Forensic News March 2016

Financial/Accounting Fraud

Toshiba Shares Plunge as U.S. Unit Faces Accounting Probe

Toshiba Corp. is under investigation by the U.S. over allegations that it hid $1.3 billion in losses at its nuclear power operations, according to two people familiar with the matter. Shares plunged in Tokyo. The Justice Department and the Securities and Exchange Commission are looking into whether fraud was committed, said the two, who asked not to be named because the investigations aren’t public. The probes, they said, follow one by Japan’s securities regulator, which found that Toshiba falsified financial statements and documents involving its issuance of corporate bonds. U.S. authorities are scrutinizing allegations made in an internal review published last year by the Tokyo-based company, the two people said. The report, a 334-page version of which was published in English on Toshiba’s web site in December, said management was complicit in padding profits for almost seven years. It led to the resignations of top officials, including Hisao Tanaka, Toshiba’ president and chief executive officer. Until now, the investigation into Toshiba’s accounting practices had been limited to its home country, where regulators fined the company $62.1 million – the largest penalty ever imposed – and fined its former auditor, Ernst & Young ShinNihon LLC, $17.4 million and barred it from accepting new business for three months. Toshiba President Masashi Muromachi, who took over as the scandal unfolded last year, promised to take steps to overhaul operations and prevent future wrongdoing. The recent expansion by U.S. authorities, which are known to open cases even when another jurisdiction is already investigating, means Toshiba could face further enforcement action in America. The U.S. can exert jurisdiction in part because the allegations involve its Westinghouse Electric Co. unit, which is based in Cranberry Township, Pennsylvania. The report also names Ernst & Young LLP, which audited the Westinghouse accounts. The Justice Department has brought a handful of accounting fraud cases over the past few years. In 2014, it levied a $30 million penalty on surgical device maker ArthroCare Corp., which it accused of inflating revenue. The former chief executive officer and chief financial officer were convicted of several counts of fraud and sentenced to prison terms of 20 years and 10 years, respectively.

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Schiller May Be Forced to Pay Back Valeant Up to $26.1 Million

Howard Schiller, the embattled Valeant Pharmaceuticals International Inc. director, may be forced to pay back some of the $26.1 million in incentive compensation he received as chief financial officer in 2014. Schiller, who was CFO until July 2015, was awarded restricted stock worth $23.7 million and a cash bonus of $2.4 million in 2014, according to Valeant’s most recent proxy statement. Under the company’s clawback policy, Valeant can reclaim that money. The policy allows Valeant to seek reimbursement of certain bonus, incentive or equity-based compensation from executives if “the company materially restates or adjusts its financial statements,” according to the filing. It also applies if the restatement was caused by fraudulent or illegal misconduct and whether or not the executive is still an employee. Schiller was accused by the company of engaging in “improper conduct” that led to the financial misstatements. Schiller denied the charges in a statement and said he’s refusing to resign from the board. ”The company has determined that the tone at the top of the organization and the performance-based environment at the company, where challenging targets were set and achieving those targets was a key performance expectation, may have been contributing factors resulting in the company’s improper revenue recognition,” it said in a statement. Outgoing CEO Mike Pearson received a $8 million bonus in 2014 that the company could also try to recoup. That bonus and Schiller’s were paid out after hitting revenue and cash earnings-per-share targets. Valeant adopted the clawback policy in 2014. Schiller was a 24-year veteran of Goldman Sachs Group Inc., where he led the bank’s health-care practice until 2009, when he became the chief operating officer of Goldman’s investment bank. He moved to Valeant in late 2011. The company hasn’t yet filed a proxy that includes 2015 pay data.

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New UK rules hold bank bosses accountable for misconduct

Britain’s financial regulators introduce the new Senior Managers Regime (SMR) to make top bankers accountable for misconduct at their companies. The reform is in response to public anger that, under the previous system, few senior bankers were punished after taxpayers had to bail out several lenders during the 2007-09 financial crisis. Banks have also been fined billions of pounds for trying to rig currency markets and interest rate benchmarks but few individuals have been held to account. The SMR, which aims to make it easier to pinpoint where blame lies when things go wrong, will be enforced by the Bank of England’s Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). Appointments of staff who come under the SMR, such as chief executives, chief financial officers and non-executive directors who chair remuneration, risk, audit and nominations committees, must be approved by regulators. Senior managers must sign up to a specific “statutory duty of responsibility”, meaning they will have to show they took “reasonable steps” to stop a rule breach from occurring or continuing. This will cover about 10,000 staff in about 900 banking firms. Banks must also give newly-appointed senior managers all the information that they could be reasonably expected to need to do their jobs. They will also have to draft and maintain a map of who is responsible for what at the bank, ensuring that all business areas are covered. Punishment for breaches include fines and bans from working in the industry. A new criminal offence covering “reckless decisions” that cause a financial institution to fail, which will be punishable by up to seven years in prison.

