Archived Forensic News May 2015
Financial/Accounting Fraud
Connecticut exec flees U.S. after insider trading, fraud claims: SEC
A Connecticut venture capital executive accused of insider trading and of cheating his clients out of tens of millions of dollars has fled the country, the U.S. Securities and Exchange Commission said. Iftikar Ahmed, a former general partner at Oak Investment Partners, left the United States some time before May 18 in violation of a judge’s order in the criminal insider trading case restricting his travel to three U.S. states, the SEC said in a court filing last week. The SEC said his “recent flight from the United States” was a reason to expand an asset freeze to include various properties owned by Ahmed. It was unclear from court records where Ahmed is currently. Ahmed, a resident of Greenwich, Connecticut, was arrested and criminally charged in April along with longtime friend Amit Kanodia for engaging in insider trading. Federal prosecutors in Boston said Kanodia learned details about India-based Apollo Tyres Ltd’s 2013 attempt to buy Cooper Tire & Rubber Co from his wife, then Apollo’s general counsel. Kanodia began tipping Ahmed and another friend, allowing them to make more than $1 million trading in Cooper Tire shares and call options before the deal was announced, authorities said. A month after that case was filed, the SEC, which had also sued over the insider trading, filed new civil charges against Ahmed for allegedly transferring $27.5 million to himself at the expense of investors in funds run by Oak Investment Partners. The SEC said Ahmed induced his Greenwich, Connecticut-based firm into overpaying for investments in two Asian e-commerce companies, and pocketed $20 million for himself. It also said Ahmed induced Oak to pay I-Cubed Domains LLC $7.5 million for its stake in a U.S. e-commerce company without revealing that he and his wife controlled I-Cubed, which had paid just $2 million for that same stake. The SEC said Ahmed is a graduate of the Indian Institute of Technology in New Delhi and Harvard Business School. He faces a maximum 20 years in prison plus a $5 million fine in the criminal case.
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Pension fund sues FXCM for fraud over drop in stock on Swiss franc
A pension fund has sued U.S. currency broker FXCM Inc for allegedly misleading investors about its financial prospects and concealing weaknesses in its core business before its stock dropped 90 percent in January. The International Union of Operating Engineers Local No. 478 Pension Fund accused FXCM of fraud and artificially inflating its stock price in the complaint, filed in federal court in New York. The complaint said that FXCM, which provides currency brokerage services to retail clients, claimed its currency trading model was “extremely low-risk” and volatility in the foreign exchange markets was good for its business. The complaint seeks class-action status and undisclosed damages. In addition to the company, the suit names FXCM’s chief executive, Dror Niv, and chief financial officer, Robert Lande. The complaint also accused Lande of insider trading, saying that he sold more than $3 million of his personal holdings of FXCM shares while the price of the stock was artificially inflated. FXCM would vigorously defend the allegations, company spokeswoman Jaclyn Klein said in an e-mail. FXCM customers experienced losses of $225 million after the Swiss franc surged as much as 41 percent against the euro in January, following a decision by the Swiss National Bank on January 15, 2015, to end a policy in place since 2011 that allowed the franc to trade freely against the euro, according to the complaint. The pension fund said it is seeking class action status for investors who bought shares in FXCM between June 11, 2013, and January 20, 2015. The pension fund in its complaint also cited FXCM’s announcement on January 16, 2015, of a $300 million loan extended by Leucadia National Corp made shortly after the Swiss Bank’s decision. It said the terms of the loan were described as “highly punitive,” and nearly all shareholder value in the company was wiped out. Trading in FXCM’s stock was suspended. Trading in the stock resumed on January 20. The shares closed at $1.60, down from the prior close on January 15 of $12.63, the complaint said. The complaint said FXCM stock “traded at artificially inflated prices during the class period.”
