Forensic News March 2015
Financial/Accounting Fraud
Citing high level of fraud in Utah, lawmakers pass white collar crime registry
Utahns can easily check to see if there are convicted sex offenders living in their neighborhoods by checking online at the state’s sex offender registry. But if they’re looking to invest, there’s no similar site to warn them about convicted fraudsters. Legislators, however, approved a bill that would establish a state-run registry for convicted white collar criminals to combat Utah’s high level of affinity fraud, which occurs predominantly among members of the LDS faith. The Utah Senate suspended its rules to give final passage to the bill on the second to last day of the 2015 general session of the Legislature. The Utah House already has given thumbs up to the measure. Gov. Gary Herbert indicated after the Senate vote that he will sign it in order to protect “the consumer and the public from fraud and predatory practices,” the governor’s spokesman, Marty Carpenter, said in a statement. In Utah, members of The Church of Jesus Christ of Latter-day Saints have been particularly vulnerable because of personal relationships and shared culture among members. In making the bill a priority for his office, Utah Attorney General Sean Reyes said the state is “sadly known for its high level of financial vulnerability to affinity fraud,” which occurs when someone exploits a relationship of trust to defraud another person. “Utah’s unique personal interweavings and close relationships offer a rich environment for predatory behavior and financial crimes in our state,” Reyes said in a press release last week. The bill’s chief sponsor, Rep. Mike McKell, R-Spanish Fork, said in an e-mail the bill would “help stem the tide of white collar crime corrupting in our community” by providing residents with readily accessible information. Under the measure, the attorney general’s office would operate the registry as a web site that contains offenders’ names, aliases, a photograph, physical description and crimes for which they were convicted. Those placed in the registry would have to be convicted of second-degree felony counts of securities fraud, theft by deception, unlawful dealing of property by a fiduciary, insurance fraud, mortgage fraud, communications fraud or money laundering. About 100 people annually are convicted in Utah of those crimes, said Missy Larsen, the attorney general’s spokeswoman. The information would be maintained online for 10 years or for a lifetime for a third conviction. Those convicted after December 31, 2005, would be required to register with the attorney general’s office for inclusion on the registry unless they have complied with all court orders, paid all court-ordered restitution to victims and not been convicted of a further crime. There also are provisions for removing someone’s name from the registry after five years. Brett Tolman, the former top federal prosecutor in Utah who now defends those accused of white collar crimes, said he worried that the crimes included in the registry were overly broad, particularly for communications fraud charges that can be interpreted to cover a wide range of business to business interactions. The listing could be a stigma for a CEO convicted of a relatively minor offense, he said. Mark Pugsley, also a white collar defense attorney, said much of the information that would be found in the registry already has been placed online by agencies such as the Utah Division of Securities and federal regulators. But white collar defense attorney Brent Baker, who has organized events to educate Utahns about avoiding fraud, praised the effort to establish the registry as “another tool to deter white collar fraud,” which often involves elderly victims who need special protection. He pointed to a bill passed in 2011 that enhanced penalties for affinity fraud convictions.
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Brazil uncovers multibillion-dollar tax fraud at Finance Ministry
Brazilian authorities said they uncovered a tax fraud scheme at the Finance Ministry’s tax appeals board that may have cost taxpayers up to 19 billion reais ($5.96 billion). The news came in the midst of a multibillion-dollar corruption scandal at state oil company Petroleo Brasileiro SA, known as Petrobras, that has rattled Brazil’s political establishment and weighed on the fragile economy. In the latest case, federal police inspector Marlon Cajado said companies bribed members of the CARF, a body within the Finance Ministry that hears appeals on tax disputes, to get favorable rulings that reduced or waived the amounts owed. Cajado said 70 industrial, agricultural, civil engineering and financial companies, including banks, were being investigated on suspicion of bribing tax officials. So far, investigators have detected suspect appeals rulings that cost the state 5 billion reais in tax evasion and are probing other cases that could raise the total to 19 billion reais, Brazil’s tax agency said in a statement. The cases under investigation came before the board between 2005 and 2013, well before current Finance Minister Joaquim Levy took office. While Levy will not be held responsible, the tax fraud case could worsen the political climate at a time when the popularity of President Dilma Rousseff’s government has plummeted due to the Petrobras scandal and a stagnant economy. “It further clouds the atmosphere,” said a Finance Ministry official who requested anonymity due to the sensitivity of the matter. “Our only alternative is to crack down on corruption.” Police seized documents and 1.3 million reais in cash in the raids in three cities, but no arrests occurred, Cajado said at a news conference. He said companies paid bribes of up to 10 percent to “manipulate” rulings in cases that involved between 1 and 3 billion reais in taxes due. The suspects face charges of influence peddling, corruption, criminal conspiracy and money-laundering, which carry prison sentences of up to 50 years. Companies accused of paying to obtain favorable rulings will have their cases reopened.
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Zynga must face U.S. lawsuit alleging fraud tied to IPO
Zynga Inc must face a lawsuit that accuses the gaming company known for its “FarmVille” game of defrauding shareholders about its prospects before and after its December 2011 initial public offering. Ruling 13 months after dismissing an earlier version of the lawsuit, U.S. District Judge Jeffrey White in San Francisco said that shareholders could pursue claims that Zynga concealed declining user activity, masked how changes in a Facebook (http://www.reuters.com/subjects/facebook) Inc platform for its games would affect demand and inflated its 2012 revenue forecast. Zynga’s market value slid by several billion dollars between March 2, 2012, when its share price peaked at $15.91, and July 26, 2012, when the price dropped below $3 after the company posted disappointing earnings and cut its outlook. The lawsuit was based in part on at least a half-dozen confidential witnesses, and White said their testimony supported the claim that Zynga management intended to commit fraud. “Plaintiff alleges that the officers at Zynga obsessively tracked bookings and game-operating metrics on an ongoing, real-time basis with regular updates on the activity and purchases by every user of every Zynga game,” White wrote. “Confidential witnesses all corroborate that the updates on game users and spending data was readily accessible to Zynga’s management.” White rejected a claim over Zynga’s alleged product launch delays, saying it was mere “business puffery” for the company to call its game pipeline “strong,” “robust” and “very healthy.” Shareholders led by David Fee also claimed that Zynga hid its weaknesses to enable insiders to sell $593 million of stock before a post-IPO lockup was to expire, and avoid a roughly 75 percent drop in its share price over the next four months. Zynga had priced its IPO at $10 per share on December 15, 2011. Kelly Pakula Kunz, a Zynga spokeswoman said the San Francisco-based company had no comment on White’s decision. Nicole Lavallee, a partner at Berman DeValerio representing shareholders, said she was gratified by the decision. Zynga’s share price has been below $5 for more than a year owing to a failure to develop games as popular as “FarmVille,” as well as the rise of mobile gaming rivals such as Dublin-based King Digital Entertainment Plc, maker of “Candy Crush Saga.”
