Forensic News June 2015
Financial/Accounting Fraud
Computer Sciences paying $190M to settle SEC fraud charges
Computer Sciences Corp. is paying a $190 million penalty and a former CEO is returning $3.7 million in compensation to resolve federal regulators’ charges of accounting fraud involving an important foreign contract. The Securities and Exchange Commission announced the settlement with the big information technology company. Computer Sciences, based in Falls Church, Virginia, neither admitted nor denied wrongdoing in the settlement of civil charges. The SEC also brought charges against eight former finance executives in the company’s international businesses. Five of the executives, including former CEO Michael Laphen, agreed to settle the charges; the other three are contesting them in federal court in Manhattan. The SEC recovered the $3.7 million from Laphen for the company in a so-called “clawback,” under a 2002 anti-fraud law that requires senior executives to repay bonuses and stock profits they received during a period in which their company violated financial reporting rules. Laphen also is paying a $750,000 penalty. Former Chief Financial Officer Michael Mancuso is returning $369,100 in compensation in a clawback and is paying a $175,000 penalty. Laphen and Mancuso and the other three executives agreeing to settlements neither admitted nor denied the SEC’s allegations. The SEC said Computer Sciences and the executives improperly inflated financial results in 2010 and 2011, and concealed the company’s losses on a multibillion-dollar contract with Britain’s National Health Service. The company said it was pleased to settle the case. “Putting this matter behind us is in the best interest of CSC, our stakeholders and our ongoing business transformation,” spokesman Richard Adamonis said in a statement. Computer Sciences changed its executive leadership in 2012, revised the affected financial statements and has made major improvements to its programs for internal financial controls, compliance and disclosure, Adamonis said. The company agreed in the settlement to hire an independent consultant to review its ethics and compliance programs. “When companies face significant difficulties impacting their businesses, they and their top executives must truthfully disclose this information to investors,” SEC Enforcement Director Andrew Ceresney said in a statement. The SEC said it also found that Computer Sciences executives in Australia and Denmark manipulated the financial results of company businesses in those regions.
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Europol arrests 49 alleged cybercriminals in financial fraud crackdown
The group of cybercriminals are accused of targeting corporations to intercept payment requests and make off with the funds. Europol has arrested 49 individuals across Europe accused of compromising business systems to conduct financial fraud and theft. The joint operation between Europol’s European Cybercrime Centre (EC3), Eurojust, and Italian, Spanish, Polish and UK law enforcement bodies resulted in the arrest of 49 individuals suspected of being part of the cybercrime ring, which is believed to have stolen six million euros in a “very short time,” according to Europol. In addition, 58 properties were searched and a variety of devices including laptops, hard disks, mobile phones, credit cards, forged documents and bank account records were seized. The criminal group is believed to have used man-in-the-middle (MITM) attacks to intercept financial transactions taking place between medium and large European companies. MITM attacks are used to tap into and intercept communication channels used by two parties or more, thereby stealing sensitive information and potentially altering the flow of data itself. In this case, the law enforcement agency believes both social engineering and malware were used to conduct MITM attacks, which began after securing access to corporate e-mail accounts. Once access to these accounts were secured, the cybercriminals allegedly monitored communications to detect payment requests, which were then diverted to bank accounts held outside of the European union and controlled by the criminal ring. According to Europol, money was transferred through a “sophisticated network of money laundering transactions.” The majority of the suspects arrested come from Nigeria, Cameroon and Spain.
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U.S.-Canadian man charged for Cynk trades, $300 million fraud
A dual U.S. and Canadian citizen has been criminally charged with running a stock manipulation fraud that generated $300 million of illegal profit, and included a pump-and-dump scheme that caused the market value of little-known Cynk Technology Corp to rocket past $6 billion. Gregg Mulholland, 45, is charged with securities fraud and money laundering conspiracies following his arrest at Phoenix International Airport during a layover of his flight to Mexico from Canada. Mulholland’s arrest and criminal charges were announced by Acting U.S. Attorney Kelly Currie in Brooklyn, New York. The U.S. Securities and Exchange Commission filed a related civil lawsuit against Mulholland, who authorities said lives in Vancouver, British Columbia, and San Juan Capistrano, California. Last July, U.S. authorities suspended trading in Cynk, a development stage company with no revenue or assets, after its share price soared without explanation to $21.95 from 6 cents in less than a month. That surge, which followed a month when no Cynk shares were traded at all, briefly gave the company a market value higher than three dozen members of the Standard & Poor’s 500. Using wiretaps to build their case, authorities believe Mulholland, who sometimes went by the names “Stamps” and “Charlie Wolf,” was behind that volatility, having previously amassed tens of millions of Cynk shares to conduct a “classic” pump and dump scheme. Prosecutors accused Mulholland of also manipulating the shares of numerous other public U.S. companies, and laundering the profit through at least five offshore law firms to avoid Internal Revenue Service reporting requirements. They said Mulholland was also the “secret” owner of Legacy Global Markets SA, a Panama- and Belize-based broker-dealer and investment manager indicted last September in Brooklyn over a separate alleged $500 million fraud scheme. “Mulholland used an elaborate offshore corporate structure built on lies and deceit,” and fled the United States after the earlier indictment, Currie said in a statement. Mulholland faces up to 20 years in prison if convicted.