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Ex-MillerCoors executive, seven others charged for $7 million fraud
ZU.S. authorities announced charges against a former MillerCoors executive and seven others for engaging in a scheme to defraud the brewing company of at least $7 million. David Colletti, a former MillerCoors vice president, was charged in an indictment filed in federal court in Chicago with mail and wire fraud for his role in an alleged scheme that caused the company to be falsely billed for promotional events and marketing services. MillerCoors, a U.S. joint venture between SABMiller Plc and Molson Coors Brewing Co was not identified by name in the charging documents. But the company had previously sued Colletti and said last year that it had referred the matter to federal authorities. Jonathan Stern, a MillerCoors spokesman, said the company was satisfied that charges were brought. “All along we’ve sought justice for the millions of dollars stolen from our company as these actions are intolerable and inexcusable,” he said. Along with Colletti, the indictment also charged seven individuals who prosecutors said controlled entities that claimed to provide third-party vendor services to MillerCoors. Those defendants include Roderick Groetzinger of North Carolina; James Rittenberg of Chicago; Scott Darst of Las Vegas; Maryann Rozenberg of Wisconsin; and Andrew Vallozzi, Thomas Longhi and Francis Buonauro of Florida. Eugene Murphy, a lawyer for Colletti, said his client would plead not guilty. Mitchell Beers, Longhi’s lawyer, said his client would also plead not guilty, adding that “a lot of the invoices were not false.”Lawyers for the other defendants either declined to comment or did not respond to requests for comment. Prosecutors said that during Colletti’s tenure at the company, he worked with the individuals connected to the vendors to submit false estimates and invoices in the entities’ names for fake promotional events and for events at inflated prices. Prosecutors said Colletti, 58, oversaw the approval of many of these false invoices. MillerCoors ultimately paid more than $7 million to the defendants’ entities, and Colletti later received a portion of those payments, prosecutors said. The defendants used the company’s money for, among other things, personal expenses, collectible firearms, golf and hunting trips, investments in a hotel and bar, and an arena football team, the indictment said.
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Tesco Overhauls Executive Pay in Wake of Accounting Scandal
Tesco Plc, the U.K.’s grocery leader, is shaking up its executive bonus plan to prioritize sales growth over short-term profit in the wake of last year’s profit overstatement that sparked a criminal investigation. Half of Chief Executive Officer Dave Lewis’s annual bonus will be determined by sales growth, with 30 percent linked to trading profit, Tesco said in its annual report. Last year, half of former CEO Philip Clarke’s bonus was determined by earnings, with only 18 percent of the amount determined specifically by sales. “To deliver turnaround performance, top-line revenue growth is fundamental and will be the foundation to ensuring sustainable levels of profit in the future,” the grocer said. The new policy aims to move management away from practices that led Tesco to reveal a 263 million-pound ($409 million) profit overstatement in September. An investigation by the Serious Fraud Office is ongoing, with Tesco admitting there are “significant uncertainties” both on the size of the overall hit to its finances and whether it will face further action. The revised remuneration scheme aligns with the strategy already being pursued by Lewis. Last month, the CEO told journalists the company would not be slavishly driven by profit targets and would continue reinvesting to drive sales growth. Excluding fuel, Tesco’s same-store sales dropped 3.3 percent in its last financial year. Lewis’s bonus can reach a maximum of 250 percent of his salary. Tesco said it will seek recovery of the termination payment made to former CEO Clarke should gross misconduct be determined following the discovery of the accounting black hole. Money paid to Laurie McIlwee, the former chief financial officer, will also be pursued in such circumstances, the U.K. grocery leader said in the report. Clarke, who was replaced as CEO prior to the discovery of the accounting issues, received a 1.22 million-pound payoff in February. Also at that time, McIlwee was handed about 1 million pounds. Tesco, which initially withheld the payments amid an internal review, hasn’t made any allegation of wrongdoing against either individual. The annual report shows that Lewis was paid 4.1 million pounds in his first six months as CEO, including 3.3 million pounds for forfeiting incentives due from previous employer Unilever. Alan Stewart, who joined as finance chief in September, received 2.3 million pounds through February, including 1.9 million pounds to compensate him for incentives forsaken at Marks & Spencer Group Plc.
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Tesco Ends 32-Year PwC Relationship After Accounting Scandal
Tesco Plc ended a 32-year relationship with PricewaterhouseCoopers LLP by hiring Deloitte LLP as its new auditor, seeking to draw a line under a 263 million-pound ($406 million) accounting scandal. The U.K.’s largest supermarket company selected Deloitte following a formal tender process, Tesco said. The tender is the first Tesco has held since it first appointed PwC in 1983, exceeding the maximum 10-year tenure recommended in the Financial Reporting Council’s corporate-governance code. Dave Lewis, Tesco’s chief executive officer, promised “decisive action” last year after being forced to slash profit forecasts less than a month into his tenure. The Serious Fraud Office opened an investigation after Tesco said some income was booked before it was earned and costs recognized later than they were incurred. Deloitte’s appointment is subject to shareholder approval at next month’s annual general meeting, Tesco said. It was mutually agreed that PwC wouldn’t take part in the tender. Tesco’s relationship with PwC is among the longest that any company in the U.K. benchmark FTSE 100 Index has had with the same auditor. The median tenure is 13 years, according to data compiled by Bloomberg. The FRC, the British audit authority, says a 10-year cycle ensures that a company’s auditor remains independent and that the company has the best auditor for its needs. New European Union regulations that require companies to conduct audit tenders every 10 years and change their audit firm every 20 years are set to come into force in 2016.