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PJT’s Caspersen Charged by U.S. Over $95 Million Fraud

A former managing director at PJT Partners Inc.’s Park Hill Group was arrested and charged with scheming to defraud investors, including a charitable foundation, of more than $95 million. Andrew Caspersen, 39, stole the money through phony private equity investments and lost millions through aggressive options trading in his own account, prosecutors said in a complaint made public. PJT told staff in a memo that Caspersen was fired. Shares of the investment bank plunged in New York trading. PJT learned of potential misconduct during the week of March 14, and hired a law firm to conduct an internal review. It then alerted law enforcement, the people said. Caspersen was arrested on March 26 at an airport, according to Manhattan U.S. Attorney Preet Bharara. He’s charged with securities fraud and wire fraud and faces a maximum prison term of 20 years on each count. Caspersen allegedly invented financiers and set up false e-mail addresses and misleading domain names. Among the alleged scams he pulled, according to the charges, Casperen claimed he structured a new investment in which he put his own money. A charitable foundation, not identified in the complaint, wired $24.6 million to invest in a credit facility that was backed by a private security portfolio. Caspersen started moving the money into his own brokerage accounts, where he lost it on bad trades, prosecutors said. A judge released Caspersen from custody on a $5 million bond after he appeared in Manhattan federal court. Prosecutors sought bail of $20 million. Defense lawyer Dan Levy said in court his client didn’t have access to the funds prosecutors claimed he had. PJT is run by Paul J. Taubman, and advises on mergers, restructurings and fund placements. It combined with advisory businesses of Blackstone Group LP and was spun off as a separate company in October. Park Hill was previously part of Blackstone, and Caspersen joined the unit that advises hedge funds, private equity and secondary funds on capital raising in 2013. He is a graduate of Princeton University and Harvard Law School, and joined from Coller Capital, according to a statement at the time of his hiring.

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SEC cites Wells Fargo with fraud in failed Curt Schilling startup

Wells Fargo was charged with fraud tied to a now-defunct video game company founded by former Red Sox pitcher and three-time World Series champion Curt Schilling. The Securities and Exchange Commission said the San Francisco bank failed to disclose an important financial gap facing Schilling’s startup, 38 Studios, to bond investors who lost money in the high-profile 2012 collapse. The civil complaint, filed in Rhode Island federal court, also charges the Rhode Island Economic Development Corporation (RIEDC), a state agency, with defrauding the same municipal bond investors. The SEC alleged that a bond offering document produced by Wells Fargo and RIEDC failed to disclose that 38 Studios had conveyed that it needed at least $75 million in funding to produce a particular video game. A subsequent $75 million bond offering resulted in a $50 million loan to 38 Studios, leaving the company with a $25 million gap to produce its game, the SEC said. The remaining money raised was used to pay expenses and to establish a reserve fund and a capitalized interest fund, the SEC said. When 38 Studios failed to obtain additional financing to close the gap, the company defaulted on the loan. The company’s closure made headlines due to Schilling’s status as a star pitcher, television commentator and 2001 World Series MVP. He has said he lost $50 million personally on the venture. “We allege that the RIEDC and Wells Fargo knew that 38 Studios needed an additional $25 million to fund the project yet failed to pass that material information along to bond investors,” said Andrew Ceresney, Director of the SEC Enforcement Division. “Municipal issuers and underwriters must provide investors with a clear-eyed view of the risks involved in an economic development project being financed through bond offerings,” Ceresney said. The SEC also charged Wells Fargo’s lead banker on the deal, Peter M. Cannava, and two former RIEDC executives, Keith W. Stokes and James Michael Saul, with aiding and abetting the fraud. Stokes and Saul have agreed to settle the charges without admitting the allegations. They have each agreed to pay a $25,000 penalty and are prohibited from participating in future municipal securities offerings. “The complaint is riddled with factual inaccuracies,” said Cannava’s lawyer Brian Kelly of Nixon Peabody. “And with regard to Mr. Cannava, they are trying to scapegoat a mid-level banker instead of holding the politicians responsible for this mess,” he said. “Wells Fargo disputes the SEC’s allegations in connection with the placement of these municipal bonds. We will respond to the specific allegations in the complaint in court,” said spokesman Alan Elias. The RIEDC, which is now called the Rhode Island Commerce Corporation, said they are still reviewing the filing, but expressed concerns that the actions taken occurred under a previous administration. “The Commerce Corporation, in its own lawsuit, has alleged that Wells Fargo, Keith Stokes, and Michael Saul failed to disclose material information about the 38 Studios deal to the former Economic Development Corporation’s board of directors and to investors.

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SEC alleges widespread fraud at Aequitas, sues top execs