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World anti-money laundering body deletes FIFA-related warning
A world anti-money laundering body has deleted all trace of an alert it issued last week warning that financial institutions had not done enough to police suspicious financial activity by officials at FIFA, soccer’s global governing body. The alert, on the web site of the Paris-based Financial Action Task Force, was originally posted on June 16, almost three weeks after U.S. authorities indicted nine current and former FIFA officials and five business executives on a series of corruption charges, including bribery, money laundering and wire fraud. In the statement, FATF said that “recent reports about alleged corruption and money laundering activities on a large scale by several high-ranking FIFA officials underscore how important it is that financial institutions identify and monitor high-risk customers.” FATF, an inter-governmental group whose members include national anti-money laundering agencies around the world, added that financial institutions “do not appear to have given a sufficient amount of scrutiny to the financial activities of the officials concerned, as many of these allegedly corruption-related transfers passed through the international financial system undetected.” Reuters first learned of the FATF notice from a European official familiar with FIFA investigations, and located it through a Google search, though when the search engine on FATF’s own web site was queried, the FIFA notice did not appear Roger Wilkins, FATF’s President, told Reuters that he took the decision to remove the statement from the agency’s web site due to concerns about its phrasing and a lack of concrete evidence to support the claims. “We don’t want to interfere with ongoing investigations and the way it’s phrased could be misconstrued ... We don’t have any direct evidence that financial institutions have done necessarily anything wrong or failed to do anything in relation to these things,” he said, while attending a FATF meeting in Brisbane, Australia. Several bank compliance officers expressed concern about the level of due diligence into the sports business that was being suggested. One, at a British bank, said: “What, am I supposed to research? Who the marketing guy is at each shoe company who makes decisions about promotions tied to players and then watch his account to see if he receives an extra $50,000? Where does it stop?” In addition to the U.S. criminal probe, Switzerland is investigating possible corruption in connection with FIFA’s award of the World Cup hosting rights to Moscow in 2018 and Qatar in 2022.
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Nigeria’s lower house to investigate crude oil swap contracts
Nigeria’s House of Representatives agreed to set up a committee to investigate whether the government has been short-changed by a state oil company scheme to swap crude for refined products. The Nigerian government may be losing money through opaque contracts in which crude oil worth billions of dollars is given to traders in exchange for refined imports, mainly gasoline, international and domestic watchdogs have said. The contracts, known as offshore processing agreements (OPAs) are between Pipelines and Product Marketing Co (PPMC), a subsidiary of state-run Nigerian National Petroleum Corp (NNPC), and oil trading companies. The lower house of parliament adopted a motion to constitute an ad hoc committee “to forensically investigate the allegations of malpractice by the Nigerian National Petroleum Corporation (NNPC), with particular reference to crude oil swap contracts”. The motion listed nine companies that have been awarded product swap contracts for a total of 445,000 barrels per day. Reuters reported earlier in June that Nigeria’s anti-corruption agency EFCC and domestic intelligence service DSS began an investigation into the swap trades last month. The PPMC head was among the NNPC and company officials called in by the investigating agencies to answer questions about the agreements, NNPC sources have told Reuters. New President Muhammadu Buhari came into power on an anti-corruption platform and the EFCC is keen show it has teeth. The EFCC has investigated various oil scandals in the past, namely a fuel subsidy fraud costing the government $6.8 billion between 2009–2011. But due to a lack of political will from the top, only a handful were prosecuted with little result. Nigeria relies on imports for the bulk of its domestic gasoline demand, which is met by gasoline coming via the crude exchanges and through a subsidy scheme that was at the root of acute fuel shortages at the end of May.
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UBS Gave Out ‘Instruction Manual on Fixing Libor,’ Hayes Said
Thomas Hayes, a former trader on trial over charges he manipulated benchmark rates, told prosecutors in 2013 that UBS Group AG distributed “an instruction manual on fixing Libor” to suit their trading positions. The Swiss bank’s e-mailed “Guide to Publishing Libor Rates,” which was shown to jurors by prosecutors in London, included an instruction for traders to adjust their submissions depending on their “delta/fixing position.” “If 3m Libor” exposure “is 4,125 this means we are receiving” and “therefore we want to increase the fixing by 25 basis points,” according to the internal UBS guide. “If the number is negative then vice-versa.” Hayes, the first person to stand trial for allegedly manipulating the London interbank offered rate, told prosecutors the document was evidence that Libor-rigging was standard operating procedure during his time at UBS. The problem was exacerbated because the managers who oversaw Libor submissions also had large trading positions based on the benchmark, Hayes added. “This is where what UBS is doing in terms of throwing individuals under the bus is really wrong,” Hayes told the Serious Fraud Office in 2013. Hayes worked at UBS from 2006 to the end of 2009 before moving to Citigroup Inc. The 35-year-old is accused of eight counts of conspiracy to manipulate Libor, a benchmark for financial products worldwide.
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France freezes funds in Russian ‘Magnitsky’ probe
French authorities have frozen millions of euros in bank accounts after launching an investigation into an alleged Russian fraud scheme uncovered by Sergei Magnitsky, a Moscow lawyer who died in a Russian jail. A judicial official in Paris said leading investigative magistrate Renaud Van Ruymbeke was heading a team of three judges inquiring into the laundering of cash from Russia connected to the case Magnitsky was working on. The French investigation arose after a complaint filed by Magnitsky’s employer, Hermitage Capital, an investment fund active in Russia. Hermitage provided evidence that detailed a trail of cash into France and Luxembourg allegedly forming part of the proceeds of a $230-million fraud exposed by Magnitsky. Magnitsky died in prison in 2009, aged 37. Human rights groups say he was beaten and denied medical help. He had been arrested after filing a complaint alleging the forcible takeover of companies belonging to Hermitage which were then used to claim fake tax rebates. Two people with knowledge of the French case said several million euros in bank accounts in France has already been frozen. A judicial official said a woman of Russian origin had been arrested and questioned about her knowledge of the money. The official said the woman was under formal investigation, a step which under French law means there are grounds for suspicion but does not always lead to trial. The woman’s lawyer, Julie Archippe, said she had no comment on the case. The outcry that followed Magnitsky’s death led to sanctions imposed on several Russian officials by U.S. Congress, the seizure of property in New York, and criminal investigations into money laundering launched in several countries.
