provide him with some respite, as the top court often takes longer to rule and sentence than its federal counterparts. Cunha has repeatedly denied any wrongdoing, and said Thursday he’s being punished for leading the impeachment process against Rousseff.
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Johnson Controls Inc (JCI.N) agreed to pay $14.4 million to settle U.S. regulatory charges that its workers bribed Chinese shipbuilders and shipyards, including some owned by the Chinese government, to win business and enrich themselves. The U.S. Securities and Exchange Commission on Monday said the accord resolves civil charges that the Milwaukee-based maker of car batteries and heating and ventilation equipment violated the federal Foreign Corrupt Practices Act. Separately, the U.S. Department of Justice said it declined to bring related criminal charges, in part reflecting Johnson Controls’ decision to voluntarily report the misconduct. Johnson Controls is the third company to publicly settle with the Justice Department under that agency’s pilot program to encourage companies to report bribery violations, in return for reduced penalties. Last month, Akamai Technologies Inc (AKAM.O) and Nortek Inc (NTK.O) reached similar, unrelated settlements, also concerning alleged bribery in China. Monday’s developments remove a legal overhang for Johnson Controls as it prepares to merge with Dublin-based Tyco International Plc (TYC.N), which it agreed to buy for $16.5 billion in a bid to lower its tax bill. According to the SEC, from 2007 to 2013 roughly 19 workers at Johnson Controls’ Chinese marine subsidiary used sham vendors to make roughly $4.9 million of improper payments, emboldened by what the regulator called a “culture of impunity.” The SEC said the company improperly recorded the payments on its books and lacked proper controls to detect them, and that the payments led to $11.8 million of profit on transactions. Without admitting wrongdoing, Johnson Controls agreed to pay a $1.18 million civil fine, give up $11.8 million of gains, and pay $1.38 million of interest to settle. No individuals were charged, but the Justice Department said Johnson Controls has ended the employment of the workers involved in the misconduct.
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Mexico’s chief anti-corruption official, who last year exonerated President Enrique Pena Nieto of conflict-of-interest allegations, resigned on Monday, just hours before new graft-fighting legislation comes into effect. Virgilio Andrade, head of the Public Administration Ministry (SFP), the government’s main anti-corruption auditor, was appointed by Pena Nieto in 2015. He was immediately asked to investigate the president, first lady Angelica Rivera and Finance Minister Luis Videgaray over revelations they had bought or made use of homes belonging to a major government contractor. The opposition accused Andrade of a whitewash when the months-long probe exonerated all three of wrongdoing, just as the president was pledging to get tough on entrenched political corruption in Latin America’s No. 2 economy. Under the new anti-corruption measures, which the opposition has accused Pena Nieto’s ruling Institutional Revolutionary Party (PRI) of seeking to water down, the new head of the SFP must now be ratified by the Senate before taking office. Andrade said in a televised address he was standing down to make way for the implementation of the new anti-corruption system, set to be promulgated by the president later on Monday. The reform aims to step up oversight of public officials and will create a special anti-graft prosecutor.
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Latam Airlines Group SA agreed to pay $12.7 million to resolve a U.S. criminal probe into allegations the Chilean carrier’s predecessor paid bribes to union officials in Argentina. The predecessor, LAN Airlines SA, made a phony $1.15 million consulting agreement with an adviser to an official of Argentina’s transportation ministry in 2006, federal prosecutors. The money was funneled to labor union officials in exchange for an agreement to accept lower wages, the U.S. said. The airline profited by more than $6.7 million as a result of the bribes paid to the union officials, according to the government. “The company collaborated with authorities in all stages of the process” and has improved its compliance controls since the payments took place, Latam Airlines said in a statement. The Justice Department said the airline cooperated with the government “after the press in Argentina uncovered and reported the conduct.” A Foreign Corrupt Practices Act case was filed Monday in Fort Lauderdale, Florida, and the company entered into a three-year deferred-prosecution agreement.