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Guatemala Central Bank Boss Arrested as Investigations Widen
Guatemala central bank President Julio Suarez was arrested as multiple corruption scandals spark increasing demands for President Otto Perez Molina’s resignation. Suarez was one of 16 people arrested for fraud as part of a probe into 116 million-quetzal ($15.1 million) contract issued by the Social Security Institute to Drogueria Pisa de Guatemala S.A., according to Ivan Velasquez, chief of the United Nations’ crime-investigations unit in Guatemala. The director the country’s Social Security Institute is also under arrest. “The people awarding this contract weren’t qualified to review the proposals,” Velasquez said, adding that the company lacked “infrastructure” and “experience” in performing dialysis. The arrest is the latest blow to Perez Molina, four months before presidential elections. Former Vice President Roxana Baldetti stepped down May 8 after the country’s tax chief was arrested for customs tax fraud and a warrant was issued for the arrest of her top aide. Energy and Mining Minister Erick Archila, questioned by Congress over contracts he issued, resigned last week, alleging blackmail by opposition lawmakers. Both former officials have declared their innocence. Suarez serves on the Social Security Institute’s board of directors, which issued the contract to perform peritoneal dialysis in a public hospital, Velasquez said. He said 15 percent of the contract was paid to board members as “commission” in exchange for its approval without specifying which members received the payments. Guatemala’s Attorney General Thelma Aldana said that five people died as a result of lack of care. “They awarded the contract without regard to the fact that the execution of the contract has been proven to have generated significant damage to the inhabitants of the country,” Velasquez said.
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Life Partners Trustee Alleges Wide-Ranging Death-Bond Fraud
A bankrupt seller of stakes in life insurance policies didn’t just mislead investors with early death estimates. It also deceived them about how much they would get when the policyholder died, a trustee found. Life Partners Holdings Inc. employed a “wide-ranging scheme” to cheat investors in so-called life settlements, trustee H. Thomas Moran said in court papers filed in Fort Worth, Texas, adding new allegations about the company, which has already been the target of a Securities and Exchange Commission lawsuit. Life settlements – known as viaticals or death bonds – are investments in which terminally ill or elderly persons sell their life-insurance policy for cash, and an intermediary – in this case, Life Partners – sells a stake in the policy to investors. When the insured person dies, the investor gets the death benefit as a return on the investment. Artificially shortened life-expectancy figures supplied by the company’s consultant convinced investors that their returns would be greater, Moran said. He announced his findings and requested court approval to control the payout of death benefits, manage premiums and take other measures to unwind the fraud in Chapter 11 bankruptcy. Life Partners lied about when policies lapsed, charged massive undisclosed fees and deceived investors about its practices in order to dodge securities regulations – all of which came on top of “egregious and continuous self-dealing by insiders,” Moran said. Life Partners filed for bankruptcy in January seeking to avoid a $46 million Securities and Exchange Commission fraud judgment against it and key officers, including the former chief executive. The SEC found a consultant hired by Life Partners to estimate life expectancies had used unreasonable methods, resulting in underestimates. Moran’s investigation uncovered other techniques used to extend the fraud, including forcing investors to abandon their stake in policies and reselling them for personal gain. The company commingled investors’ money and used it in unauthorized ways the report didn’t specify. Life Partners generated huge profits by concealing the actual amount it paid to acquire policies, Moran said, describing an instance in which it charged investors almost $3 million for contracts that cost the company only $700,000. “While those investors had to wait to find out whether they would receive any return on their investments, LPI generated a ‘profit’ of over 200 percent,” Moran said.
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U.K. White-Collar Prosecutions Tumble Even as Tip-Offs Surge
Prosecutions for white-collar crime in the U.K. have tumbled by nearly a fifth since 2011 despite a surge in tip-offs of financial wrongdoing and prosecutions of cybercriminals, according to London law firm Pinsent Masons. The number of white-collar cases prosecuted fell 17 percent to 9,343 last year, according to data obtained by the law firm. Reports of alleged crime jumped 46 percent to 227,726 in the 12 months through March 31, 2014 from a year earlier. The spike in tip-offs reflects growing concern that financial wrongdoing in the City of London continues to grow despite pledges by banks and other financial-service companies to clamp down on fraud. The first trial (http://www.bloomberg.com/news/articles/2015-05-06/after-seven-years-a-libor-rigging-case-heads-to-court-in-london) for rigging of Libor benchmark interest rates is scheduled to begin this month, years after regulators began investigating the issue. The U.K.’s Serious Fraud Office has been criticized for being too slow in opening a criminal investigation into the Libor scandal. Barry Vitou, a partner at Pinsent Masons, said the surge in tip-offs and simultaneous drop in convictions shows that enforcement agencies are “under-resourced and ill-equipped to deal with the scale of white collar crime.” The number of prosecutions for cybercrime jumped to 45 in 2014 from 15 in 2011, Pinsent Masons said.