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Foreign Corrupt Practices Act (FCPA)
Justice Department Stumbles in Closely Watched Foreign-Bribery Case
The Justice Department claimed victory in the abruptly concluded foreign-bribery trial of Miami businessman Joseph Sigelman. But a close look at Sigelman’s guilty plea reveals a prosecution in disarray and a defendant who will walk away with minimal punishment. Sigelman, the founder and former chief executive of a Colombian oil field-services provider called PetroTiger, pleaded guilty in federal court in Camden, N.J., to conspiring to pay bribes to an official of the Colombian national oil company in violation of the Foreign Corrupt Practices Act (FCPA). Or that’s what the Justice Department emphasized in a triumphant-sounding press announcement listing no fewer than seven federal prosecutors, including the assistant U.S. attorney general in charge of the department’s criminal division. In fact, with its case rapidly deteriorating, the government agreed to let Sigelman plead to a single count of failing to supervise his employees adequately—a felony akin to criminal negligence. At his sentencing, Sigelman faces a sentence of up to a year and a day in prison but is more likely to get probation for a period of one to several years. That’s a striking victory for the defense, given that Sigelman, 43, originally faced a prison sentence of 20 years. Just before the trial began on June 1, the Justice Department offered him a deal that would have included a 10-year prison sentence; Sigelman refused that deal. If he receives a term of probation, he would have to check in regularly with federal authorities but otherwise could return to his international business activities with few if any restrictions. Apart from the near-vindication won for Sigelman by his legal team from the law firm of Quinn Emanuel Urquhart & Sullivan, the trial result reflects a troubling setback for the Justice Department’s stepped up enforcement of the FCPA. The government has achieved a series of major corporate settlements under the anti-bribery law, but the Sigelman case garnered attention because it was the first FCPA prosecution to go to trial since the collapse in 2012 of the so-called Africa Sting case. In the earlier trial, prosecutors charged 22 gun-industry executives with conspiring to bribe FBI informants they allegedly thought represented the government of Gabon in a small-arms deal. Almost all of the charges related to the sting eventually fell apart. The Sigelman-PetroTiger case also involved aggressive government tactics, including the FBI’s wiring of the defendant’s former in-house lawyer to try to record incriminating admissions. The undercover tape turned out to be more ambiguous than prosecutors initially represented in court papers—one of several missteps that undercut the case against Sigelman.
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11 indicted in federal investigation of fraud, theft at Baltimore landfills
One morning in March, commercial trash hauler Adam Williams Jr. sent a text message to a Baltimore Department of Public Works employee at the city-owned Quarantine Road Landfill that read, “N. The. Gum.” Two minutes later, according to a federal indictment, Williams pulled up to a window where haulers usually pay a $67.50-per-ton city “tipping fee” based on the amount of trash they’ve offloaded at the landfill. Instead, he handed the DPW employee a brown paper bag with “an open pack of gum with $500 in cash stuffed inside.” Federal prosecutors say the money was just one example of a wide-ranging bribery scheme that took place for more than a decade and cost the city $6 million in “tipping fee” revenues. Similar transactions regularly occurred between at least six commercial haulers and four DPW employees between 2001 and this year, the 44-count indictment said, with the haulers paying the landfill employees between $50 and $100 per visit to the landfill on a daily or weekly basis. As a result, the indictment alleges, the haulers involved won an advantage over their commercial competitors and the DPW employees made thousands of dollars. The indictment was one of two announced by Maryland U.S. Attorney Rod J. Rosenstein on two “related but separate schemes” at the Quarantine Road facility and the city-owned Northwest Transfer Station facility—both uncovered by a sprawling, years-long investigation that involved wiretaps and informants. That investigation was first revealed last month in criminal complaints filed by the FBI against five DPW employees. Those employees were again named in the indictments, as were Williams and the five other commercial haulers—bringing the total number of people indicted in the schemes to 11. In addition to Williams of Ice Trucking & Roll-Off Service, the first indictment names haulers Mustafa Sharif of Dependable Contracting and Recycling, LLC; Larry Lowry of Lowery’s Trash Removal; Quentin Turgot Glenn and Jessie Lee Wilson, Jr. of Glenn Services; and John Howard Brady of Brady’s Roll Off Service. It also names DPW employees Tamara Oliver Washington, a scale house operator; William Charles Nemec Sr., a solid waste supervisor; and Charles Dennis Bolden, Sr., a landfill laborer. FBI Special Agent in Charge Scott Hinckley said his agency would “remain relentless in our pursuit to root out corruption and fraud anywhere, including Baltimore City, especially when it has a negative impact on the American taxpayer.” “This case is an example of how just a small group of corrupt government employees can bring significant damage,” he said. “The U.S. attorney already mentioned that the city lost approximately $6 million in revenue. In the times we have right now in Baltimore City, obviously that $6 million could’ve been better spent in other arenas.” The second, 18-count indictment alleges Nemec and Bolden also conspired with two other DPW employees—Michael Theodore Bennett and Jarrod Terrell Hazelton—to steal nearly $900,000 worth of scrap metal from the Quarantine Road site and the Northwest Transfer Station between 2005 and 2015. Hazelton, a landfill laborer, could not be reached for comment. Bennett, a Northwest Transfer Station laborer, declined to comment. Both have been released after appearing before a judge, Rosenstein’s office said. One other DPW employee—the one who allegedly took the brown paper bag from Williams—has not been named. In the tipping-fee case—which includes charges of conspiracy, bribery and extortion—the defendants could face decades in prison, Rosenstein’s office said. The defendants in the scrap-metal case also could face decades in prison, on charges of conspiracy, wire fraud, theft from a government program, and filing false tax returns or failing to file tax returns, Rosenstein’s office said. For example, Hazelton earned hundreds of thousands of dollars from the scrap scheme that he never reported to the IRS, according to the indictment.