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Wal-Mart Stores Inc (WMT.N) executives and directors persuaded a federal appeals court on Friday to reject shareholder claims that they permitted and then covered up pervasive bribery by officials at the world’s largest retailer’s Mexico unit. By a 3-0 vote, the 8th U.S. Circuit Court of Appeals in St. Louis upheld a lower court dismissal of a federal lawsuit accusing the defendants, including former chief executives Mike Duke and Lee Scott, of breaching their duties in failing to stop alleged bribery at Wal-Mart de Mexico. Chief Judge William Riley said the claims “do not give rise to a reasonable inference that Wal-Mart’s board of directors learned of the suspected bribery by Wal-Mex while the alleged bribery was being covered up and the internal investigation quashed.” The decision could spell the end of derivative litigation, where shareholders seek to hold company officials liable for damages, stemming from the Bentonville, Arkansas-based retailer’s 2012 bribery scandal. On May 13, a Delaware state judge dismissed a similar case, saying the April 2015 dismissal of the federal lawsuit by U.S. District Judge Susan Hickey in Arkansas precluded him from acting. Friday’s decision upheld Hickey’s dismissal. Judy Scolnick, a lawyer for the shareholders, did not immediately respond to requests for comment. Wal-Mart’s market value fell by roughly $17 billion over three days in April 2012, after The New York Times published a Pulitzer Prize-winning report saying the retailer paid bribes to Mexican officials to help it open stores faster. Shareholders claimed that Wal-Mart’s board was put on notice about the bribery as early as 2005, when company investigators reported their early findings to audit committee chair Roland Hernandez. Riley, however, found no proof that the board knew or must have known about the bribery, no matter how pervasive it might have been, and even though Hernandez was “only a degree or two” removed from key directors.
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Senior executives at Volkswagen AG (VOWG_p.DE) including its former chief executive covered up evidence that the German automaker had cheated on U.S. diesel emissions tests for years, three U.S. states charged on Tuesday in civil lawsuits against the company. New York, Massachusetts and Maryland filed separate, nearly identical lawsuits in state courts, accusing the world’s No. 2 automaker of violating their environmental laws. The lawsuits, which could lead to state fines of hundreds of millions of dollars or more, complicate VW’s efforts to move past the “Dieselgate” scandal that has hurt its business and reputation, and already cost it billions of dollars. The suits outlined more than a decade of efforts by VW to deceive regulators in the United States and Europe, citing internal VW documents. VW last September admitted using sophisticated secret software in its cars to cheat exhaust emissions tests, with millions of vehicles worldwide affected. The scandal prompted the departure of VW’s CEO and other executives. The states charged that dozens of VW employees at various levels knew that the company’s “clean diesel” engines could not meet pollution standards in normal driving without compromises to performance or fuel economy. The suits publicly identified for the first time many of these employees and accused them of “unlawful conduct.” The suits said at least eight employees in VW’s engineering department deleted or removed incriminating data in August 2015 after a senior attorney advised them of an impending order not to destroy documents. The New York suit stated that “some but not all of the data has been recovered.”
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Herbalife Ltd. agreed to pay $200 million and make sweeping changes to its business to settle U.S. claims that the nutrition company deceived consumers with get-rich-quick promises. The U.S. Federal Trade Commission stopped short of hedge fund manager Bill Ackman’s call to declare Herbalife a pyramid scheme and to shut it down, but it described the company’s business in harshly critical terms and said it must restructure and stop misrepresenting how much money its members are likely to make. Herbalife claimed that people could quit their jobs and earn thousands of dollars a month by selling its shakes and nutritional supplements even though the vast majority earned little or no money. These practices caused “substantial economic injury,” the agency said in a statement Friday. At a news conference, FTC Chairwoman Edith Ramirez wouldn’t call Herbalife a pyramid scheme but also wouldn’t say that it wasn’t one. “Our focus isn’t on the label,” she said. “The company promised people a dream: a chance to change their lives, quit their jobs and gain financial freedom,” Ramirez said. But that dream “was an illusion,” she said. Investors cheered the settlement, bidding up Herbalife’s shares 9.9 percent to close at $65.25 in New York. But the agreement’s long-term effect on Herbalife’s results and recruiting are unclear. The FTC is forcing changes that could make it more difficult for distributors to make money. Herbalife will have to depend on retail sales, which are to be verified by receipts, instead of bulk purchases by members. “They will have to demonstrate retail sales,” said Tim Ramey, an analyst for Pivotal Research Group. Ramey is one of the few analysts still covering Herbalife and has defended the company throughout Ackman’s onslaught. “I don’t think Herbalife would have agreed to a deal they couldn’t do. But the proof is in the pudding.”