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PP Slush Fund Fuels Doubts of Rajoy Surviving as Spanish Premier
For the first four years of Prime Minister Mariano Rajoy’s leadership, his People’s Party operated a secret slush fund, a special court in Madrid said. Two former PP treasurers will stand trial on charges they helped run the fund to make political payoffs and finance campaigns, Investigating Magistrate Pablo Ruz of the Audiencia Nacional said in a ruling. Luis Barcenas and Alvaro de Lapuerta will be prosecuted for corruption and tax fraud charges and the party itself may face subsidiary civil liability. The evidence shows the existence of under-the-table accounting in the People’s Party, “which was functioning from at least 1990 through 2008,” Ruz said in the ruling. There was “a reception, registering, functioning and application of funds outside the legal economic circuit.” The ruling marks a double blow for Rajoy at the start of a string of ballots leading up to his bid for re-election at the end of the year. Voters in Andalusia, Spain’s most-populous province handed the PP its worst defeat in a quarter of a century, prompting public doubts about Rajoy’s position. “Alternative leadership to Rajoy should be an urgent first point of discussion for the party based on public opinion criteria,” said Lluis Orriols, a political scientist at Carlos III University in Madrid. “Still, sometimes internal party power dynamics and public opinion follow different patterns.” The ruling marks the end of a two-year investigation after El Pais, Spain’s best-selling newspaper, reproduced on January 2013 what it said were extracts from handwritten ledgers by Barcenas, showing payments to party officials including Rajoy, who has repeatedly denied having received any payment. The PP may be responsible for a tax fraud after failing to submit its corporate tax application in 2008, Ruz said. Rajoy has been the leader of the party since 2004. The case marked the beginning of the decline in Rajoy’s popular support and forced him to testify to parliament in 2013 to face down calls for his resignation from opposition parties. Although the Spanish economy is growing at the fastest pace in seven years, Rajoy’s party is still polling at less than half the 45 percent support he won in the 2011 election. The party was on 21 percent, according to a Metroscopia poll published by El Pais last month, with Podemos leading on 28 percent.
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BOE’s Carney Hints at Multiple Banks’ Involvement in Fraud Probe
Mark Carney, the governor of the Bank of England, hinted to lawmakers that a probe into money-markets auctions by the U.K.’s Serious Fraud Office will examine both external traders and central bank officials. When asked by the House of Lords’ Economic Affairs Committee about the scope of the SFO’s investigation, Carney told them that “the clarity that has been provided is around auctions and there are a variety of participants in auctions.” The Bank of England got a tip-off last spring to the potential abuse of emergency liquidity auctions in 2007 and 2008, which gave banks access to cash during the depths of the financial crisis, Carney said at the hearing. The central bank referred the initial findings of its own inquiry to the SFO, which opened a full investigation in December. The SFO advised the central bank not to comment on the probe to avoid any risk of prejudicing it, Carney said. The BOE will inform the public and parliament about the investigation as soon as it’s able, he said. “These are serious issues – obviously, for them to be referred – and it’s absolutely paramount that they are properly investigated and dealt with,” Carney said. “I don’t want to do anything that would jeopardize that.”
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U.K. FCA Plans Review of Dark Pools, Big Data in 2015 Agenda
Conflicts of interest in dark pools and how insurers use big data are two of the main areas the U.K. Financial Conduct Authority will look into over the next year, the regulator said in its annual business plan. The FCA will also examine how asset managers charge investors starting early next year, the regulator said in describing its market studies and thematic reviews through 2016. The dark pool and insurance inquiries will begin this year. The U.K. regulator is planning a more ambitious agenda for 2015, increasing its budget by six percent as it comes under pressure to crack down on market abuse in the wake of scandals such as interest-rate and currency benchmark rigging. It’s already outlined plans to examine topics including competition in investment and corporate banking, announced in February, and added a “culture” review this year. “Change in culture will only come when the tone at the top is right,” the FCA said in the business plan. “Firms must ensure that all of their processes support and reinforce the culture they want to promote.” The regulator will increase its 2015–2016 budget by 27 million pounds ($40 million) to 479 million, primarily related to personnel and information systems to increase enforcement activities to combat market abuse, according to the report. The FCA’s enforcement powers will also be extended in April to allow the regulator to take action against anti competitive behavior. The FCA levied 1.47 billion pounds in fines last year, the vast majority of which was accounted for by the 1.1 billion-pound settlement five banks agreed to in November for misconduct and attempted manipulation of rates on their foreign-exchange trading desks. Dark pools, private stock markets usually operated inside large banks, are under increasing scrutiny around the world. London-based Barclays Plc was sued in New York by Attorney General Eric Schneiderman last year over claims it engaged in a pattern of “fraud and deceit” with customers using the platform. How firms use big data – large collections of data that companies use to gather information on industry trends or people – has also become an issue of increasing concern due to changing privacy rules and threats posed by hackers to cybersecurity. The FCA said it will “identify potential risks and benefits for consumers, including whether the use of Big Data creates barriers to access products or services” of insurers. Systems and controls to prevent financial crime was the one new area of concern identified in an annual risk report published.