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Petrobras urges dismissal of U.S. lawsuit over corruption probe
Brazil’s state-run oil company, Petroleo Brasileiro Petrobras SA, urged a U.S. judge to throw out an investors’ class action lawsuit claiming a multibillion-dollar bribery scandal overvalued it for years. Speaking at a hearing in federal court in New York, Petrobras lawyer Roger Cooper said the company itself was a victim of the fraud, which he said was orchestrated by a handful of individuals. But the investors filing the case, who claim $98 billion of its stocks and bonds were artificially inflated by Petrobras overstating the value of some of its major projects, argued there is no way company executives could have been in the dark. “This is a vast fraud taking place possibly over two decades, and everyone is asking the court and the public to believe, ‘We didn’t know,’” said Jeremy Lieberman, a lawyer for the investors. “The question we would ask is: can they be serious?” The hearing on the lawsuit, filed in December, came amid the largest corruption investigation in Brazilian history into what authorities say was a years-long scheme involving price-fixing, bribery and political kickbacks. Prosecutors have charged dozens of senior executives at a number of Brazilian companies, sending shockwaves through the country’s economy and sending President Dilma Rousseff’s popularity to all-time lows. U.S. District Judge Jed Rakoff did not rule on Petrobras’ request but said he would do so within two weeks. The judge asked several questions during the hearing but did not indicate how he was leaning. Cooper told Rakoff that the company was unaware of the alleged fraud, even if a few high-ranking employees were involved. The probe has continued to widen, with a prosecutor in Brazil saying it could extend to utility Eletrobras and several foreign companies. Brazilian authorities last week detained the head of construction company Odebrecht SA, and the CEO of builder Andrade Gutierrez. A British pension fund, Universities Superannuation Scheme, is leading the plaintiffs, who seek to bring claims on behalf of anyone who purchased U.S. shares or bonds in Petrobras from January 2010 to March 2015. Petrobras in April took a $17 billion write-down partially related to the bribery scandal. Lieberman said the investors remain skeptical that the losses tied to the scheme have been fully divulged. The company’s value has cratered to approximately $60 billion, after nearing $300 billion in 2008.
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IAP Worldwide Services Inc. Resolves Foreign Corrupt Practices Act Investigation
A Florida defense and government contracting company, IAP Worldwide Services Inc. (IAP), entered into a non-prosecution agreement and agreed to pay a $7.1 million penalty to resolve the government’s investigation into whether the company conspired to bribe Kuwaiti officials in order to secure a government contract. A former vice president of IAP also pleaded guilty to conspiracy to violate the Foreign Corrupt Practices Act (FCPA) for his involvement in the bribery scheme. James Michael Rama, 69, of Lynchburg, Virginia, pleaded guilty before U.S. District Court Judge James C. Cacheris of the Eastern District of Virginia to one count of conspiracy to violate the anti-bribery provisions of the FCPA. Sentencing is scheduled for September 11, 2015. In 2004, Kuwait’s Ministry of the Interior (MOI) initiated the Kuwait Security Program (KSP), a project that was intended to provide nationwide surveillance capabilities for several Kuwaiti government agencies primarily through the use of closed-circuit television. The project was divided into two phases: a planning and feasibility period called “Phase I” and an installation period called “Phase II.” The MOI was responsible for overseeing the KSP, including selecting contractors to facilitate its implementation. Revenues from the Phase II contract were expected to be substantially greater than from Phase I. According to admissions made in connection with both the non-prosecution agreement and Rama’s plea agreement, IAP and Rama schemed to ensure that IAP worked as the consultant for Phase I so that it could tailor the requirements for the Phase II contracts to IAP’s strengths, which would give the company an advantage in the Phase II bidding. To that end, both IAP and Rama admitted that in February 2006, executives and senior employees of IAP, including Rama, set up a shell company called “Ramaco” to bid on Phase I, in part to conceal IAP’s role in crafting the Phase II requirements and its conflict of interest in connection with securing the Phase II contract.
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Litigation Matters
French judges cuts 1 bln euro HSBC bail in tax fraud case
A French appeals court has reduced a 1 billion euro ($1.1 billion) bail for HSBC Holdings in a tax fraud case to 100 million euros. The decision offers the bank some relief as various tax, regulatory and legal authorities look into allegations that its Swiss private bank helped conceal millions of dollars in assets. French prosecutors had called on judges to confirm the billion euro bail to cover a potential fine over allegations that Swiss private bank had helped clients avoid taxes in 2006–2007. That sum would have been nearly half the value of HSBC’s alleged fraud of 2.2 billion euros, according to a source when the bail was initially ordered. HSBC appealed the bail, calling it excessive. Under French court processes, companies can be ordered to post a deposit when they are put under formal investigation, even if charges are not brought. “The HSBC group takes note of the appeals court decision which partially upholds the appeal lodged in April,” a spokesman said. HSBC Holdings was put under formal investigation in France in April on suspicions that the parent company did not exercise sufficient controls on the activities of its Swiss private bank. HSBC has admitted failings in controls at the Swiss private bank, but has denied knowledge of fraudulent activity.
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U.S. Bancorp unit to pay $44.5 mln in Peregrine settlement-court filing
A unit of Minneapolis-based U.S. Bancorp has agreed to pay $44.5 million to settle a class action brought by former customers of brokerage Peregrine Financial Group, which failed in 2012 after its funds were siphoned off in a long-running fraud. Disclosed in a filing in an Illinois federal court, the proposed settlement resolves claims that the bank let Peregrine’s founder Russell Wasendorf Sr. treat an account set up for brokerage customer funds like a personal checking account, diverting money for himself and his other businesses. “We are pleased to have reached a resolution regarding Peregrine Financial Group,” U.S. Bank spokesman Dana Ripley said in an e-mailed message. Ripley declined further comment, citing terms of the settlement. U.S. Bank, the banking unit of U.S. Bancorp, was accused in the lawsuit of fraud by omission, breach of fiduciary duty and aiding and abetting violations of the Commodity Exchange Act. The lawsuit said Wasendorf misappropriated funds from an account at U.S. Bank that was supposed to be used exclusively for the benefit of Peregrine customers. Wasendorf is serving a 50-year sentence after pleading guilty to embezzling more than $215 million from thousands of Peregrine customers in a nearly 20-year fraud. The futures brokerage filed to liquidate in 2012 after regulators accused it of misappropriating customer money, dealing a blow to confidence in the U.S. futures industry just months after the larger MF Global collapsed. The proposed settlement, which requires court approval, would repay about 14,000 former customers more than 20 percent of the money Wasendorf diverted, before accounting for attorneys fees and expenses, according to court filing. In the filing, lawyers for Peregrine’s former customers said they may seek up to 31 percent of the settlement fund in attorneys’ fees. In February, U.S. Bancorp agreed to pay $18 million to former Peregrine customers to settle a lawsuit brought by the U.S. Commodity Futures Trading Commission in 2013 over the Wasendorf fraud.