The U.S. Securities and Exchange Commission moved decisively into the Aequitas Capital Management scandal, suing the Lake Oswego company and three top executives for allegedly running a $350 million Ponzi scheme. The SEC claims Aequitas defrauded more than 1,500 investors into believing they were making health care, education and transportation-related investments, when their money was really being used in a last-ditch effort to save the firm. The commission has asked the court to appoint a receiver to take control of Aequitas. It also removed Aequitas chief executive Bob Jesenik and his longtime partner, Brian Oliver, from positions at the company and sought to ban them from the securities industry. Jesenik, Oliver and Scott Gillis, former Aequitas chief financial officer, were named defendants in the complaint. Filed in U.S. District Court in Portland, the suit alleges that since 2014, Aequitas has used much of the new money it raised from investors to fund operating expenses and, increasingly, to pay off existing investors. “By at least July 2014, Jesenik and Oliver knew that redemptions and interest payments to prior investors were being paid primarily from new investor money in a Ponzi-like fashion, and that very little investor money was being used to purchase trade receivables,” the SEC alleges. Jesenik said the SEC rushed to judgment. In a written statement issued by his lawyer, Jesenik said Aequitas brought on a consulting company called FTI. In an effort to protect investors’ interests, he said the SEC agreed to ask a federal judge to retain FTI as a receiver in the case. “However, I’m disappointed that the SEC has also chosen to rush to judgment about the company’s management and make sweeping allegations without the benefit of a thorough investigation,” Jesenik said. “I look forward to addressing these claims in court.” Oliver too disputed the SEC’s claims. ““Brian has not done anything wrong and we are deeply disappointed that the SEC would make such serious allegations without even speaking to him,” said Oliver’s lawyer Jahan Raissi. After reading the complaint, veteran Portland securities lawyer Bob Banks said it’s a wonder Aequitas executives and its allies “that peddled these junk notes into 2016 can sleep at night.” As first reported by The Oregonian and OregonLive, Aequitas was hurt badly when its deal to buy hundreds of millions of dollars worth of student loans from controversial for-profit college Corinthian Colleges fell apart in January 2014. Though the loans were deemed predatory and illegal by a federal judge, it was Aequitas largest source of revenue. The company continued to try and collect the debt from former Corinthian students long after Corinthian went bankrupt. The SEC claimed in its lawsuit that Corinthian accounted for 75 percent of Aequitas debt-buying business. Aequitas insisted to the bitter end that losing Corinthian had an “immaterial” impact on the company. As Aequitas’ position grew weaker, it became more desperate to raise investor cash. By late 2014, it offered to pay investors 15 percent interest if they would commit their money for a full year, an extraordinary rate of return today’s low-interest environment. The Aequitas scandal could spread well beyond Oregon. The company convinced independent investment advisers from Puget Sound to Long Island to peddle its private note investments. Aequitas paid many of them 2 percent commissions for every dollar they steered into its private notes. Investors across the country, some of whom are convinced they were misled, have lawyered up and are considering whether to sue Aequitas, their individual investment advisers or both. The company laid off most of its employees in February. In all investors have about $600 million in Aequitas private notes and in various Aequitas investment funds. It remains unclear how much they will recover.

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Credit Suisse Accused of Money Laundering by Billionaire

Lawyers for Georgia’s billionaire former prime minister Bidzina Ivanishvili accused Credit Suisse Group AG of money laundering as they step up their fight with the Swiss bank over its handling of a former wealth manager who allegedly made unauthorized transactions to cover up trading losses. They filed the criminal complaint with Geneva prosecutors alleging that the bank failed to install adequate procedures to prevent money laundering, allowing employees to act with complete freedom. The complaint is based on hearings, a review of the evidence as well as information received from MROS, Switzerland’s Money-Laundering Reporting Office, the lawyers wrote. “A limited examination of the dossier in this case revealed facts that lead us to conclude numerous acts of money laundering were committed within Credit Suisse,” to the detriment of Ivanishvili, according to the criminal complaint filed by his attorneys. The complaint is at least the second to target Credit Suisse in a widening scandal that has put the spotlight on its wealth management unit and what it knew about allegations made by Ivanishvili and two other Russian clients about improper trading dating back to 2007. The Geneva banker – who can’t be named under Swiss law – has been charged with fraud and criminal mismanagement by Geneva prosecutors and the investigation is ongoing. The Frenchman remains in detention in the Swiss canton as he is considered a flight risk to France. The Zurich-based bank said it is cooperating with prosecutors and put the blame on its former employee. “The former relationship manager concealed his deceptions from colleagues and this is to the best of our knowledge an individual case,” the bank said. The bank filed its own criminal complaint as an aggrieved party against its former employee on Dec. 23, two days after Ivanishvili lodged its first complaint against him on similar charges. Credit Suisse appealed a decision earlier this month to award Ivanishvili the status of an aggrieved party in the case, which forced his lawyers to return evidence they are sifting through until the appeal’s outcome is decided.

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Foreign Corrupt Practices Act (FCPA)

Qualcomm Hired Relatives of Chinese Officials to Obtain Business

The Securities and Exchange Commission announced that Qualcomm Incorporated has agreed to pay $7.5 million to settle charges that it violated the Foreign Corrupt Practices Act (FCPA) by hiring relatives of Chinese government officials deciding whether to select the company’s mobile technology products amid increasing competition in the international telecommunications market. An SEC investigation found that Qualcomm also provided gifts, travel, and entertainment to try to influence officials at government-owned telecom companies in China. With insufficient internal controls to detect improper payments, Qualcomm misrepresented in its books and records that the things of value provided to foreign officials were legitimate business expenses. “Companies must effectively design and implement internal controls across all business operations to prevent FCPA violations, including its hiring practices,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. “For more than a decade, Qualcomm went to extraordinary lengths to gain a business advantage with foreign officials deciding between Qualcomm’s technology and its competitors.” According to the SEC’s order instituting a settled administrative proceeding, Qualcomm offered and provided full-time employment and paid internships to foreign officials’ family members internally referred to as “must place” or “special” hires in order to try to obtain or retain business in China. One official asked Qualcomm employees to find an internship for her daughter studying in the U.S. and the company obliged, acknowledging in internal communications that her parents “gave us great help for Q.C. new business development.” The SEC’s order finds that Qualcomm violated the anti-bribery, internal controls, and books-and-records provisions of the Securities Exchange Act of 1934. Without admitting or denying the findings, Qualcomm agreed to pay the $7.5 million penalty and self-report to the SEC for the next two years with annual reports and certifications of its FCPA compliance.