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Commerzbank to Pay $1.45 Billion to Resolve U.S. Claims
Commerzbank AG agreed to pay $1.45 billion to settle multiple U.S. investigations, closing the door on half a decade of legal woes over sanctions violations claims and its role in one of Japan’s biggest accounting scandals. The bank entered into a deferred-prosecution agreement with the Justice Department and agreed to pay penalties to almost a half-dozen government agencies, including the Manhattan District Attorney, the Federal Reserve and the Treasury Department, according to statements from U.S. enforcement authorities. New York’s Department of Financial Services also ordered the bank to hire an independent monitor and terminate four employees, according to a statement by Superintendent Benjamin Lawsky. The head of compliance in the New York branch has already resigned as a result of the DFS probe. “When there was profit to be made, Commerzbank turned a blind eye to its anti-money laundering compliance responsibilities,” Lawsky said. Commerzbank said it has improved its compliance, including adding staff and changing senior compliance executives. From at least 2002 to 2008, the bank used a series of measures, including stripping out information identifying clients subject to U.S. sanctions, to process transactions valued at more than $250 billion on behalf of Iranian and Sudanese entities. The bank’s New York compliance controls were ineffective, meaning that “fewer alerts or red flags were raised” than would have been had proper controls been in place, Lawsky said. Commerzbank said it would take an additional one-time charge of 338 million euros ($359 million) in the fourth quarter to cover the settlement. The settlement “was an expensive issue for Commerzbank,” said Stefan Bongardt, an analyst at Independent Research GmbH, who recommends clients sell the stock. “We’ll certainly see the topic of capital resurface again during the course of the year.” The bank has increased capital five times since receiving an 18.2 billion-euro bailout in 2009 from the German government, which still holds a 17 percent stake in the lender. With the settlement, Commerzbank puts a cap on mounting legal costs as it restructures to reach 2016 profit targets. Record-low interest rates and faltering economic growth in Europe are making it harder for the bank to meet its goals, Blessing has said. The sanctions case grew out of an investigation by Manhattan District Attorney Cyrus Vance Jr., whose office filed charges in 2011 against Islamic Republic of Iran Shipping Lines. Subsequently, federal prosecutors in Manhattan opened a separate probe related to accounting fraud at Olympus Corp., a Japanese maker of cameras and endoscopes.
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Foreign Corrupt Practices Act (FCPA)
Ex-Direct Access CEO Sentenced to Four Years in Bribe Scheme
The former chief executive officer of Direct Access Partners LLC, a New York-based broker-dealer, and his partner were sentenced to four years in prison for their roles in a bribery plot to win bond-trading business from an economic development bank owned by Venezuela’s government. Benito Chinea, who pleaded guilty in December, received almost the maximum five-year sentence for conspiring to pay millions of dollars in bribes to the head trader at Banco de Desarrollo Economico y Social de Venezuela, or Bandes. He was sentenced in Manhattan federal court. “The extent of the misconduct here is extraordinary,”U.S. District Judge Denise Cote said. “This was a serious, ongoing violation of the law, and even when it ended you wanted it to continue.” Joseph DeMeneses, a former Direct Access partner who ran the firm’s fixed-income trading business, was also sentenced to four years. He pleaded guilty in December as well. Bandes, a state-owned and state-controlled economic development bank in Venezuela, acted as the government’s agent in an effort to promote economic and social development, according to prosecutors. Prosecutors said Chinea and DeMeneses paid millions of dollars in kickbacks to Maria Gonzalez, a vice president of finance at Bandes. As a result, Direct Access collected at least $60 million with the defendants each earning millions of dollars, Assistant U.S. Attorney Harry Chernoff said in court.
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CEO and Managing Director Of US Broker-Dealer Sentenced for International Bribery Scheme
The former chief executive officer and former managing director of a U.S. broker-dealer (the Broker-Dealer), were sentenced to prison for their roles in a scheme to pay bribes to a senior official in Venezuela’s state economic development bank, Banco de Desarrollo Económico y Social de Venezuela (Bandes), in return for trading business that generated more than $60 million in commissions. Benito Chinea, 48, of Manalapan, New Jersey, and Joseph DeMeneses, 45, of Fairfield, Connecticut, were each sentenced to four years in prison. They were also ordered to pay $3,636,432 and $2,670,612 in forfeiture, respectively, which amounts represent their earnings from the bribery scheme. On December 17, 2014, both defendants pleaded guilty to one count of conspiracy to violate the Foreign Corrupt Practices Act and the Travel Act. “These Wall Street executives orchestrated a massive bribery scheme with a corrupt official in Venezuela to illegally secure tens of millions of dollars in business for their firm,” said Assistant Attorney General Caldwell. “The convictions and prison sentences of the CEO and Managing Director of a sophisticated Wall Street broker-dealer demonstrate that the Department of Justice will hold individuals accountable for violations of the FCPA and will pursue executives no matter where they are on the corporate ladder.” “Benito Chinea and Joseph DeMeneses paid bribes to an officer of a state-run development bank in exchange for lucrative business she steered to their firm,” said U.S. Attorney Bharara. “Chinea and DeMeneses profited for a time from the corrupt arrangement, but that profit has turned into prison and now they must forfeit their millions of dollars in ill-gotten gains as well as their liberty.” Chinea, the chief executive officer, and DeMeneses, a managing director in the Broker-Dealer, admitted that they worked with others, to arrange bribe payments to the Bandes official, Maria De Los Angeles Gonzalez, in exchange for her directing Bandes’s financial trading business to the Broker-Dealer. Previously, Gonzalez, along with two employees of the Broker-Dealer, Tomas Alberto Clarke Bethancourt (Clarke) and Jose Alejandro Hurtado (Hurtado), pleaded guilty for their involvement in this bribery scheme. A managing director of the Broker-Dealer, Ernesto Lujan, also pleaded guilty for his role in the scheme.