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Foreign Corrupt Practices Act (FCPA)
Ex-Alstom Ethics Official Is Charged in U.K. Corruption Probe
A former Alstom SA executive, who had a senior role in ethics and compliance, became the sixth person charged by U.K. prosecutors in a long-running corruption probe. Jean-Daniel Laine, a former Alstom vice president, appeared at a London court facing four charges of corruption and conspiracy to corrupt in relation to the supply of trains to the Budapest Metro from January 2006 to October 2007. The company’s U.K. unit, Alstom Network UK Ltd. and its business development director during that period, Michael John Anderson, have also been charged in relation to the case. Alstom has been plagued by global investigations for alleged corruption over the last six years in the U.K., France, Switzerland, Brazil and the U.S. The U.K. Serious Fraud Office charged Alstom’s U.K. unit last year over alleged corruption related to transportation projects in India, Poland and Tunisia. Laine and Anderson were ordered by a London judge to next appear at Southwark Crown Court on May 26. Laine, 68, is the sixth person to be charged by the SFO in its investigation, prosecutors said.
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Kenyan Anti-Corruption Body Seeks Charges Against Two Ministers
Kenya’s anti-corruption agency requested charges of abuse of office against two cabinet ministers after they were named among 175 people being investigated for graft. The Ethics and Anti-Corruption Commission recommended that Transport Secretary Michael Kamau face prosecution for embezzlement of funds and Labor Secretary Kazungu Kambi be charged for irregularly appointing officials to the board of the state-run National Social Security fund, the Director of Public Prosecutions said in an e-mailed statement. Kamau and Kambi were among five ministers (http://www.bloomberg.com/news/articles/2015-03-28/kenyan-ministers-officials-named-in-corruption-probe-step-aside) who temporarily took leave of office in March after President Uhuru Kenyatta told officials mentioned in the anti-graft body’s fraud dossier to step aside to allow investigations to take place. Kambi has previously denied accusations of graft. Kamau said after being questioned by the EACC in April that his Twitter account had been hacked, the Nairobi-based Star newspaper reported on April 9. The EACC, as the anti-graft body is known, recommended that cases involving Lands Secretary Charity Ngilu and Agriculture Secretary Felix Koskei be closed. Koskei was listed as a witness in a case in which he was previously accused of irregularly leasing public land. Energy Secretary Davis Chirchir, who also stepped down in March, wasn’t mentioned in the statement.
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SEC Charges BHP Billiton With Violating FCPA at Olympic Games
The Securities and Exchange Commission charged global resources company BHP Billiton with violating the Foreign Corrupt Practices Act (FCPA) when it sponsored the attendance of foreign government officials at the Summer Olympics. BHP Billiton agreed to pay a $25 million penalty to settle the SEC’s charges. An SEC investigation found that BHP Billiton failed to devise and maintain sufficient internal controls over its global hospitality program connected to the company’s sponsorship of the 2008 Summer Olympic Games in Beijing. BHP Billiton invited 176 government officials and employees of state-owned enterprises to attend the Games at the company’s expense, and ultimately paid for 60 such guests as well as some spouses and others who attended along with them. Sponsored guests were primarily from countries in Africa and Asia, and they enjoyed three- and four-day hospitality packages that included event tickets, luxury hotel accommodations, and sightseeing excursions valued at $12,000 to $16,000 per package. “BHP Billiton footed the bill for foreign government officials to attend the Olympics while they were in a position to help the company with its business or regulatory endeavors,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement. “BHP Billiton recognized that inviting government officials to the Olympics created a heightened risk of violating anti-corruption laws, yet the company failed to implement sufficient internal controls to address that heightened risk. According to the SEC’s order instituting a settled administrative proceeding, BHP Billiton required business managers to complete a hospitality application form for any individuals they sought to invite to the Olympics, including government officials. However, the company did not clearly communicate to employees that no one outside the business unit submitting the application would review and approve each invitation. BHP Billiton failed to provide employees with any specific training on how to complete forms or evaluate bribery risks of the invitations. Due to these and other failures, a number of the hospitality applications were inaccurate or incomplete, and BHP Billiton extended Olympic invitations to government officials connected to pending contract negotiations or regulatory dealings such as the company’s efforts to obtain access rights.