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Global oil and shipping markets reacted nervously on Tuesday after an international arbitration court ruled against Beijing’s claims across large swathes of the South China Sea, fuelling geopolitical tensions in the vital waterway. A tribunal in The Hague, Netherlands, found China had breached the sovereign rights of the Philippines and had no legal basis to its historic claims in the South China Sea, a major shipping lane between Europe, the Middle East and Africa. The ruling will be seen as a victory by other regional claimants such the Philippines and Vietnam, but with China rejecting the ruling and saying its military would defend its sovereign rights, nerves were on edge. Although shippers and oil traders said they did not expect an immediate impact on shipping as a result of the ruling, oil prices jumped following the findings. Brent crude futures were up over $1, or more than 2 percent, to $47.60 per barrel at 1110 GMT. “It is vital that merchant ships are allowed to go about their lawful business on the world’s oceans without diversion or delay. We will of course be monitoring for any interference in the coming weeks,” said Peter Hinchliffe, Secretary General of the International Chamber of Shipping in London. The deep waters of the South China Basin between the Spratly and also-disputed Paracel Islands are the most direct shipping lane between northeast Asia’s industrial hubs of China, Japan and South Korea and Europe and the Middle East. The geography of the region offers few economically viable alternative routes for large oil tankers or dry-bulk ships and container ships. Esben Poulsson, president of the Singapore Shipping Association, said any actions that restricted the right of innocent passage and freedom of safe navigation for merchant shipping would potentially drive up shipping costs, resulting in a detrimental impact on maritime trade. Reuters shipping data shows that, counting just Very Large Crude Carrier (VLCC) super-tankers, some 25 VLCCs are passing between the disputed Spratly and Paracel islands at any time, with enough capacity to carry the equivalent of about 11 days’ worth of Japanese demand. Some industry participants were more relaxed, however. “It’s just pure politics,” Ralph Leszczynski, head of research at ship broker Banchero Costa said. “China will simply ignore it, and it will not change in any way the reality on the ground. All there is at stake is access to offshore oil and gas deposits and perhaps fishing grounds,” he said. Insurers said costs were unlikely to rise in the short term.
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China expanded efforts to steady the currency markets, with the central bank adding verbal support to the exchange rate after a week that saw it slip past a key level against the dollar. The People’s Bank of China will work hard to keep the yuan stable against a basket of currencies, Deputy Governor Chen Yulu said at a conference in Beijing on Sunday, adding that the authority will improve the policy framework for the yuan’s offshore market and cross-border services. Chen’s comments come after the PBOC fueled speculation that it was defending a level of 6.7 per dollar by strengthening its daily reference rate even as a gauge of the greenback rose. This spurred speculation that the central bank isn’t sticking to its stated policy of following the direction of the market, which would have resulted in weaker fixings. The signs of intervention come amid increasing pressure on the currency, with Goldman Sachs Group Inc. saying that the yuan’s declines affected sentiment and resulted in a significant pickup in outflows in June. The threat of capital flight unsettling financial markets is complicating China’s strategy of steadily weakening the yuan to combat a drop in exports as it looks to support growth in the world’s second-largest economy. The yuan advanced 0.9 percent, the most since October, against a 13-currency trade-weighted basket in the five days through July 22. The currency traded onshore posted its first weekly advance against the dollar since early June, recovering earlier losses after dropping beyond 6.7 against the dollar for the first time since 2010. Deputy Governor Chen addressed issues for the bond market as well, saying Sunday that the monetary authority will orderly push forward with the opening of financial markets, supporting quality issuers overseas to sell yuan bonds onshore and local issuers to sell yuan notes offshore.
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MasterCard Inc hopes to apply this year to become a payment service provider in China after the government opened the market, but the company is still weighing whether to do so alone or with a partner, senior executives said on Friday. The world’s most populous country is “pretty crucial” to its future, but MasterCard is still studying rules in China that would affect its business and is hammering out a business plan, Ann Cairns, president of international markets, told Reuters in an interview. China in June allowed foreign payment card companies to operate in the country under new rules, potentially giving companies like MasterCard and Visa Inc (V.N) access to its 55 trillion yuan ($8.25 trillion) card payment market. Under the rules, China’s national security and cyber security standards must be met. Applicants must also hold 1 billion yuan in registered capital in a local company. “We’re trying to understand the rules,” Cairns said, adding that MasterCard would like to enter China as soon as possible. “Certain things inside the rules – such as the new cyber rules, which need more development and understanding about how they’re going to work.” Visa and MasterCard, the world’s two largest credit and debit card companies, have been lobbying for more than a decade for direct access to China’s cards market, projected to become the world’s biggest by 2020. Asked if it was possible that MasterCard submits a license application this calendar year, Ling Hai, co-president for Asia-Pacific, said that was the hope but there were no guarantees. “There is so much uncertainty and variability in the process. Something that should take one year can take two years,” he said.