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United States Assists Korean Authorities in Recovering Over $28.7 Million In Corruption Proceeds of Former President of the Republic of Korea
The Department of Justice has reached a settlement of its civil forfeiture cases against $1.2 million in assets in the United States traceable to corruption proceeds accumulated by Chun Doo Hwan, the former president of the Republic of Korea. The department also assisted the government of the Republic of Korea in recovering an additional $27.5 million in satisfaction of an outstanding criminal restitution order against former President Chun. “Chun Doo Hwan’s campaign of corruption and bribery while serving as Korea’s president betrayed the trust of the Korean people, deprived Korea’s government of precious resources and undermined the rule of law,” said Assistant Attorney General Caldwell. “Fighting corruption is a global imperative that demands a coordinated global response. The close cooperation between the United States and Korea in successfully recovering corruption proceeds stands as a testament to our resolve to battle the scourge of corruption through international collaboration.” “Former Korean President Chun violated the trust of the people of Korea,” said Director Saldaña. “The results in this case reflect the outstanding international cooperation that exists between U.S. law enforcement and the government of Korea.” “The U.S. will not idly standby and serve as a money laundering haven for foreign officials to hide corrupt activities,” said Assistant Director in Charge David Bowdich. “The FBI will continue to collaborate with our foreign partners by leveraging its resources in order to identify those engaged in foreign corruption and to recover their ill-gotten gains.” According to court documents, President Chun was convicted in Korea in 1997 of receiving more than $200 million in bribes from Korean businesses and companies. President Chun and his relatives laundered some of these corruption proceeds through a web of nominees, trusts and shell companies in both Korea and the United States. Under the terms of the U.S. settlement, $1,116,951.45 in assets will be forfeited to the United States. During the joint U.S.-Korean investigation, approximately $27.5 million in additional funds were paid by an associate of former President Chun to the Korean government to partially settle the judgment entered against former President Chun upon his criminal conviction. Including the settlement announced, the U.S. and Korean authorities have recovered more than $28.7 million in connection with Korea’s investigation and prosecution of former President Chun.
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Pomerantz Firm Chosen to Lead Petrobras Share Fraud Suit
New York law firm Pomerantz LLP was appointed to lead investors suing Petroleo Brasileiro SA for securities fraud tied to an alleged multimillion-dollar kickback scheme. U.S. District Judge Jed Rakoff in Manhattan selected Pomerantz and its client, a Liverpool, England-based pension fund, to lead a class of investors who claim they lost money when the scheme became public and shares of Brazil’s state-run oil producer, known as Petrobras, plunged. U.S. lawyers often file securities fraud suits on behalf of a single investor after news about alleged misconduct at a company sends its shares down. Firms that attract the most investors or largest stakeholders seek to become lead counsel. Rakoff selected the Pomerantz firm and Universities Superannuation Scheme Ltd. over three other groups. These included the Skagen-Danske group, comprising SKAGEN AS, Danske Invest Management A/S and Danske Invest Management Co., which claimed it had the largest loss – about a quarter-billion dollars – of the investors in the case. Petrobras is at the center of a corruption scandal that has spread to the nation’s largest construction and engineering companies. Suppliers to the Rio de Janeiro-based energy firm allegedly bribed executives to win contracts at projects ranging from refineries to offshore drilling rigs, according to court documents filed in Brazil. The investigation put President Dilma Rousseff on the defensive during her campaign for re-election, which she won narrowly October 26. Petrobras shares tumbled after it delayed the release of earnings for a month amid the escalating scandal, which led to the arrest of former executives. The company is also locked out of credit markets. On November 21, Petrobras received a subpoena from the U.S. Securities and Exchange Commission requesting documents related to the regulator’s probe of the company, the oil producer said in a November 24 statement. Brazil’s prosecutor general asked the nation’s Supreme Court to authorize an investigation of senior politicians, including probes into whether office-holders are implicated in the alleged kickback scheme, according to a person with knowledge of the request who asked not to be identified because the matter isn’t public.
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Litigation Matters
Former U.K. Rabobank Derivatives Trader Pleads Guilty to LIBOR Interest Rate Manipulation Charges
A former senior derivatives trader at the London desk for Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank) pleaded guilty in U.S. federal court for his role in a scheme to manipulate the U.S. Dollar (USD) and Yen London InterBank Offered Rate (LIBOR), a benchmark interest rate. Lee Stewart, 51, of London appeared in the Southern District of New York before United States District Judge Jed S. Rakoff and pleaded guilty to one count of conspiracy to commit wire and bank fraud. A sentencing hearing is scheduled for June 9, 2017. At the time relevant to the charges, LIBOR was an average interest rate, calculated based on submissions from leading banks around the world, reflecting the rates those banks believed they would be charged if borrowing from other banks. It served as the primary benchmark for short-term interest rates globally and was used as a reference rate for many interest rate contracts, mortgages, credit cards, student loans and other consumer lending products. LIBOR was published by the British Bankers’ Association, a trade association based in London, and was calculated for 10 currencies at 15 borrowing periods, known as maturities, ranging from overnight to one year. The published LIBOR “fix” for U.S. Dollar and Yen currency for a specific maturity was the result of a calculation based upon submissions from a panel of 16 banks, including Rabobank. According to admissions made in connection with his guilty plea, Stewart worked as a senior derivatives trader at Rabobank’s London desk from 1993 to 2009, and entered into derivative contracts involving interest rate swaps linked to the U.S. Dollar LIBOR rate. Stewart admitted that from May 2006 through early 2011, he conspired with others at Rabobank to manipulate the LIBOR benchmark interest rate, which was tied to the profitability of interest rate derivative trades entered into by Rabobank traders.
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Bank Of New York Mellon Settles Misrepresentation Claims For $714 Million
Bank of New York Mellon (http://www.forbes.com/companies/bank-of-ny-mellon/) admitted to a “statement of facts” that alleged the bank misrepresented the pricing and execution of foreign exchange trades it made on behalf of clients over the course of multiple years. The admission came as part of a $714 million settlement that resolves long-running litigation between the bank, a handful of regulatory bodies, and a class action lawsuit filed by its customers. Bank of New York Mellon also will fire David Nichols, head of product management at the bank, in addition to other executives responsible for its misrepresentations. BNY’s misconduct, made over a span of years, centers on how it represented pricing to its clients in foreign exchange markets. While BNY said it was providing the “best rates” and “best execution” on forex pegged to interbank rates, the firm was actually giving its clients the worst reported price on those rates. The distinction, meant that clients who thought their forex trades were done at the best available market price at the time of execution were actually receiving prices at the far margin of interbank ranges, where pricing is the worst. BNY also agreed to pay a total of $714 million to settle lawsuits brought by the U.S. government, the State of New York, the Securities and Exchange Commission, the Department of Labor and private investors. The bank will pay a civil penalty of $335 million to the United States and New York State, collectively, money that will go in to a fund that compensates customers who were victims of BNY’s misconduct, including state agencies such as the New York State Deferred Compensation Plan and the State University of New York system. BNY will also pay $335 million to resolve private class action lawsuits filed by the Bank’s customers. The government’s lawsuit was brought under the Financial Institutional Reform, Recovery and Enforcement Act and New York State’s lawsuit was brought pursuant to the Martin Act, which permits the State to seek damages and other relief for fraud. BNY will also pay $14 million to its Employee Retirement Income Security Act plan customers, in addition to $70 million from other settlements, to resolve claims with the Department of Labor.