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Guatemala wiretaps lead to fraud, bribery allegations that touch highest levels of government
Wiretappings that prosecutors used to track down a million-dollar fraud ring run out of the Guatemalan government have cost the vice president her job and now may lead to the Central American country’s Supreme Court. Recorded telephone calls obtained by The Associated Press show backdoor negotiating between a businessman, lawyers and suspects to pay bribes to free those detained in a scheme to defraud the state of millions of dollars in customs payments. In a call dated April 16, clothing boutique owner Luis Mendizabal tells detainee Javier Ortiz to remain calm because he will be out soon, and mentions Supreme Court Justice Blanca Stalling Davila. “Blanca Stalling is behind it and they have very good communication,” Mendizabal said of the behind-the-scenes negotiating to get Ortiz out of jail. Stalling Davila told the AP that she does not know Mendizabal, and that he could be confusing her name with her sister-in-law, Marta Sierra de Stalling, also a judge, who has been implicated in the case. “I don’t know anyone related to these people,” Stalling Davila said. “I don’t have a reason to apply any kind of pressure nor interfere with any process.” The tax fraud scheme has rocked Guatemala’s political class since it was announced in April and has become the largest corruption scandal for a sitting president, in this case Otto Perez Molina. Former Vice President Roxana Baldetti resigned and gave up her immunity from possible prosecution, a move lauded by Perez Molina. Baldetti’s former private secretary, Juan Carlos Monzon Rojas, is alleged to have been the ringleader of a scheme to defraud the state of millions of dollars by taking bribes in exchange for lower customs duties. Monzon is a fugitive whose last known whereabouts were overseas, and he is being sought by authorities. Baldetti was ordered by a judge not to leave the country while the investigation is ongoing. Prosecutors argue that she must have known what was going on, though she has denied any involvement. In a separate but related case against Mendizabal and others, five lawyers were arrested for allegedly bribing a judge to free suspects jailed in the corruption case. Prosecutors and a U.N. investigative commission said the attorneys paid Judge Marta Sierra de Stalling to release three suspects on bail, including Ortiz. He was later re-arrested after authorities learned of the bribery scandal. Sierra de Stalling has not been charged because of judicial immunity, but prosecutors have asked the Supreme Court to revoke her immunity. Prosecutors say Sierra de Stalling heard the cases against the fraud suspects rapidly and freed three ringleaders and three employees of the Tax Administration involved in the case, arguing that they were not public officials. Authorities say the facilities of Mendizabal’s clothing boutique, Emilio, were used as the hub by the fraud ring. He also is a fugitive. In another phone call, he is told by Ruth Emilza Higueros, one of the detained lawyers, that the law firm has various lawyers working on his case with “a lot of knowledge and a lot of friends.” In the general corruption case, investigators say the fraud ring received bribes from businessmen to evade paying import taxes to the Treasury Departments. At least 50 private citizens and public officials, including Guatemala’s current and former tax chiefs, are suspects in the customs scandal. Prosecutors said 27 are in custody. Stalling Davila oversees all judicial matters on the Supreme Court that have to do with criminal cases. Her arrival to the bench was a troubled one, amid claims by civil groups that the election of judges was fraught with irregularities.
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Litigation Matters
Six Banks Pay $5.8 Billion, Five Guilty of Market Rigging
Six of the world’s biggest banks will pay $5.8 billion and five of them agreed to plead guilty to charges tied to a currency-rigging probe as they seek to wind down almost half a decade of enforcement actions. Citicorp, JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Plc agreed to plead guilty to felony charges of conspiring to manipulate the price of U.S. dollars and euros, according to settlements announced by the Justice Department in Washington. The main banking unit of UBS Group AG agreed to plead guilty to a wire-fraud charge related to interest-rate manipulation. The Swiss bank, the first to cooperate with antitrust investigators, was granted immunity in the currency probe. The four banks that agreed to plead guilty to currency charges are among the world’s biggest foreign-exchange traders. They were accused of colluding to influence benchmark rates by aligning positions and pushing transactions through at the same time. Traders who described themselves as members of “The Cartel” used online chat rooms to discuss their positions before the rates were set and suppress competition in the market, the Justice Department said. All of the banks that pleaded guilty said they received needed waivers from the Securities and Exchange Commission to continue managing mutual funds and raise capital quickly.