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Miami Businessman Pleads Guilty to Foreign Bribery and Fraud Charges in Connection with Venezuela Bribery Scheme

The owner of multiple U.S.-based energy companies pleaded guilty to foreign bribery and fraud charges for his role in a scheme to corruptly secure energy contracts from Venezuela’s state-owned and state-controlled energy company, Petroleos de Venezuela S.A. (PDVSA). Shiera was arrested in Miami on Dec. 16, 2015, after a federal grand jury returned an 18-count indictment against him and Roberto Enrique Rincon Fernandez (Rincon), 55, of The Woodlands, Texas. According to admissions made in connection with Shiera’s plea, Shiera and Rincon worked together to submit bids to provide equipment and services to PDVSA through their various companies. Shiera admitted that beginning in 2009, he and Rincon agreed to pay bribes and other things of value to PDVSA purchasing analysts to ensure that his and Rincon’s companies were placed on PDVSA bidding panels, which enabled the companies to win lucrative energy contracts with PDVSA. Shiera also made bribe payments to other PDVSA officials in order to ensure that his companies were placed on PDVSA-approved vendor lists and given payment priority so that they would get paid ahead of other PDVSA vendors with outstanding invoices, he admitted.

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Medical Equipment Company Will Pay $646 Million for Making Illegal Payments to Doctors and Hospitals in United States

The United States’ largest distributor of endoscopes and related equipment will pay $623.2 million to resolve criminal charges and civil claims relating to a scheme to pay kickbacks to doctors and hospitals, U.S. Attorney Paul J. Fishman of the District of New Jersey and Principal Deputy Assistant Attorney General Benjamin C. Mizer of the Justice Department’s Civil Division announced. U.S. Attorney Fishman and Principal Deputy Assistant Attorney General David Bitkower of the Justice Department’s Criminal Division also announced that a subsidiary of the distributor will pay $22.8 million to resolve criminal charges relating to the Foreign Corrupt Practices Act (FCPA) in Latin America. Olympus Corp. of the Americas (OCA) was charged in a criminal complaint filed in Newark, New Jersey, federal court with conspiracy to violate the Anti-Kickback Statute (AKS), which prohibits payments to induce purchases paid for by federal health care programs. OCA has entered into a three-year deferred prosecution agreement (DPA) that will allow it to avoid conviction if it complies with the reform and compliance requirements outlined in the agreement. “For years, Olympus Corporation of the Americas and Olympus Latin America dropped the compliance ball and failed to have in place policies and practices that would have prevented the substantial kickbacks and bribes they paid,” said U.S. Attorney Fishman. “It is appropriate that they be punished for that. At the same time, the deferred prosecution agreement takes into account the companies’ cooperation and commitment to fully functional corporate compliance.” As a result of the conduct outlined in the government’s criminal complaint and DPA, OCA has agreed to pay a $312.4 million criminal penalty and an additional $310.8 million to settle civil claims under the federal and various state False Claims Acts, the largest total amount paid in U.S. history for violations involving the AKS by a medical device company. “The Department of Justice has longstanding concerns about improper financial relationships between medical device manufacturers and the health care providers who prescribe or use their products,” said Principal Deputy Assistant Attorney General Mizer. “Such relationships can improperly influence a provider’s judgment about a patient’s health care needs, result in the use of inferior or overpriced equipment, and drive up health care costs for everybody. In addition to yielding a substantial recovery for taxpayers, this settlement should send a clear message that we will not tolerate these types of abusive arrangements, and the pernicious effects they can have on our health care system.” In a separate DPA, Olympus Latin America Inc. (OLA), a subsidiary of OCA, will pay a $22.8 million criminal penalty for violations of the FCPA.

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Litigation Matters

VW Fails to Reach Agreement With U.S. on Fix for Diesel Engines

Volkswagen AG was given four more weeks to reach an agreement with regulators for getting 600,000 diesel vehicles off U.S. roads as it faces hundreds of lawsuits for rigging pollution control systems to cheat emissions tests. U.S. District Judge Charles Breyer in San Francisco, who said at a hearing that “substantial progress” has been made, set an April 21 deadline for the carmaker to come up with a concrete and detailed proposal. Breyer also remarked that the company faces engineering difficulties in finding a solution. Volkswagen admitted last year that it had rigged diesel engines on about 11 million cars worldwide so that emission controls switched on only during testing. Those controls shut off while the car was on the road, increasing fuel efficiency and performance but producing nitrogen oxide pollution well in excess of the U.S. legal standard. “We’re working around the clock like everyone else,” Elizabeth Cabraser, the lead attorney for consumers suing VW, said after the hearing. “We’ll sleep when the cars are fixed.” The automaker is facing lawsuits by the U.S. Justice Department and state attorneys general, and fines of as much as $46 billion, as well as hundreds of private lawsuits, for installing the so-called defeat device. Breyer, who last month set March 24 as VW’s deadline, said that if there’s no plan by April 21 , he may set a trial for this summer. The judge said that he was being informed all along by the special master he appointed to the case, Robert Mueller, on the progress of the talks. Mueller, a former director of the Federal Bureau of Investigation, had been meeting with all the parties.