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The U.S. Department of Justice unveiled its largest-ever criminal healthcare fraud case against individuals on Friday, charging the owner of Miami-based assisted living facilities and two others in a $1 billion scheme to swindle Medicare. Prosecutors alleged that Philip Esformes, 47, “masterminded and executed a sophisticated health care fraud and money laundering” conspiracy that spanned more than a decade, according to court records. Esformes and his alleged co-conspirators Odette Barcha, 49, and Arnaldo Carmouze, 56, are accused of steering patients who did not qualify for assisted living or skilled nursing into his network of facilities where they received medically unnecessary services that were billed to government healthcare programs. The government also alleges that they solicited and extracted kickbacks from pharmacies, home health agencies and other providers. The kickbacks were disguised as payments to escorts, to charities, and even to a basketball coach, among other things, according to a copy of the government’s request to detain Esformes. Esformes plans to vigorously contest the charges, his lawyers said in a joint statement. “Mr. Esformes is a respected and well regarded businessman. He is devoted to his family and his religion. The government allegations appear to come from people who were caught breaking the law and are now hoping to gain reduced sentences,” the attorneys, Michael Pasano and Marissel Descalzo, said. This is not the first time Esformes has been in trouble with the law. In 2006, he paid $15.4 million to resolve civil federal healthcare fraud claims for what the government called “essentially identical conduct.” To evade detection, the Justice Department said he and the other defendants adapted their strategy by employing “sophisticated money laundering techniques.”
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The U.S. Department of Justice arrested a record 301 individuals on health-care fraud allegations in late June. The number was striking, but so was the word—”takedown”—Attorney General Loretta Lynch used to describe what was essentially a white-collar enforcement operation. “Health-care fraud is not an abstract violation or a benign offense,” Lynch said at a June 22 press conference. “It is a serious crime.” The arrests, from Florida to Alaska, involved about $900 million in suspect billings. They’re the most visible result yet of a policy shift set in motion last fall, when Deputy Attorney General Sally Yates issued a memo barring prosecutors, without special permission, from releasing individuals from criminal or civil liability when settling fraud cases against companies. Prosecutors typically used such immunity deals as leverage in pursuing civil settlements with companies accused of fraud. “Those days are gone,” says Mark Hardiman, an attorney in Los Angeles who represents health-care companies. One of Hardiman’s clients is Dr. Prem Reddy, the founder and chief executive officer of Prime Healthcare Services of Ontario, Calif. Prime, one of the fastest-growing hospital chains in the U.S., is the target of a whistle-blower complaint alleging its doctors needlessly hospitalized Medicare patients to boost profits. On June 23 the government filed a civil complaint against Reddy. Prosecutors alleged in an affidavit that he personally told his emergency room doctors “to find a way to admit all patients over 65.” “This particular case is a shining example of the DOJ’s follow-through with respect to the Yates memo,” Hardiman says. He and Troy Schell, Prime’s general counsel, say Prime and Reddy deny the fraud allegations. The Justice Department didn’t respond to requests for comment on the Prime case or the shift in health-care enforcement. Prosecutors are forgoing subpoenas and civil investigative demands, which rely on a suspect’s cooperation, in favor of more forceful measures such as search warrants and raids. Patrick Cotter, a defense lawyer in Chicago who as an assistant U.S. attorney in Brooklyn in the 1990s prosecuted mobsters including John Gotti, says one of his clients was eating breakfast with his family earlier this year when armed agents burst through the door of his home. The agents ordered the family onto the couch while they hauled away computers, cell phones, and documents as part of an investigation into Medicare rules violations.