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HSBC Wins New Trial in $2.46 Billion Securities Fraud Suit
HSBC Holdings Plc won a new trial in a decade-old securities fraud lawsuit that led to a $2.46 billion judgment against the bank’s Household International unit. A federal appeals court set aside a 2009 verdict that three Household executives misled investors about its business practices. While jurors made that initial determination after a month-long trial, it took four and a half more years to determine the proper amount of damages (http://www.bloomberg.com/news/articles/2013-10-18/hsbc-2-46-billion-judgment-may-not-be-total-liability). The three-judge appeals panel said the investors hadn’t shown the lenders shares drop wasn’t the result of other factors. The judges rejected the investors’ accounting for what it called “nonfraud information” that could have affected the stock price. An expert witness had testified that that such information was insignificant. The judges also questioned whether some of the false statements for which the lender itself remains responsible could be properly attributed to former Household Chief Executive Officer William Aldinger and two other executives named as defendants in the suit. Jury trials are seldom seen in securities class actions as cases frequently fail to survive initial legal challenges and those that do are typically settled. The lead lawyer for investors, Mike Dowd of San Diego-based Robbins Geller Rudman & Dowd LLP, said he’s pleased the appeals court rejected almost all the bank’s arguments and ordered only “very limited issues” to be revisited as the case proceeds.
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Etsy Counterfeit Problems Grow as Investors Allege Fraud
Etsy Inc. is facing fraud claims from investors after allegations that millions of items sold through its online crafts and specialty wares marketplace likely violate trademarks. Investors filed a proposed class action against the Brooklyn, New York-based company and its executives after an analyst said this week that more than 5 percent of about 40 million listings may be counterfeit or otherwise infringe well-known brands. Etsy went public in April and its value rapidly climbed to more than $3 billion. The share price has fallen amid fears of brands increasingly cracking down on the sales of infringing merchandise, cutting into the site’s fees and commission, investors alleged. Investors acquired Etsy securities “in ignorance of the adverse facts concerning Etsy’s business and financial condition which were concealed by defendants,” shareholders said in the complaint filed in Brooklyn federal court against the company, Chief Executive Officer Chad Dickerson and Chief Financial Officer Kristina Salen. The executives were “were personally motivated” to make false statements or omissions “in order to personally benefit from the sale of Etsy securities from their personal portfolios,” investors alleged. Etsy’s web site is a platform for sellers of items such as handmade clothing, jewelry and collectibles, some of which sport likenesses of popular logos and characters. Would-be buyers can find anything from Captain America-themed earrings to celebrity or movie-inspired wedding-cake toppers. The site appears to list items that may infringe brands such as Louis Vuitton, Chanel, Michael Kors, Disney and NFL brands, equity analyst Gil Luria of Wedbush Securities said in a note May 11. The investors lawsuit seeks unspecified damages on behalf of all shareholders who bought securities in Etsy from April 16 to May 10.
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Litigation Finance Takes Another Hit in Chevron Pollution Case
A British-based litigation-finance firm has pulled out of a controversial oil pollution case against Chevron, again raising questions about a new market in which outside investors seek to share in lawsuit recoveries. Litigation finance describes a growing group of specialized hedge funds and individual investors who back lawsuits in exchange for a share off the top of any recovery. The U.S. Chamber of Commerce and other business advocates have condemned (http://www.bloomberg.com/news/articles/2015-03-18/hedge-fund-betting-on-lawsuits-is-spreading) the spreading practice as likely to encourage frivolous litigation against corporate defendants. The long-running environmental campaign against Chevron has become Exhibit A in the case against litigation finance. In 2011, an American plaintiffs’ attorney, Steven Donziger, won a multibillion-dollar judgment against Chevron in Ecuador. Donziger relied on a variety of litigation-finance backers to sustain lawsuits that began in 1993 in the U.S. before shifting to Ecuador. Chevron struck back last year, winning a judgment in federal court in New York that found Donziger’s campaign had devolved into a racketeering conspiracy involving bribery, coercion, and fabricated evidence. Donziger denies wrongdoing and is appealing the racketeering verdict, which Chevron has invoked in refusing to pay the Ecuadorian judgment, now worth about $9.5 billion, according to the Ecuadorian courts. Under pressure from Chevron, three of Donziger’s litigation-finance backers, collectively responsible for investing some $30 million in the case, have withdrawn from the troubled Ecuadorian lawsuit in the wake of the 2014 racketeering ruling. The latest to pull out is Woodsford Litigation Funding of the U.K., which invested $2.5 million in 2013, long after Chevron had accused Donziger of fraud. In a statement, Woodsford said it “acted in good faith and in the normal course of its business” when it invested in Donziger’s lawsuit on behalf of poor Ecuadorian farmers and indigenous tribe members affected by oil contamination in the rain forest east of the Andes Mountains. In light of the 2014 racketeering verdict, “and having become deeply concerned about the ethical standards of attorney Steven Donziger,” Woodsford said it “has decided to forego any financial benefit from this matter and to relinquish its entire interest in the proceeds of the litigation to Chevron.”