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HP Wins Approval of Autonomy Settlement With Shareholders
The third time was the charm for Hewlett-Packard Co., which won court approval of its settlement with shareholders over the botched Autonomy Corp. acquisition after a judge had rejected two previous deals. U.S. District Judge Charles Breyer in San Francisco granted preliminary approval to the accord, saying that unlike the last proposal it doesn’t provide officers and directors with broad protection against possible lawsuits that have nothing to do with the Autonomy acquisition. The settlement releases Hewlett-Packard from investor claims specifically related to Autonomy in exchange for a set of corporate governance reforms and no money damages. Executives at Hewlett-Packard and Autonomy have been sparring over who’s to blame for the $8.8 billion writedown related to the $10 billion 2011 takeover of the U.K.-based software company. Hewlett-Packard, which blamed much of the writedown on inaccurate financial statements, said it was the victim of fraud by Autonomy’s managers. Former Autonomy executives contend Palo Alto, California-based Hewlett-Packard was at fault. “The third amended settlement is within the range of possible approval because it appears to be a fundamentally fair, adequate, and reasonable resolution of shareholder claims,”Breyer said. The governance reforms apply to both entities to be formed when Hewlett-Packard splits into two companies. The reforms include the creation of a senior executive-led risk management committee, modifications to board-level oversight of mergers and acquisitions and a new due diligence policy for mergers.
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U.S. Is Seeking Billions From Global Banks in Currency Manipulation Settlement
The U.S. Justice Department is seeking about $1 billion each from global banks being investigated for manipulation of currency markets, according to two people familiar with the talks. The figure is a starting point in settlement discussions, with some banks being asked for more and some less than $1 billion. One bank that has cooperated from the beginning is expected to pay far less, one of the people said. Penalties of about $4 billion are on the table, according to one of the people, though the number could change markedly. Banks are pushing back harder than in some previous negotiations, including those for mortgage-backed securities, and the final penalties could be lower, people close to the talks said. The discussions, which have begun in earnest in recent weeks, could lead to settlements that would resolve U.S. accusations of criminal activity in the currency markets against Barclays Plc, Citigroup Inc., JPMorgan Chase & Co., Royal Bank of Scotland Group Plc and UBS Group AG. The government has also said it is preparing cases against individuals. Peter Carr, a Justice Department spokesman, declined to comment, as did spokesmen for the banks. Prosecutors are also pressing Barclays, Citigroup, JPMorgan and the Royal Bank of Scotland to plead guilty, people familiar with the matter have said. In the worldwide investigation into currency-rigging, six banks have already agreed to pay regulators about $4.3 billion. The Justice Department’s move signals that investigations are giving way to wrangling over issues such as whether the banks plead guilty to antitrust or fraud charges, what behaviors the banks will admit to in settlement documents and how much they will pay. Barclays reserved 750 million pounds ($1.1 billion) for the currency settlement in the fourth quarter, bringing its total to 1.25 billion pounds. RBS took a 1.2 billion-pound charge in the same period for conduct and litigation, including a 320 million-pound provision for U.S. currency-rigging probes. JPMorgan Chase set aside an additional $1.1 billion, pre-tax, for legal expenses in the fourth quarter, without breaking out an amount for the currency settlement. Citigroup added $2.9 billion in the fourth quarter, in part to resolve foreign-exchange probes. UBS set aside 176 million francs ($175 million) for legal charges in the fourth quarter, after allotting 1.84 billion Swiss francs the previous quarter. Final settlements often vary significantly from the Justice Department’s initial demands as both sides hammer out an agreement over weeks or even months. During settlement talks for BNP Paribas SA over sanctions violations, penalties ranging from $3.5 billion to $15 billion were floated, according to a person familiar with the discussions. The bank ultimately agreed to plead guilty and pay $8.97 billion.
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China Market
China police freeze two Trafigura bank accounts over alleged fraud
Chinese police have frozen two bank accounts held by Trafigura, one of the world’s three largest private oil and metals traders, as the authorities investigate an alleged $32 million gasoline trade fraud, according to three sources. Police have held Beijing-based Trafigura employee Tian Meng since August in the northern city of Cangzhou and can detain him for up to seven months without charge. The investigation was launched after private Chinese trader Qingdao United Energy (QUE) told police it had lost $32 million when a trader, Zhang Wei, arranged trade financing deals with Tian that used QUE’s letters of credit without its consent to cancel out Zhang’s personal trading losses with Trafigura, sources have said. According to two sources with direct knowledge of the matter and another who had been briefed by police, the police last month froze one account at Industrial and Commercial Bank of China and another at Bank of China, both held in Shanghai by Trafigura Private Limited, a Singapore unit. Trafigura will be anxious to avoid any disruption to its business in Shanghai, the hub for its metals activity in China, the world’s largest buyer of most commodities. “This will first hamper (Trafigura) obtaining financing in the relevant Chinese banks,” said a senior China-based trader with a western trading house. “If the news spreads, other Chinese banks will be scared off, too.” In late February, police told prosecutors they proposed a charge of contract fraud against Tian Meng, Zhang Wei and Trafigura Pte Ltd, the sources said. A senior Trafigura source, however, said the company was aware of the latest developments in China and of the proposed charges. “As far as we are concerned, there is no change in the substance of this matter, which is a commercial dispute and not a matter for police or state prosecutors,” said the source. “We believe the prosecutors will conclude there are no charges to answer, but if any are brought we will vigorously contest them.” Two of the sources said police believed the Swiss trader’s Singapore-based trade operation helped arrange the gasoline financing deal, after investigators went through e-mail traffic Zhang turned in to police. Prosecutors could revise the charge over the next five months and might ask the investigators to gather more evidence. In late 2014 the same senior Trafigura source told Reuters that Zhang, who had been trading derivatives with Trafigura since 2011 using collateral and credit backed by a local-government-backed firm, had accumulated losses of $32 million by late 2013 and agreed to a financing scheme with Tian and the Singapore-based gasoline team to settle the losses. Zhang bought 700,000 barrels of gasoline from Trafigura at market price using letters of credit issued by QUE and then sold them back to Trafigura at a discount of $32 million, two official sources with direct knowledge of the investigations said. The senior Trafigura source said in December that Tian believed Zhang was the authorised agent of QUE, and that Zhang had represented other companies in previous transactions without problems. Commodity financing deals in China are already under the spotlight after a billion-dollar scandal at Qingdao Port, where a private Chinese trading firm has been accused of duplicating warehouse certificates to secure bank loans.