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Merrill Lynch Admits Using Inaccurate Data for Short Sale Orders, Agrees to $11 Million Settlement
The Securities and Exchange Commission charged two Merrill Lynch entities with using inaccurate data in the course of executing short sale orders. Merrill Lynch agreed to admit wrongdoing, pay nearly $11 million, and retain an independent compliance consultant in order to settle the charges. According to the SEC’s order instituting a settled administrative proceeding, Merrill Lynch and other broker-dealers are routinely asked by customers to “locate” stock for short selling, and firms prepare easy-to-borrow (ETB) lists comprised of stocks they have deemed readily accessible for the purpose of granting locates. At times during the course of a trading day, some securities that Merrill Lynch placed on its ETB list that morning became no longer easily available to borrow as determined by lending desk professionals tracking market events and other daily developments. The SEC’s order finds that Merrill Lynch personnel appropriately ceased using the ETB list to source locates when availability of certain shares became restricted, but the firm’s execution platforms were programmed to continue processing short sale orders based on the ETB list. For example, while personnel received responses from lenders that a supply of a particular security was no longer available, Merrill Lynch’s systems continued to rely on the ETB list and execute short sales totaling thousands of shares of that security. It wasn’t until the platforms received the next day’s ETB list that they returned to utilizing accurate and present data. After the SEC started investigating, Merrill Lynch began implementing systems enhancements to correct the problem. “Firms must comply with their short-selling obligations by making sure they do not rely on inaccurate ETB lists,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “When firm personnel determine that a security should no longer be considered easy to borrow, the firm’s systems need to incorporate that knowledge immediately.” The SEC’s order further finds that for a period until 2012, a flaw in Merrill Lynch’s systems occasionally triggered the inadvertent use of day-old data when constructing ETB lists. The stale data caused some securities to be included on an ETB list when they should not have been.
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Appeals process for US flood insurance claims needs work-Senate probe
The U.S. government’s appeals process for reviewing flood insurance claim disputes is riddled with flaws, but there is no evidence of systematic underpayments by insurers to flood victims, an investigation by U.S. Senate staffers has found. “Despite widespread concerns, it does not appear that systematic incentives exist for any participant in the program to underpay on claims,” according to a copy of a draft overview of the Senate Banking Committee’s investigation reviewed by Reuters. The Senate Banking Committee’s investigation was fueled by allegations of widespread underpayment of claims to the victims of Hurricane Sandy, a 2012 Atlantic storm that generated 144,484 flood insurance claims and caused more than $68 billion in damage. Last year, numerous flood victims filed lawsuits alleging that insurers and engineering firms had doctored reports about the causes of damage to their homes in an effort to reduce insurance payouts. In response, the Federal Emergency Management Agency (FEMA), which oversees the flood insurance program, created a task force to review the victims’ claims, settle pending litigation and reform the flood insurance program. New York and New Jersey’s state attorneys general, along with the Department of Homeland Security’s inspector general, are conducting criminal investigations into the matter. The report will be the first by a group of new investigators hired recently by Senate Banking Committee Chairman Richard Shelby, an Alabama Republican. The probe did not examine specific allegations of fraud by victims. It focused on the structure and management of FEMA’s flood insurance program. Using FEMA audit data, investigators did not detect any evidence that the system creates incentives for write-your-own insurance carriers or other vendors to reduce payouts to victims. In addition, data on Sandy flood claims that were re-inspected by a second adjuster showed “low overall error rates.” Investigators believe underpayments that did occur can likely be attributed to the “scale of Sandy,” which overwhelmed the program and outstripped the number of engineers and adjusters available to handle claims, the overview says. The report will call on FEMA to improve how it plans for similar future catastrophes to help reduce problems with the claims process.
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China Market
Citi metals financing in China at standstill after suspected fraud
U.S. bank Citigroup Inc said it currently has no metals financing clients in China after suspected fraud led to a web of lawsuits, and was reviewing the future of the business. While the bank retreated in that area, it still managed to achieve broad growth in commodities as others withdrew from the sector. Last month, Citigroup failed in a bid to win an order from a London court that would force trade house Mercuria to pay about $270 million in potential losses for metals financing deals in China hit by the suspected fraud. “There’s no question that when we look at a situation like that, we do a lot of analysis about who we are doing business with, where we’re doing business and what kind of transactions we do,” Jim Cowles, chief executive of the bank for Europe, Middle East and Africa (EMEA) told Reuters. “That has lead us to examine each one of those areas and we’ve made changes accordingly.” he told Reuters in an interview. Cowles did not give further details, but a spokesman said the bank no longer has any metals financing business in China and was reviewing its strategy. The complex court case was one of a web of legal actions filed in the wake of a probe launched in May 2014 by Chinese authorities of suspected fraud at China’s Qingdao port, the world’s seventh busiest, and nearby Penglai. The alleged fraud is estimated to have stung Western banks and trading houses as well as local Asian banks for more than $3 billion in total, according to industry sources. Neither Citigroup or Mercuria Energy Trading Ltd is accused of fraud, but have been caught in the fallout from the probe. Citigroup has expanded in commodities, moving as some rivals withdrew due to higher capital requirements and tougher regulation in the wake of the global financial crisis. “If you look at what we had within the institutional business on commodities, we didn’t have that much of a presence. We decided that we wanted to build that business and we’re doing it at the same time our competitors had historic businesses that they had to get out of,” Cowles said. Citigroup’s commodity revenue doubled last year after soaring 230 percent in 2013. It does not provide outright revenue figures for its commodities business. The bank moved up to fourth ranking for commodities revenues among top investment banks at the end of 2014 from ninth in 2012, according to financial sector consultancy Coalition.