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Burkle’s Yucaipa Sues Distressed-Debt Investors for Fraud
A fund controlled by billionaire Ron Burkle filed a suit accusing distressed-debt investors of improperly pushing a trucking company he owned into bankruptcy so they could jump the line to recover their claims before him. Allied Systems Holdings Inc., a top transporter of new automobiles in North America, was forced into an involuntary bankruptcy in 2012 and later consented to being in Chapter 11. The unsecured creditors’ committee and senior lenders both have lawsuits pending seeking to block Yucaipa from making any recovery as a secured creditor of Allied. Burkle’s Yucaipa American Alliance Fund I LP sued two Black Diamond Capital Management funds and Spectrum Investment Partners LP on May 8 alleging they knocked down its potential recovery by fraud “to the tune of more than $175 million.” Yucaipa said Black Diamond and affiliates “engaged in a carefully orchestrated series of lies, payoffs and legal maneuvers designed to wrongfully enrich themselves” at Yucaipa’s expense by “the wrongful filing of an involuntary bankruptcy petition against Allied.” Allied got permission from a bankruptcy court in Delaware in September 2013 to sell the business for $135 million to Jack Cooper Holding Corp. After the sale, Allied changed its name to ASHINC Corp. The judge, in approving the sale, required that 55 percent of the price be held in escrow until the resolution of objections to Yucaipa’s claims. In addition to being an owner, Yucaipa held a majority of the first- and second-lien debt.
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China Market
EU anti-fraud office probing imports of Chinese solar panels
The European Union’s anti-fraud office is investigating producers and importers of Chinese solar panels on suspicion that they are evading import duties designed to ensure a fair market, according to a source familiar with the study. The investigation is part of a series of challenges to Chinese solar equipment producers since the European Commission put in place in 2013 an arrangement allowing Chinese producers to sell into the EU at a minimum price. EU ProSun, a grouping of EU producers, has complained that Chinese rivals have been getting around this and selling at lower prices by falsely claiming the product is not Chinese or by routing it via other countries not subject to tariffs. Chinese solar modules not imported under the 2013 minimum price arrangement are subject to anti-dumping and anti-subsidy duties ranging from 33.7 to 64.9 percent. The investigation by the EU anti-fraud office (OLAF) is “ongoing and well under way”, the source familiar with the study said. If OLAF establishes customs fraud it can recommend that EU member states recover the evaded duties from the EU importers concerned and possibly launch criminal prosecutions against importers who knowingly imported goods with false declarations. Dutch tax inspectors in March carried out searches at a number of sites on suspicion an importer there had evaded duties of 65 percent, or 1.2 million euros ($1.3 million), by bringing in panels via free ports in Malaysia and Taiwan. EU ProSun lodged a complaint with EU regulators in April, accusing Chinese producers of trying to dodge the import tariffs by dispatching panels via Malaysia and Taiwan and asking the European Commission to cut off these channels. In 2013, OLAF detected a similar practice for Chinese screws and bolts, also subject to anti-dumping duties, which were sent to a free trade zone in Indonesia (http://www.reuters.com/places/indonesia) and then re-exported to the EU with documents claiming they were from Indonesia.
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Physics Professor Charged in China Superconductor Scheme
The former head of Temple University’s Physics Department was accused in an indictment with passing secrets to his native China about superconductor technology that can be used in high-speed trains and “electromagnetic-bombs.” The charges by Philadelphia U.S. Attorney Zane Memeger follow indictments of six Chinese citizens for stealing wireless technology from two U.S. firms, as Justice Department officials revamp ways to stop Beijing from taking trade secrets (http://www.bloomberg.com/news/articles/2015-05-21/economic-spying-by-china-spurs-new-tactics-from-u-s-prosecutors). Such thefts cost the economy hundreds of billions of dollars each year, U.S. officials say. Xiaoxing Xi, 47, who worked an unidentified U.S. company while on sabbatical from Temple University, was charged with four counts of wire fraud for using his advanced knowledge of thin-film magnesium diboride superconductivity “in an effort to assist Chinese entities in becoming world leaders” in the field. Zero-resistance electrical technology can be used in floating magnetic-levitation trains, particle accelerators operating near the speed of light, and hypersensitive magnetic detectors to clear minefields, according to the U.K.’s Royal Society of Chemistry. The technology can also be employed in developing “E-bombs,” which release billion-watt pulses to disable electronic devices. It’s also being used to build faster computers and more efficient power plants. Officials contend that Xi also offered to build “a world class thin-film laboratory in China.” If convicted, he could receive a maximum sentence of 80 years in prison and a $1 million fine.