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Trafigura, Wanxiang plan Hong Kong arbitration for China metals dispute
Trading house Trafigura and China’s Wanxiang Resources are expected to agree to arbitration in Hong Kong for a dispute linked to alleged metals financing fraud after sparring over jurisdiction, lawyers for the firms said. Trafigura won a judgment ordering Wanxiang to halt court proceedings in Shanghai, but Mr. Justice Blair at England’s High Court encouraged the two sides to hammer out an agreement on arbitration. Trafigura wanted the case heard in English courts, but Wanxiang said any result there would not be enforceable in China (http://www.reuters.com/places/china). The two sides have discussed bringing their case to Hong Kong’s International Arbitration Centre and hope to agree details in coming days or weeks, lawyers for the two companies said at a court hearing. In a January hearing, Trafigura said having an English court venue could cut potential damages to $1 million from about $10 million in a Chinese court. The case is one of many legal actions sparked by a probe launched in May last year by Chinese authorities into suspected fraud at China’s Qingdao port, the world’s seventh busiest, and nearby Penglai. The alleged fraud is estimated to have cost Western banks and trading houses as well as local Asian banks more than $3 billion in total. Neither Trafigura nor Wanxiang are accused of fraud, but have been caught in the fallout from the probe. A private metals trading firm, Decheng Mining, allegedly duplicated warehouse certificates stored at Qingdao port to pledge a metal cargo multiple times as collateral for bank loans. Wanxiang launched proceedings in China in August last year against Impala Warehousing and Logistics, owned by Trafigura, accusing Impala of failing to deliver 5,004 tonnes of aluminium it owned from warehouses. Wanxiang Resources, a commodities (http://www.reuters.com/finance/commodities) trading arm of Wanxiang Group, demanded the metal or damages of $8.9 million. According to court documents, Wanxiang believed its cargo ended up in Korea while Impala said the fate of the metal was unknown. Chinese authorities imposed a lockdown on parts of the two ports where the metal was held, preventing Impala and Wanxiang from accessing the warehouses, the documents said.Impala had insisted that an agreement to store Wanxiang’s aluminium in Impala’s warehouses included a provision that all disputes be heard in English courts while Wanxiang said Shanghai was the proper venue for the case.
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Healthcare Industry
Adventist Health System to Pay $5.4 Million to Resolve False Claims Act Allegations
Adventist Health System Sunbelt Healthcare Corporation (Adventist) has agreed to pay $5,412,502 to resolve claims that it violated the False Claims Act by providing radiation oncology services to Medicare and TRICARE beneficiaries that were not directly supervised by radiation oncologists or similarly qualified persons, the Department of Justice announced. Adventist is a non-profit healthcare organization operating a large network of hospitals in the South and the Midwest, and doing business in Florida as Florida Hospital. Radiation oncology services provided to patients served by Medicare and TRICARE, the Department of Defense’s health care program, must be directly supervised by a radiation oncologist or similarly qualified personnel. The United States alleged that, from January 1, 2010, through December 31, 2013, Adventist violated this supervision requirement for radiation oncology services provided to federal health care program beneficiaries at several Florida locations, including in Altamonte Springs, Daytona Beach, Deland, Kissimmee, Orange City, Orlando, Palm Coast and Winter Park. These services included radiation simulation, dosimetry, radiation treatment delivery and devices, and intensity-modulated radiation therapy. “Medicare and TRICARE patients deserve high quality health care,” said U.S. Attorney A. Lee Bentley III of the Middle District of Florida. “We will not tolerate providers recklessly cutting corners, particularly when furnishing such critical medical services as radiation oncology.” The settlement partially resolves allegations made in a qui tam lawsuit under the False Claims Act filed in Tampa, Florida, by Dr. Michael Montejo, a radiation oncologist and former employee of Florida Oncology Network P.A., a radiation oncology group. The act permits private individuals to sue on behalf of the government for false claims and to share in any recovery. Dr. Montejo will receive $1,082,500 as his share of the recovery.
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Cardiac Monitoring Company to Pay $6.4 Million for Alleged Overbilling of Government Health Care Programs
BioTelemetry Inc., a heart monitoring company headquartered in Malvern, Pennsylvania, has agreed to pay $6.4 million to resolve allegations made under the False Claims Act (FCA) that its subsidiary, CardioNet, overbilled Medicare and other federal health programs for Mobile Cardiac Outpatient Telemetry (MCOT) services when those services were not reasonable or medically necessary, the Justice Department announced. “Billing for a higher-level service that is not necessary to treat a patient’s condition to receive higher reimbursement from federal health care programs will not be tolerated,” said Acting Assistant Attorney General Benjamin C. Mizer of the Justice Department’s Civil Division. “Such conduct wastes critical federal health care program funds and drives up the costs of health care for all of us.” “This settlement should send a message to all providers: do not misuse federal billing systems to improperly gouge the healthcare system upon which so many Americans rely.” An MCOT monitor provides real-time, outpatient cardiac monitoring. MCOT monitors are worn by patients for a period of time during which the device continuously records the activities of the patient’s heart, including any irregular rhythms or other cardiac event, and transmits data to CardioNet’s diagnostic center using cell phone technology. Traditional, less expensive event monitors only download patient data periodically over a landline. The government alleges that CardioNet was aware that MCOT services were not eligible for Medicare reimbursement when provided to patients who had experienced only mild or moderate heart palpitations, since less expensive monitors could effectively collect data about those patients’ conditions. Nonetheless, CardioNet allegedly submitted claims to Medicare for those patients containing the billing code for the more expensive MCOT services along with an inaccurate diagnostic code that misrepresented the true condition of the patients and their need for MCOT services.