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Ex-Performance Sports chairman sues accounting firm in Canada

The former chairman of Performance Sports Group Ltd, Graeme Roustan, has sued accounting firm Grant Thornton for breach of contract and defamation in connection with a battle over the retailer’s strategy, according to a claim filed in a Canadian court. Following his unhappiness with the decision of Performance Sports to open its own retail stores, Roustan hired Grant Thornton last year to conduct a survey of some of the retailer’s major customers, according to the lawsuit filed in the Ontario Superior Court of Justice. After Grant Thornton conducted the survey, Performance Sports wrote to Grant Thornton asking to “cease this survey immediately,” the lawsuit says. The lawsuit says that Grant Thornton completed the survey but later terminated the engagement, citing reputational harm. Grant Thornton and Performance Sports did not immediately respond to a request for comment. Roustan declined to comment beyond the lawsuit. Roustan, who owns a small stake in Performance Sports, has said he is looking to take the company private if he does not see a reversal in its retail strategy and its chief executive replaced. He could also launch a proxy battle to get a seat on the company’s board.

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Texas Lawyers Sued for Allegedly Bankrolling BP Spill Scam

Two high-profile Texas attorneys were sued by a fishing boat captain who said they were involved in a scam to cheat BP Plc out of millions of dollars with false compensation claims for the Gulf of Mexico oil spill. The captain is one of thousands of Vietnamese-American fishermen and women who had their identities faked or stolen in the fraud, bankrolled by Bob Hilliard and John Cracken, Houston lawyer Tammy Tran said in a complaint. They blame the lawyers in part for obstructing their efforts to pursue their own claims for payments under BP’s restitution program. Tran is seeking more than $100 million in punitive damages from Hilliard and Cracken to compensate the immigrants. Many of them claim to have suffered mental anguish from “nightmarish memories” of Vietnam’s communist regime, revived by federal agents knocking on doors to investigate the identity thefts. Compensation is also sought for homes and businesses lost while waiting for BP to pay under its seafood accord. Hilliard denied the allegations, calling them fictitious. Tran, who represents about 1,000 Vietnamese-American fishermen and women against BP, said in an interview she learned of Hilliard’s and Cracken’s connection to the scam from a criminal-defense attorney with knowledge of the indictment of a third lawyer. Mikal Watts, who allegedly orchestrated the fraud, was indicted for identity theft and making false claims in connection with the BP spill. Watts, a San Antonio attorney, denied any wrongdoing.

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Olympus to pay $92 million to resolve lawsuits over accounting

Olympus Corp said it has agreed to pay as much as 11 billion yen ($92 million) to resolve two civil lawsuits arising from a 2011 accounting scandal at the maker of cameras and medical imaging equipment. The settlements resolve claims raised in Tokyo District Court by 86 entities, including foreign institutional investors and pension funds, that sought to recoup 37.7 billion yen in damages, the Tokyo-based company said. Olympus said it had been defending against the claims, but decided that “swiftly resolving this matter through settlement” was best to avoid further litigation and related legal costs. It said it previously set aside 11 billion yen for the settlements. In 2011, Olympus admitted in a $1.7 billion accounting scandal to having concealed investment losses dating to the 1990s, and using a series of overpriced acquisitions, some of which it quickly wrote down, to cover up losses. The problems were exposed by former Chief Executive Michael Woodford, a Briton who was fired after he questioned Olympus’s accounting. Olympus later restated five years of results. In 2013, Olympus agreed to pay $2.6 million to settle U.S. litigation over its accounting and disclosures by investors who bought its American depositary receipts. A federal judge in Allentown, Pennsylvania, approved that settlement last May.

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China Market

China Pledges Greater Effort to Crack Down on Financial Crime

China’s judicial authorities vowed to do more to combat financial crimes in the coming year, as the economy slows and leaders remain concerned that financial risks might lead to higher unemployment and social unrest. Chief prosecutor Cao Jianming said in his annual report to the country’s top legislature that his department would prioritize investigations into finance, securities and insurance to “guarantee a healthy development of capital market.” The Supreme People’s Procuratorate plans to tackle financial crimes involvin illegal fundraising to protect the public and focus on contract fraud crimes to establish a “fair and orderly environment of market competition”, he said. People’s Supreme Court President Zhou Qiang said in a separate report to the National People’s Congress in Beijing that the top court would strengthen oversight of financial crimes involving the Internet. Chinese courts last year handled 1.4 million cases involving peer-to-peer lending worth 821 billion yuan ($126 billion), Zhou said. More than 72,000 people were convicted for crimes involving illegal fundraising and P2P lending. The government has launched investigations involving some of the nation’s largest financial firms following a stock market collapse last year that erased $5 trillion in value. Regulators in Beijing also have also targeted the booming online loan industry by investigating one of the largest P2P brokers, Ezubao. Judicial authorities also pledged to punish suspected threats to state security, including terrorism, secessionism and religious extremism, with Cao vowing to fight “infiltration, subversion and sabotage by hostile forces.” Last year, Chinese courts convicted 1,419 people accused of harming state security, including those participating in terrorist and secessionist activities, Zhou said.