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Italy Seeks Charges in Bank of China Money-Laundering Probe
Italian prosecutors filed a request to indict about 300 people, including officials of Bank of China Ltd.’s Milan branch, for crimes including money laundering related to more 4.5 billion euros ($5.1 billion) of funds transferred to China. Prosecutors in Florence are seeking to charge four managers of the state lender and requested that dozens of Italian residents, originally from China, go to trial, a court filing shows. A seven-year investigation has led to accusations of tax evasion, criminal association and fraud related to several businesses in Italy, prosecutors said in the filing. The Chinese lender said that it hadn’t received any formal prosecution documents from the Italian authorities. The bank always complies with the laws and regulations of countries where it operates and does its duty in investigating money laundering and reporting suspicious transactions, Bank of China said in a statement to Hong Kong’s stock exchange. Proceeds from criminal activities including brand counterfeiting, slavery and prostitution were smuggled to China from Italy between 2006 and 2010 through a money-transfer service, according to prosecutors. Bank of China’s managers in Milan helped to transfer to China about 2.2 billion euros of cash received by the money-transfer company, the document shows. The bank’s managers assisted the transfer to China by not reporting suspicious transactions and by helping to hide the source and destination of the funds, the prosecutors allege. Bank of China earned more than 758,000 euros in fees on the transfers, according to the request for indictments. The prosecutors’ request typically goes to a judge for validation and a date for the hearing has yet to be set, according to a court official, who requested anonymity in line with policy.
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Tensions build for Trafigura after top China oil boss detained
When Chinese police detained a second employee of Swiss trading house Trafigura last week in a long-running investigation into alleged fraud, they didn’t just go for an ordinary trader. In a sign of escalating tension, the police detained Trafigura’s “Mr Oil” in China – the firm’s most important oil representative in the country, the head of the company’s Beijing office and Singaporean citizen, Li Bo. “For years, Li has been Trafigura’s only face in Chinamaintaining the China relationship, with Unipec (the trading arm of Sinopec) and its refineries,” said an acquaintance of Li. Li Bo, head of the Beijing office since 2009, was detained by police on June 1 as he was preparing to fly from Beijing to Singapore. No charges were made against him. “Trafigura runs an integrated global crude team with its main operations directed from Singapore, Geneva and Houston. Our business in China carries on as normal serving its local customers,” Trafigura told Reuters in its first comment since Li Bo was detained. Li became the second Trafigura person to be detained by police after Tian Meng, a Beijing-based oil product marketer, was arrested last August and has still not been charged. The investigation into Tian was launched after private Chinese trader Qingdao United Energy (QUE) 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. Senior sources at Trafigura have repeatedly said the company believes the dispute is a commercial one and is not a matter for police or state prosecutors. Trafigura sells crude oil to China from West Africa, South America and more recently, Russia. Volumes differ from year to year but generally amount to dozens of millions of barrels a year, according to trading sources. It’s main counterparty is Unipec, the trading arm of China’s top refiner that buys nearly 4 million barrels of crude oil a day from the global market.
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Healthcare Industry
Insurers Gaming Medicare Might Cost Washington Billions a Year
Two years ago, Anita Silingo accused health insurance companies of brazenly ripping off the government. Silingo, who worked at a company called MedXM that consulted for health insurance companies, filed a sealed whistleblower lawsuit claiming that MedXM exaggerated or outright fabricated illnesses to get its clients higher fees from Medicare. The Justice Department hasn’t taken up the suit and the companies have sought to dismiss it in court. But new research suggests that the kind of inflated diagnoses Silingo described costs the government billions a year. Silingo is one of a handful of whistleblowers who have come forward with claims that health plans have profited by illegally claiming patients are sicker than they are. According to her complaint, MedXM altered medical records to make diagnoses appear more severe and often created records without doing the face-to-face patient visits required by law. Health insurers, including Anthem, Health Net, and Molina, “all turned a blind eye to the truth in exchange for receiving” bigger Medicare payments, Silingo alleged. Representatives for the companies named declined to comment. Until about 15 years ago, the U.S. government didn’t care how sick people were for the purposes of paying for health care. Medicare generally paid physicians directly for each procedure performed. In the mid-2000s, the government tried to reduce costs by promoting privately managed Medicare Advantage plans, which pay insurance companies a fixed sum to manage health care for a group of patients. To keep insurers from cherry picking the healthiest people, the contracts pay more if sicker people sign up. The extra payment is based on a risk score calculated from diagnostic codes that physicians submit. This approach, called risk adjustment, has now permeated the U.S. health-care system—and it gives health plans incentives to do exactly what Silingo alleges they did.