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Departments of Justice and Health and Human Services Announce Over $27.8 Billion in Returns from Joint Efforts to Combat Health Care Fraud
More than $27.8 billion has been returned to the Medicare Trust Fund over the life of the Health Care Fraud and Abuse Control (HCFAC) Program, Attorney General Eric Holder and Department of Health and Human Services (HHS) Secretary Sylvia M. Burwell announced. The government’s health care fraud prevention and enforcement efforts recovered $3.3 billion in taxpayer dollars in Fiscal Year (FY) 2014 from individuals and companies who attempted to defraud federal health programs, including programs serving seniors, persons with disabilities or those with low incomes. For every dollar spent on health care-related fraud and abuse investigations in the last three years, the administration recovered $7.70. This is about $2 higher than the average return on investment in the HCFAC program since it was created in 1997. It is also the third highest return on investment in the life of the program. The recoveries announced reflect a two-pronged strategy to combat fraud and abuse. Under new authorities granted by the Affordable Care Act, the administration continues to implement programs that move away from “pay and chase” to preventing health care fraud and abuse in the first place. In addition, the Health Care Fraud Prevention and Enforcement Action Team (HEAT), run jointly by the HHS Office of the Inspector General and the Justice Department, is changing how the federal government fights certain types of health care fraud. These cases are being investigated through “real-time” data analysis in lieu of a prolonged subpoena and account analyses, resulting in significantly shorter periods of time between fraud identification, arrest and prosecution.Increased funding from the administration and Congress has allowed HHS and the Justice Department to build on early successes of the Medicare Strike Force by expanding into nine geographic territories – Miami, Los Angeles, Detroit, Houston, Brooklyn, New York, Southern Louisiana, Tampa, Florida, Chicago and Dallas. Since its inception, Strike Force prosecutors filed more than 963 cases charging more than 2,097 defendants who collectively billed the Medicare program more than $6.5 billion; 1,443 defendants pleaded guilty and 191 others were convicted in jury trials; and 1,197 defendants were sentenced to imprisonment for an average term of approximately 47 months. Through the Strike Force and other efforts, in FY 2014 alone, the Justice Department opened 924 new criminal health care fraud investigations. Federal prosecutors filed criminal charges in 496 cases involving 805 defendants. A total of 734 defendants were convicted of health care fraud-related crimes during the year.
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SEC Regulatory Actions
SEC Approves Less-Regulated Mini-IPOs Cheered by Hambrecht
U.S. regulators opened a new path for small companies to raise money in less-regulated, mini public offerings. Small businesses will be able to raise as much as $50 million from the general public without certain regulatory hurdles, such as approval from every state where the firm has investors. The Securities and Exchange Commission unanimously approved the rule. The regulation stems from a provision in the 2012 JOBS Act that was pushed by the financial industry, including investment banker William Hambrecht, who helped take public companies such as Apple Inc. and Google Inc. Hambrecht has said he plans to underwrite such offerings. Critics, including the state regulators, have warned that the less-regulated offerings open the door to fraud. The SEC’s rules, which were proposed two years ago, will make many deals greater than $20 million entirely exempt from review by state regulators. Businesses have argued that the rule will make it easier for them to raise capital and create jobs. “You’re talking about companies that are further along in their life-cycle and are looking for millions of dollars,” said D.J. Paul, a fundraising consultant for small companies who sits on an SEC advisory committee. “Those tend to be companies that deploy that money toward the creation of jobs and actual research and development.” Investors who put money into firms through the mini-IPOs could eventually trade the shares on so-called venture exchanges, which are being studied by the SEC. The less-regulated markets could become a home for smaller companies whose shares trade less frequently, SEC Chair Mary Jo White said last month. State officials have fought efforts to limit their involvement in smaller stock offerings, saying such deals are often risky and can be a source of fraud. Under the SEC’s rules, they will retain the authority to vet offerings under $20 million that lack standard financial disclosures, such as audited statements and periodic financial updates. Companies that provide the enhanced disclosures and limit the participation of less wealthy investors will be able to avoid state review of their deals. The SEC also unanimously approved a proposal that all high-frequency traders register with the Financial Industry Regulatory Authority, the brokerage industry’s self-regulator. Some proprietary-trading firms have taken advantage of a regulatory exemption to avoid Finra oversight of their business. The SEC’s plan would change that, giving Finra the ability to conduct compliance exams and bring enforcement actions for violations.
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SEC files fraud charges against Wings Network
Federal securities regulators have filed civil fraud charges against three officers and 12 promoters of Wings Network, alleging that the company raised at least $23.5 million in a pyramid scheme with echoes of the alleged TelexFree swindle. In a complaint filed in Boston federal court, the Securities and Exchange Commission said foreign companies operating as Wings Network claimed to offer digital and mobile technology for customers. The enterprise allegedly sold “membership packs” that promised guaranteed monthly returns in exchange for recruiting friends and family to join. But in reality, Wings made money by recruiting thousands of Latinos to invest, and using some money raised from later participants to pay off people who had become involved earlier, the SEC said. The principals allegedly diverted $16.5 million to themselves. “Wings Network’s claims about visionary mobile products were just a smoke screen to disguise a classic pyramid scheme,’’ Paul G. Levenson, director of the SEC’s Boston regional office, said in a statement. Many people in Brazilian and Dominican immigrant communities in Massachusetts put money into the scheme from November 2013 through April 2014, the SEC said. The Globe in May reported that Secretary of State William F. Galvin’s office had filed civil fraud charges against Wings and three employees. Galvin began receiving complaints about Wings amid his investigation of the alleged $1 billion global TelexFree fraud run out of Brazil and Marlborough. Marlborough is also a home base for several of the Wings promoters charged by the SEC. One of the Marlborough promoters allegedly earned $1.3 million in commissions for bringing in $15 million from consumers. Boston played host to some of Wings Network’s “Mega Business Events” early last year. The company’s promoters reportedly used social media, including Facebook and YouTube, to invite participants to these events, which were essentially rallies to bring in more business. Promoters held meetings at hotels and other locations in Massachusetts, Connecticut, California, Florida, Texas, Georgia, and Utah. The promoters also set up storefronts to lure investors, including two locations in downtown Framingham. The principals have allegedly transferred millions of dollars out of the companies behind Wings—called Tropikgadget FZE and Tropikgadget Unipessoal LOA, both based in Portugal—and moved the money into personal accounts, and also used some to purchase a hotel.