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The Securities and Exchange Commission today suspended an accountant for conducting a faulty audit of the financial statements of a public company that was committing fraud, and the firm where he was a partner at the time has been prohibited from accepting new public company clients for one year. New York-based accounting firm EFP Rotenberg LLP also agreed to pay a $100,000 penalty to settle the SEC’s charges, and it can only begin accepting new public company clients again next year after an independent consultant certifies that the firm has corrected the causes of its audit failures. The accountant, Nicholas Bottini, agreed to pay a $25,000 penalty in addition to being permanently suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. According to the SEC’s order instituting a settled administrative proceeding, the failed audit pertained to Illinois-based ContinuityX Solutions Inc., a publicly-traded company that claimed to sell internet services to businesses and whose executives have since been charged by the SEC for allegedly engineering a scheme to grossly overstate the company’s revenue through fraudulent sales. The SEC’s order finds that during the audits of ContinuityX, EFP Rotenberg and Bottini failed to perform sufficient procedures to detect the fraudulent sales in the company’s financial statements. EFP Rotenberg and Bottini also failed to obtain sufficient audit evidence over revenue recognition and accounts receivable, identify related party transactions, investigate management representations that contradicted other audit evidence, perform procedures to resolve and properly document inconsistencies, and exercise due professional care. “Auditors are supposed to act as gatekeepers to protect the integrity of our markets, but EFP Rotenberg and Bottini failed to live up to their professional obligations,” said David Glockner, Director of the SEC’s Chicago Regional Office. The SEC order finds that EFP Rotenberg violated and Bottini aided and abetted and caused EFP Rotenberg’s violations of Sections 10A(a)(1) and 10A(a)(2) of the Securities Exchange Act of 1934 and Rule 2-02(b)(1) of Regulation S-X. The order also finds that EFP Rotenberg and Bottini engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) and (iii) of the SEC’s Rules of Practice. EFP Rotenberg and Bottini agreed to cease and desist from committing or causing any violations of Sections 10A(a)(1) and 10A(a)(2) and Rule 2-02(b)(1) without admitting or denying the findings in the order.
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The Securities and Exchange Commission today announced an enforcement action against an investment advisory firm that failed to properly prepare clients for additional transaction costs beyond the “wrap fees” they pay to cover the cost of several services bundled together. In wrap fee programs, subadvisers typically use a sponsoring brokerage firm to execute their trades on behalf of clients, and the costs of those trades are included in the annual wrap fee that each client pays. An SEC investigation found that Richmond, Va.-based RiverFront Investment Group disclosed to investors in Forms ADV that client trades were typically executed through the sponsoring broker so the wrap fee would cover the transaction costs. But RiverFront actually used brokers besides the wrap program sponsor to execute the majority of its wrap program trading, resulting in additional costs to clients for those transactions. While RiverFront did disclose that some “trading away” from the sponsoring broker could occur, the firm inaccurately described the frequency, rendering its disclosures materially misleading. RiverFront agreed to settle the SEC’s charges. “Investors were misled about the overall cost of selecting RiverFront to manage their portfolios,” said Sharon Binger, Director of the SEC’s Philadelphia Regional Office. “Investors in wrap fee programs pay one annual fee for bundled services without expecting to pay more, so if subadvisers like RiverFront trade in a way that incurs additional costs to clients, those costs must be fully and clearly disclosed upfront so investors can make informed investment decisions.” The SEC’s National Exam Program has included wrap fee programs among its annual examination priorities, particularly assessing whether advisers are fulfilling fiduciary and contractual obligations to clients and properly managing such aspects as disclosures, conflicts of interest, best execution, and trading away from the sponsor. The SEC’s order against RiverFront finds that the firm violated Sections 207 and 204 of the Investment Advisers Act of 1940 and Rule 204-1(a). Without admitting or denying the findings, RiverFront agreed to be censured and pay a $300,000 penalty, and the firm must post on its Web site on a quarterly basis the volume of trades by market value executed away from sponsors and the associated transaction costs passed onto clients.
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The Securities and Exchange Commission today announced that Citigroup Global Markets has agreed to pay a $7 million penalty and admit wrongdoing to settle charges that a computer coding error caused the firm to provide the agency with incomplete “blue sheet” information about trades it executed. According to the SEC’s order instituting a settled administrative proceeding, the coding error occurred in the software that Citigroup used from May 1999 to April 2014 to process SEC requests for blue sheet data, including the time of trades, types of trades, volume traded, prices, and other customer identifying information. During that 15-year period, Citigroup consequently omitted 26,810 securities transactions from its responses to more than 2,300 blue sheet requests. After discovering the coding error, Citigroup failed to report the incident to the SEC or take any steps to produce the omitted data until nine months later. “Broker-dealers have a core responsibility to promptly provide the SEC with accurate and complete trading data for us to analyze during enforcement investigations,” said Robert A. Cohen, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit. “Citigroup did not live up to that responsibility for an inexcusably long period of time, and it must pay the largest penalty to date for blue sheet violations.” The SEC’s investigation was conducted by Martin Zerwitz, Michael C. Baker, and Deborah A. Tarasevich of the Market Abuse Unit, and the case was supervised by Mr. Cohen.
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