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DaVita to Pay $450 Million to Resolve Allegations That it Sought Reimbursement for Unnecessary Drug Wastage
DaVita Healthcare Partners, Inc., the largest provider of dialysis services in the United States, has agreed to pay $450 million to resolve claims that it violated the False Claims Act by knowingly creating unnecessary waste in administering the drugs Zemplar and Venofer to dialysis patients, and then billing the federal government for such avoidable waste. Davita is headquartered in Denver, Colorado, and has dialysis clinics in 46 states and the District of Columbia. “This settlement is an example of what can be accomplished as a result of the successful cooperation between the government and whistleblowers in protecting our vital federal health care programs,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. This civil settlement resolves allegations brought in a whistleblower action that DaVita devised and employed dosing grids and/or protocols specifically designed to create unnecessary waste of the drugs Venofer and Zemplar. These drugs are packaged in single-use vials, which are intended for one-time use. Sometimes, the amount of the drug in the vials does not match the dosage specified by the physician, resulting in the remainder of the drug in the vial being discarded. At the time of the alleged scheme, Medicare would reimburse a dialysis provider for certain waste if the dialysis provider – acting in good faith – discarded the remainder of the drug contained in a single-use vial after administering the requisite dose and/or quantity of the drug to a Medicare patient. The whistleblowers’ complaint alleged that, to create unnecessary Zemplar waste, DaVita required its employees to provide Zemplar to dialysis patients pursuant to mandatory and wasteful “dosing grids.” Zemplar, a Vitamin D supplement usually administered at every dialysis session, is packaged in single-use vial sizes of 2 mcg, 5 mcg, and 10 mcg. Davita allegedly created unnecessary waste by requiring its employees to provide Zemplar to dialysis patients pursuant to mandatory “dosing grids,” which were designed to maximize the amount of Zemplar administered to patients. DaVita then allegedly billed the government not only for the amount of Zemplar administered to patients, but also for the amount “wasted.”
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Fraud Still Plagues Medicare’s Prescription Drug Program
Fraud and abuse continue to dog Medicare’s popular prescription drug program, despite a bevy of initiatives launched to prevent them, according to two new reports by the inspector general of Health and Human Services. Their release follows the arrests of 44 pharmacy owners, doctors and others, who last week were accused of bilking the program, known as Part D. The two reports issued provide more insight into the extent of the fraud, as well as steps federal regulators should take to stop it. The first report, which covers data from last year, found: (1) More than 1,400 pharmacies had questionable billing practices last year in the drug program. Some billed for extremely high numbers of prescriptions per patient and others billed for a high proportion of narcotic controlled substances. Collectively, they billed Part D $2.3 billion in 2014. (2) Prescriptions for commonly abused opioids continue to rise, despite warnings about inappropriate use. Between 2006 and 2014, Medicare’s spending on them grew to $3.9 billion from $1.5 billion, a 156 percent increase. By comparison, spending for all drugs in the program, including expensive specialty medications, grew by 136 percent during the same period. More than 40 percent of Medicare beneficiaries in Alabama, Tennessee, Oklahoma and Alaska filled at least one prescription for a narcotic in 2014, compared to 32 percent for the nation as a whole. (3) New York and Los Angeles remain hot spots for questionable prescribing, with far higher use of expensive drugs associated with fraud than other parts of the country. The New York metropolitan area, for instance, accounted for half of all prescriptions for the expensive topical ointment Solaraze last year, a disproportional rate. The drug is used for lesions formed as a result of overexposure to the sun. New York and Los Angeles also stood out for prescribing of two omega-3 fatty acids, used to help reduce very high triglyceride levels. The two regions accounted for nearly half of all prescriptions for Vascepa and about a third of those for Lovaza. The inspector general’s findings come two years after ProPublica reported on how weak oversight by the Centers for Medicare and Medicaid Services (CMS) allowed abusive prescribing and outright fraud to proliferate in Part D. Medicare promised a more aggressive approach to analyzing its own data.
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Authorities arrest 243 people in $712 million Medicare fraud
The U.S. Department of Justice said that 243 people have been arrested across the country, charged with submitting fake billing for Medicare, a government healthcare program, that totaled $712 million. Attorney General Loretta Lynch described the arrests as the largest criminal health care fraud takedown in the history of the Justice Department. Those arrested included 46 doctors, nurses and other licensed medical professionals. The charges are based on a variety of alleged fraud schemes, the government said, including submitting claims to Medicare and Medicaid, the healthcare program for low-income individuals, for treatments that were medically unnecessary and often never provided. The nationwide sweep, led by the Medicare Fraud Strike Force and the U.S. Centers for Medicare and Medicaid Services, involved about 900 law enforcement officials. It’s the largest both in terms of the number of those charged and the amount of money lost. Many of the arrests were in Florida, long an epicenter of Medicare fraud. In Miami, 73 defendants were charged with offenses involving approximately $263 million in false billings. One mental health facility there billed close to $64 million for psychotherapy sessions that were nothing more than moving patients to different locations, Lynch said in a press conference. Other cities involved include Houston, Dallas and McAllen, Texas; Los Angeles; Detroit; Tampa; Brooklyn, New York; and New Orleans. One case in Michigan involved a doctor who prescribed unnecessary narcotics in exchange for patients’ identification information, which was used to generate false billings. Patients then became deeply addicted to the prescription narcotics and were bound to the scheme as long as they wanted to keep their access to the drugs. “In the days ahead, the Department of Justice will continue our focus on preventing wrongdoing and prosecuting those whose criminal activity drives up medical costs and jeopardizes a system that our citizens trust with their lives,” Lynch said. Since 2007, as part of increased efforts to tackle Medicare fraud, federal authorities have charged nearly 2,100 people with falsely billing the Medicare program more than $6.5 billion, according to the Justice Dept. The arrests bring that total to over 2,300 people who have billed over $7 billion.