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SEC Charges New York-Based Brokerage Firm With Faulty Underwriting of Public Offering by China-Based Company
The Securities and Exchange Commission announced charges against a New York-based brokerage firm responsible for underwriting a public offering despite obtaining a due diligence report indicating that the China-based company’s offering materials contained false information. Macquarie Capital (USA) Inc., a wholly owned subsidiary of global financial services firm Macquarie Group Limited, has agreed to settle the SEC’s charges by paying $15 million and separately covering the costs of setting up a Fair Fund to compensate investors who suffered losses after purchasing shares in the public offering by Puda Coal. The SEC previously charged the Puda Coal executives (http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171487402) behind the offering fraud at the company, which is no longer in business. “Underwriters are critical gatekeepers who are relied upon by the investing public to ferret out the essential facts and address potential inaccuracies before marketing a public stock offering,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “Macquarie Capital proceeded with this offering despite a due diligence process that exposed a false claim by Puda Coal, and investors suffered massive losses when the truth publicly came to light.” The SEC also charged former Macquarie Capital managing director Aaron Black and former investment banker William Fang for failing to exercise appropriate care in their due diligence review. Black agreed to pay $212,711 and Fang agreed to pay $35,000 to settle the charges. According to the SEC’s complaint filed in federal court in Manhattan, Macquarie Capital was the lead underwriter on a secondary public stock offering in 2010 by Puda Coal, which traded on the New York Stock Exchange at the time and purported to own a coal company in the People’s Republic of China (PRC). In the offering documents, Puda Coal falsely told investors that it held a 90-percent ownership stake in the Chinese coal company. Macquarie Capital repeated those statements in its marketing materials for the offering despite obtaining a report from Kroll showing that Puda Coal did not own any part of the coal company. According to corporate registry filings in the PRC that Kroll accessed in its due diligence review, Puda Coal’s chairman had transferred ownership of the coal company to himself and then sold nearly half of his interest to the largest state-owned investment firm in the PRC. As a result, Puda Coal no longer had any ownership stake or source of revenue. According to the SEC’s complaint, Kroll provided its report to Fang, who read it but failed to act on the information revealing that Puda Coal no longer owned the coal company. Instead, Fang circulated the report to other members of the Puda Coal deal team and stated in the e-mail that “no red flags were identified.” Black, who served as one of the transaction directors on the Puda Coal deal, received the report from Fang and read portions stating that Puda Coal’s chairman owned 50 percent of the coal company of which Puda Coal was claiming to own 90 percent. Black likewise failed to act on the information.
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Former Company Officer Earns Half-Million Dollar Whistleblower Award for Reporting Fraud Case to SEC
The Securities and Exchange Commission announced a whistleblower award payout between $475,000 and $575,000 to a former company officer who reported original, high-quality information about a securities fraud that resulted in an SEC enforcement action with sanctions exceeding $1 million. Officers, directors, trustees, or partners who learn about a fraud through another employee reporting the misconduct generally aren’t eligible for an award under the SEC’s whistleblower program. However, there is an exception to this exclusion that makes an officer eligible if he or she reports the information to the SEC more than 120 days after other responsible compliance personnel possessed the information and failed to adequately address the issue. This is the first SEC whistleblower award to an officer under these circumstances. “Corporate officers have front-row seats overseeing the activities of their companies, and this particular officer should be commended for stepping up to report a securities law violation when it became apparent that the company’s internal compliance system was not functioning well enough to address it,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement. The SEC has now awarded 15 whistleblowers since its whistleblower program began more than three years ago. Payouts have totaled nearly $50 million out of an investor protection fund established by Congress. The fund is financed entirely through monetary sanctions paid to the SEC by securities law violators, and no money is taken or withheld from harmed investors to pay whistleblower awards. Whistleblower awards can range from 10 percent to 30 percent of the money collected in a case. By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.
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SEC Suspends Trading in 128 Dormant Shell Companies to Put Them Out of Reach of Microcap Fraudsters
The Securities and Exchange Commission announced it has suspended trading in 128 inactive penny stock companies to ensure they don’t become a source for pump-and-dump schemes. The trading suspensions are the latest in a microcap fraud-fighting initiative known as Operation Shell-Expel in which the SEC Enforcement Division’s Office of Market Intelligence utilizes technology to scour the over-the-counter (OTC) marketplace and identify dormant companies ripe for abuse. The proactive efforts have prevented fraudsters from having the opportunity to manipulate these thinly-traded stocks by pumping the companies’ stock value through false and misleading promotional campaigns and then dumping the stocks after investors buy in. Since it began in 2012, Operation Shell-Expel has resulted in trading suspensions of more than 800 microcap stocks, which comprises more than 8 percent of the OTC market. Once a stock has been suspended from trading, it cannot be relisted unless the company provides updated financial information to prove it’s actually operational. It’s extremely rare for a company to fulfill this requirement, and the trading suspensions essentially render the shells worthless and useless to scam artists. “Operation Shell-Expel continues to be an efficient way to combat microcap fraud by denying fraudsters the empty nests they need to hatch their schemes,” Andrew J. Ceresney, Director of the SEC Enforcement Division. “We are getting increasingly aggressive and adept at ridding the microcap marketplace of dormant shells within a year of the companies becoming inactive.
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Archived Forensic News
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