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China court jails 24 over $1.5-bln financial fraud: Xinhua

A court in southern China has jailed 24 people for fraudulently raising nearly 10 billion yuan ($1.5 billion) in one of the country’s biggest financial scams, the official Xinhua news agency said. The group was convicted of illegally raising funds during the decade to 2012 from more than 230,000 investors, mainly senior citizens who put in their life savings, it said, citing the court. Guangdong Bangjia Leasing Co set up four firms in the southern province and many branches and subsidiaries across China, luring retail investors to buy memberships and fund nonexistent loans by promising returns of as much as 47 percent. The case spotlights growing risks in a loosely regulated wealth management products industry, which lures millions of unsophisticated retail investors to high-yield products offered by opaque online finance firms and privately run exchanges. In February, authorities arrested 21 officials of Ezubao, once China’s biggest peer-to-peer lending platform, which collected $7.6 billion in less than two years from more than 900,000 investors. Ezubao used savvy marketing, authorities said, to fund “a complete Ponzi scheme”, that used investor funds to support a lavish lifestyle for company executives. Last year, hundreds of angry investors also hit the streets in Beijing and Shanghai after losing $6 billion from the Fanya Metals Exchange, which offered investment products promising an annual return of up to 14 percent. The Guangzhou Intermediate People’s Court sentenced the main suspect in the Guangdong fraud, Jiang Hongwei, to life in prison, while the others received terms ranging from 3 years to 14 years, Xinhua said. The court has frozen and seized their assets, including 127 vehicles and 43 villas, but prosecutors said few victims might get their money back, since Jiang had squandered millions on luxuries, the agency added. Some older investors who lost money in the Guangdong fraud said they were attracted by its fancy branding. “Their grand exhibition occupied six halls,” Xinhua quoted one elderly woman from Jiangsu province as saying.

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£61 million deadly vaccines fraud uncovered in China

A mother and daughter have been held in China after police uncovered a £61 million trade in illegal vaccines, potentially exposing patients to dangerous drugs in what appears the country’s biggest case of its kind. At least 300 people were involved in the trade of vaccines which were made by licensed producers but were not stored properly before reaching buyers, officials said. “Such vaccines have potential side-effects and can even cause disability or death,” state news agency Xinhua reported. The mother and daughter had allegedly been illegally bulk-selling 25 different kinds of vaccines for conditions such as chicken pox, hepatitis A, flu, rabies and meningitis. It is unclear how much of the vaccines reached the market, but reports said the trading was taking place four years before the women were arrested last April. Police had carried out at least 20 raids since they detained the mother, a former doctor, and her daughter, a medical school graduate from the eastern Shandong province. It is unclear why the case has only become public now, and some web-users raised concerns over the delay in the release of details. China has previously sought to cover up health scares. The mother – who is 47-years-old and has the surname Pang – was reportedly handed a suspended prison sentence in 2009 after she was convicted of illegally selling vaccines. Zhu Zengfa, an inspector with a Food and Drug Administration in Shandong, said: “Results of some investigations show individuals who own or work for certified manufactures and authorised wholesale companies illegally bought the vaccines and sold them.” Further investigation was required to determine how much these individuals “worked the system”, Mr Zhu said, according to state-run China Radio International (CRI). China is the world’s second biggest market for drugs but its fractured health sector leaves room for black market deals to take place. Red tape means it is sometimes difficult for patients to get hold of drugs, and so they seek unlicensed products through unofficial channels. Individuals who trade in vaccines require licenses under Chinese law, which also stipulates that the drugs should be stored and transported at temperatures between 2C to 8C. The mother and daughter were said to have kept the vaccines at home in temperatures of around 14C. Authorities are now trying to identify any “possible victims” of the fraud, while police are calling on those involved to hand themselves in. Officials are also urging vaccination centres to make their records public.

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Healthcare Industry

Shkreli’s Strategy to Jack Up Drug Prices May Be Curbed by FDA

With a small regulatory change, the U.S. Food and Drug Administration may have just stopped the next Martin Shkreli. The agency said that it will prioritize review of new applications for generic drugs that would compete with treatments made by only one company. That could help make it less profitable for somebody like Shkreli, who was until last year the chief executive officer of Turing Pharmaceuticals AG, from buying an old, patent-expired drug with no competition and jacking up the price. At Turing, Shkreli became notorious for acquiring Daraprim, a decades-old anti-parasitic treatment, and increasing the price to $750 a pill from $13.50. Because Turing is the only company with FDA approval for the medicine, he could charge whatever he wanted. He defended the move by saying he was playing by the rules, and perhaps should have increased the price even more. The FDA estimates the change in prioritization could expedite review of as many as 125 generic drug applications, Sandy Walsh, an agency spokeswoman, said via e-mail. The agency already prioritized review for generics that would be the first to compete with a brand-name product. Shkreli is currently facing securities fraud charges related to a separate former company and several hedge funds that he used to run. He has maintained his innocence and pleaded not guilty. Turing fired Shkreli after his arrest. Turing and Shkreli didn’t immediately respond to requests for comment. With older drugs that have lost patent protection, the companies that originally invented them may have ceased manufacturing or sold the rights to another owner, leaving a single version to monopolize the market. Since it can take months or years to get a new version approved, whoever holds the rights in the meantime has huge pricing power. In January, senators asked Janet Woodcock, director of FDA’s Center for Drug Evaluation and Research, whether the agency could prioritize reviews of drugs that would compete with ones made by just one manufacturer. At the time, Woodcock said that the agency will expedite a generic drug review if there’s only one manufacturer and a shortage is possible, but not because of price hikes resulting from a monopoly. The agency collects fees from drug companies to review their applications in a timely manner. The FDA’s goal for this fiscal year is to review 75 percent of generic drug applications in 15 months, according to Woodcock’s January testimony before the Senate Health, Education, Labor and Pensions Committee. The agency received about 1,500 generic drug applications in fiscal 2014, she said.