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SEC Regulatory Actions
SEC Charges CSC and Former Executives With Accounting Fraud
The Securities and Exchange Commission charged Computer Sciences Corporation and former executives with manipulating financial results and concealing significant problems about the company’s largest and most high-profile contract. The SEC additionally charged former finance executives involved with CSC’s international businesses for ignoring basic accounting standards to increase reported profits. CSC agreed to pay a $190 million penalty to settle the charges, and five of the eight charged executives agreed to settlements. Former CEO Michael Laphen agreed to return to CSC more than $3.7 million in compensation under the clawback provision of the Sarbanes-Oxley Act and pay a $750,000 penalty. Former CFO Michael Mancuso agreed to return $369,100 in compensation and pay a $175,000 penalty. The SEC filed complaints in federal court in Manhattan against former CSC finance executives Robert Sutcliffe, Edward Parker, and Chris Edwards, who are contesting the charges against them. Sutcliffe was CSC’s finance director for its multi-billion dollar contract with the United Kingdom’s National Health Service (NHS). The SEC alleges that CSC’s accounting and disclosure fraud began after the company learned it would lose money on the NHS contract because it was unable to meet certain deadlines. To avoid the large hit to its earnings that CSC was required to record, Sutcliffe allegedly added items to CSC’s accounting models that artificially increased its profits but had no basis in reality. CSC, with Laphen’s approval, then continued to avoid the financial impact of its delays by basing its models on contract amendments it was proposing to the NHS rather than the actual contract. In reality, NHS officials repeatedly rejected CSC’s requests that the NHS pay the company higher prices for less work. By basing its models on the flailing proposals, CSC artificially avoided recording significant reductions in its earnings in 2010 and 2011. The SEC’s investigation found that Laphen and Mancuso repeatedly failed to comply with multiple rules requiring them to disclose these issues to investors, and they made public statements about the NHS contract that misled investors about CSC’s performance. Mancuso also concealed from investors a prepayment arrangement that allowed CSC to meet its cash flow targets by effectively borrowing large sums of money from the NHS at a high interest rate. Mancuso merely told investors that CSC was hitting its targets “the old fashioned hard way.” “When companies face significant difficulties impacting their businesses, they and their top executives must truthfully disclose this information to investors,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “CSC repeatedly based its financial results and disclosures on the NHS contract it was negotiating rather than the one it actually had, and misled investors about the true status of the contract. The significant sanctions in this case against the company, CEO, and CFO reflect our focus on ensuring that such misconduct is vigorously pursued and punished.” Stephen L. Cohen, Associate Director in the SEC’s Division of Enforcement, added, “The wide-ranging misconduct in this case spanned several countries and occurred over multiple years, reflecting significant management lapses and internal controls failures. We expect this settlement and the recommendations of an independent ethics and compliance consultant will help prevent future misconduct.” In addition to the accounting and disclosure violations involving the NHS contract, the SEC’s investigation found that CSC and finance executives in Australia and Denmark fraudulently manipulated the financial results of the company’s businesses in those regions.
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SEC Charges 36 Firms for Fraudulent Municipal Bond Offerings
The Securities and Exchange Commission announced enforcement actions against 36 municipal underwriting firms for violations in municipal bond offerings. The cases are the first brought against underwriters under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, a voluntary self-reporting program targeting material misstatements and omissions in municipal bond offering documents. The Enforcement Division initiative announced in March 2014, offered favorable settlement terms to municipal bond underwriters and issuers who self-reported securities law violations. The first issuer charged under the initiative settled with the SEC in July 2014. “The MCDC initiative has already resulted in significant improvements to the municipal securities market, including heightened awareness of issuers’ disclosure obligations and enhanced disclosure policies and procedures,” said SEC Chair Mary Jo White. “This ongoing enforcement initiative will continue to bring lasting changes to the municipal securities markets for the benefit of investors.” The SEC alleged that between 2010 and 2014 the 36 firms violated federal securities laws by selling municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations. The underwriting firms also allegedly failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers. “The MCDC initiative highlights the importance of continuing disclosure in the municipal bond market and due diligence in the underwriting process,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “The initiative has brought much needed attention to these issues and has already improved the behavior of participants in the $3.7 trillion municipal bond market.” Continuing disclosure provides municipal bond investors with information, including annual financial reports, on an ongoing basis. The SEC’s 2012 Municipal Market Report identified issuers’ failure to comply with their continuing disclosure obligations as a major challenge for investors seeking information about their municipal bond holdings. “The settlements announced reflect these underwriters’ cooperation in self-reporting their own misconduct and agreeing to improve their procedures going forward,” said LeeAnn Ghazil Gaunt, Chief of the Enforcement Division’s Municipal Securities and Public Pensions Unit. “Because these 36 firms underwrite a substantial portion of the country’s municipal bonds each year, we expect a large number of bondholders will benefit from the resulting improvements in due diligence and disclosure.” The 36 firms, which did not admit or deny the findings, agreed to cease and desist from such violations in the future. Under the terms of the MCDC initiative, they will pay civil penalties based on the number and size of the fraudulent offerings identified, up to a cap based on the size of the firm. The maximum penalty imposed is $500,000. In addition, each firm agreed to retain an independent consultant to review its policies and procedures on due diligence for municipal securities underwriting.
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SEC Charges Microcap Oil Company, CEO, and Stock Promoter With Defrauding Investors
The Securities and Exchange Commission charged a Texas-based oil company and its CEO with defrauding investors about reserve estimates and drilling plans, and charged the author of a stock-picking newsletter for his role in a fraudulent promotional campaign encouraging readers to buy the oil company’s penny stock shares. The SEC alleges that shortly after becoming Norstra Energy’s CEO in March 2013, Glen Landry began making false and misleading claims about business prospects on Norstra’s web site as well as in press releases and SEC filings. Landry and Norstra Energy misled investors about the location of the company’s property in order to make the wells appear more promising and twice disclosed an inaccurate date to begin drilling operations to make the potential for oil riches appear imminent. The SEC’s complaint filed in federal court in Manhattan alleges that promotional materials issued by Eric Dany falsely proclaimed that “Norstra Energy could be sitting on top of as much as 8.5 billion barrels of oil!” and said the planned wells had a 99 percent chance of profitability. After the exaggerated statements about its property and prospects caused Norstra Energy’s stock price to increase nearly 600 percent in a three-month period, the SEC suspended trading in June 2013. The SEC’s complaint charges Norstra Energy, Landry, and Dany with fraud and seeks final judgments ordering permanent injunctions, return of allegedly ill-gotten gains with interest, and financial penalties. The SEC also seeks to bar Landry from serving as an officer or director of a public company or participating in a penny stock offering.
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