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Abbott Faces $1 Billion Claim in Trial Over Stent Marketing

Abbott Laboratories is accused in a trial of marketing unapproved stents for unsuspecting patients and cheating Medicare as a whistle-blower seeks more than $1 billion, a risk the company hasn’t fully disclosed to shareholders. The company faces allegations it increased sales by marketing devices for uses that weren’t approved by the U.S. Food and Drug Administration. Kevin Colquitt, a former salesman for Abbott and Guidant turned whistle-blower, claims it pushed bile-duct stents, intended for short-term purposes, for more complex vascular use. The drugmaker didn’t conduct a clinical trial on the safety, instead using so-called off-label marketing to test devices on patients without their informed consent, Colquitt claims. Multiple patients suffered complications including fractures of the devices after implantation, stroke, infections and migration of the stents, he alleges. The company conducted an “experiment on senior citizens” and a “fraud” on the Medicare system, Chris Hamilton, Colquitt’s lawyer, said in court. Abbott “hid the paper trail and buried evidence of malfunctions,” including the case of an elderly man who lost his leg and then died after a stent was placed in him, Hamilton said in his opening statement to the jury. Abbott, which acquired Guidant’s stent business in 2006, denies the claims and calls the lawsuit an attempt to “rewrite history.’’ The use of biliary, or bile duct, stents to treat peripheral vascular or arterial disease was “a generally accepted medical practice and indeed, standard of care,’’ Abbott lawyers said in court papers. “To give patients the best care, the government chose to reimburse for the off-label use of biliary stents,” James Hurst, Abbott’s lawyer, told jurors in Dallas. “It was with complete knowledge.” During the period covered in the lawsuit, the FDA’s system for giving approval to vascular stents was broken, he said. “It had been broken since the ‘90s.” By the time stents went through three to six years of clinical trials and testing, they were outdated, he said.

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Yet another whistleblower alleges Medicare Advantage fraud

Insurance giant Humana Inc., which operates some of the nation’s largest private Medicare health plans, knew for years of billing fraud at some South Florida clinics, but did little to curb the practice even though it could harm patients, a doctor alleges in a newly unsealed whistleblower lawsuit. The suit was filed by South Florida physician Mario M. Baez. It accuses Humana, and his former business partner, Dr. Isaac K. Thompson, of engaging in a lucrative billing fraud scheme that lasted years. The suit also names three other Palm Beach County doctors, two medical clinics and a doctors’ practice group as defendants. The suit was filed in October 2012, but remained under a federal court seal until Feb. 26. Humana had no comment. “As a matter of long-standing company policy, Humana does not comment on pending litigation,” said company spokesman Tom Noland. Thompson, a Delray Beach doctor, was indicted early last year on health care fraud charges stemming from similar allegations. He had pleaded not guilty, but indicated he would change his plea, and was to appear in federal court in Fort Lauderdale, according to court records. The Baez case is likely to bring fresh scrutiny to the giant Louisville, Kentucky-based insurer, which treats more than 3 million elderly patients in its Medicare Advantage plans nationwide. The case could also spotlight costly flaws in the government’s complex and controversial method for paying private Medicare health plans. The Baez suit targets a billing formula called a risk score, which is designed to pay Medicare health plans higher rates for sicker patients and less for people in good health. But overspending tied to inflated risk scores has cost taxpayers tens of billions of dollars in recent years, as the Center for Public Integrity reported in a series of articles published in 2014. Federal officials have struggled for years to stamp out these overcharges, known in health care circles as “upcoding,” while at least a half-dozen whistleblowers have filed lawsuits accusing Medicare Advantage plans of ripping off the government. Baez’s case adds a new wrinkle because it alleges that inflating risks scores not only wastes taxpayer dollars, but can also cause a patient to be harmed by improper medical treatment. Baez alleges in his suit that in February 2009 he became suspicious of billing practices at the two clinics and confronted doctors who worked there about it. The doctors said they had been told by Thompson to “upcode” diagnoses, according to the suit. Baez said he reported the abuses to Humana in May 2009, but the company failed to return the alleged overpayments. In 2012, Baez contacted the FBI, which eventually sparked the Department of Justice criminal investigation that ensnared Thompson. Doctors use a series of billing codes to document patients’ health, including any diseases they have and how severe they are. The Medicare Advantage plans report these codes to the government, which calculates a patient risk score and sends off a payment to the health plan. In Thompson’s case, Humana paid 80 percent of the money it received to the doctor and retained the rest. Prosecutors charged that fraudulent diagnoses submitted by Thompson between January 2006 and June 2013 generated overpayments of $4.8 million. Baez alleges that Humana encouraged overbilling by providing affiliated doctors with forms that highlighted “more profitable” diagnosis codes they could use for patients. Many were statistically impossible to support, according to the suit, which cited allegedly inflated risk scores in more than three dozen patients.

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Respironics to Pay $34.8 Million for Allegedly Causing False Claims to Medicare, Medicaid and Tricare Related to the Sale of Masks Designed to Treat Sleep Apnea

Respironics Inc., based in Murrysville, Pennsylvania, has agreed to pay $34.8 million to resolve alleged False Claims Act violations for paying kickbacks in the form of free call center services to durable medical equipment (DME) suppliers that bought its masks for patients with sleep apnea, the Department of Justice announced. The United States alleged that Respironics violated the Anti-Kickback Statute and the False Claims Act by providing free services to DME suppliers to induce them to purchase Respironics masks that treat sleep apnea. Respironics allegedly provided DME companies with call center services to meet their patients’ resupply needs at no charge as long as the patients were using masks that Respironics manufactured; otherwise, the DME companies would have to pay a monthly fee based on the number of patients who used masks manufactured by a competitor of Respironics. The government alleged that the conduct began in April 2012 and continued until November 2015. Respironics will pay roughly $34.14 million to the federal government and roughly $660,000 to various state governments based on their participation in the Medicaid program. The settlement resolves a lawsuit originally brought by Dr. Gibran Ameer, who has worked for different DME companies, under the qui tam provisions of the False Claims Act. The Act permits private citizens with knowledge of fraud against the government to bring a lawsuit on behalf of the United States and to share in any recovery. Under the civil settlement announced, Dr. Ameer will receive $5.38 million out of the federal share of the recovery.

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SEC Regulatory Actions

SEC Charges Company and Executives for Faulty Evaluations of Internal Controls

The Securities and Exchange Commission has settled charges against Texas-based oil company Magnum Hunter Resources Corporation and several individuals, including a company consultant, for deficient evaluation of the company’s internal controls over financial reporting, and failures to maintain internal control over financial reporting between Dec. 31, 2011 and Sept. 30, 2013. Internal control over financial reporting (ICFR) refers to a company’s process for providing reasonable assurance to the public regarding the reliability of its financial reporting. SEC rules require company management to evaluate and annually report on the effectiveness of ICFR, including disclosing any identified material weaknesses that creates a reasonable possibility that the company will not timely prevent or detect a material misstatement of its financial statements. Management may not conclude ICFR is effective if a material weakness exists. The SEC alleges that MHR and two senior officers – former CFO Ronald Ormand and former chief accounting officer David Krueger – failed to properly evaluate and apply applicable ICFR standards and improperly concluded that MHR had no material weaknesses. The SEC also charged former MHR consultant Joseph Allred, and former MHR audit engagement partner Wayne Gray, with improperly evaluating the severity of MHR’s internal control deficiencies and misapplying relevant standards for assessing deficiencies and material weaknesses. Accordingly, the public was not told that MHR had a material weakness in its ICFR.

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SEC Halts Fraud by Manager of Investments in Pre-IPO Companies

The Securities and Exchange Commission announced fraud charges and asset freezes obtained in a case filed against a New Jersey-based fund manager and two firms he controls that marketed shares in promising pre-IPO tech companies in the Bay Area. The SEC alleges they stole $5.7 million from investors and diverted millions more to other improper and undisclosed uses. Specifically, the SEC alleges that John Bivona used money raised through Saddle River Advisors and SRA Management Associates to pay off earlier investors, prop up other funds, and pay family-related expenses. He secretly steered the lion’s share of misappropriated funds to his nephew Frank Mazzola, who was barred from the securities industry in a prior SEC enforcement action and is charged along with Bivona and his firms in the complaint filed in federal district court in California. “We allege that Bivona preyed on investors seeking to invest in popular pre-IPO technology companies and hid the scheme by avoiding outside reviews of the funds and depriving investors of financial statements despite promises to do so,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office. According to the SEC’s complaint, Bivona raised more than $53 million from investors, and the money he was siphoning away for undisclosed uses left his firms continuously short of the cash needed to buy the shares promised to investors. Bivona kept the scheme going by indiscriminately transferring money among more than a dozen bank accounts associated with an array of different entities.

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SEC Charges Microcap Company CEO for Touting Bogus “Clean Energy” Contracts With Foreign Governments

The Securities and Exchange Commission charged a microcap company CEO for falsely claiming to have a lucrative relationship with the United Nations and billions of dollars in clean energy contracts with foreign governments. The SEC alleges that RVPlus Inc. CEO Cary Lee Peterson made bogus claims in the company’s public filings and in statements to private investors, and that he and RVPlus participated in an unlawful distribution of RVPlus’s stock. The SEC temporarily suspended trading in RVPlus securities in July 2013, citing “material deficiencies” in the company’s financial statements. “We allege that Peterson inflated RVPlus’s finances and expected profitability,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “We also allege that using a pseudonym, he posted hundreds of messages to an online investors’ forum calling RVPlus stock ‘undervalued,” and urging investors to ‘buy up as much as possible.’” In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced criminal charges against Peterson. According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, (1) Starting in May 2012, Peterson filed periodic reports with the SEC claiming that RVPlus had a lucrative relationship with the United Nations and clean energy agreements with governmental bodies in Nigeria, Haiti, and Liberia worth $2.8 billion. RVPlus had no relationship with the U.N. and the contracts were fictitious. (2) Peterson repeatedly claimed in RVPlus’s SEC filings that RVPlus had issued invoices and was owed millions of dollars in accounts receivable on the bogus contracts. (3) RVPlus and Peterson gained control of more than 90 percent of RVPlus’s free trading shares and gave them to individuals who unlawfully sold them into the market.

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