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Healthcare Industry
Tenet Says Hospitals Target of Criminal Probe Over Kickbacks
Four Tenet Healthcare Corp. hospitals are the target of a federal criminal probe into allegations executives paid kickbacks to obstetric clinics for patient referrals, the company said in securities filings. The investigation arose from a 2009 whistle-blower lawsuit accusing Tenet’s hospitals of paying local clinics to send pregnant, undocumented Hispanic women to their facilities for deliveries covered by Medicaid, officials of the Dallas-based hospital chain said in a May 4 filing. Federal prosecutors told Tenet last month the hospitals, located in Georgia and South Carolina, were “designated as targets of the government’s criminal investigation,” the chain said in the U.S. Securities and Exchange Commission filing. Tenet, the third-largest publicly traded hospital chain, has been dogged by fraud allegations over the years and agreed to a $900 million settlement with the government in 2006 to resolve claims it cheated Medicare through overbilling. Donn Walker (https://www.tenethealth.com/media), a Tenet spokesman, said the company had “disclosed this investigation in our public filings for some time” and declined to comment further on the hospitals’ target status. The probe is part of a U.S. Justice Department crackdown on health-care fraud that has recovered more than $13 billion through whistle-blower cases, prosecutors said last year. The government decided to join (http://www.bloomberg.com/news/articles/2014-02-19/u-s-joins-kickback-suit-against-tenet-health-management) a suit targeting the Tenet hospitals’ referral payments to the clinics in February 2014. The suit also focuses on referral kickbacks allegedly made by Health Management Associates Inc., another hospital chain, to the same clinics. The company has denied the allegations. Last year, the Justice Department joined eight whistle-blower cases against HMA accusing the Naples, Florida-based company of billing federal health-care programs for unnecessary admissions from hospital emergency departments. Franklin, Tennessee-based Community Health Systems Inc. acquired HMA last year for $3.9 billion after U.S. antitrust regulators cleared the deal. In the Tenet case, hospital officials allegedly paid kickbacks disguised as legitimate payments to a chain of obstetric clinics known as Clinica de la Mama in return for patient referrals. The chain was owned by Hispanic Medical Management, a Georgia company hired by Tenet and HMA to provide translation services, marketing and evaluations of Medicare eligibility, according to court documents and Tenet’s SEC filing. The clinics primarily served undocumented Hispanic women. The hospitals then falsely billed Medicare for reimbursements for procedures, according to court filings.
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Medco to Pay $7.9 Million to Resolve Kickback Allegations
Medco Health Solutions Inc., a wholly-owned subsidiary of the pharmacy benefit manager Express Scripts Holding Company, of Missouri, has agreed to pay the government $7.9 million to settle allegations that it engaged in a kickback scheme in violation of the False Claims Act, the Justice Department announced. Medco provides pharmacy benefit management services to clients who receive subsidies under the Medicare Retiree Drug Subsidy program. “We will continue to pursue pharmacy benefit managers that enter into kickback arrangements with pharmaceutical manufacturers,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer of the Justice Department’s Civil Division. “Hidden financial agreements between drug manufacturers and pharmacy benefit managers can improperly influence which drugs are available to patients and the price paid for drugs.” The settlement resolves allegations that Medco solicited remuneration from AstraZeneca, a pharmaceutical manufacturer, in exchange for identifying Nexium as the “sole and exclusive” proton pump inhibitor on certain of Medco’s prescription drug lists known as formularies. The United States alleged that Medco received some or all of the remuneration from AstraZeneca in the form of reduced prices on the following AstraZeneca drugs: Prilosec, Toprol XL and Plendil. The United States contended that this kickback arrangement between Medco and AstraZeneca violated the Federal Anti-Kickback statute, and thereby caused the submission of false or fraudulent claims for Nexium to the Retiree Drug Subsidy Program. In January 2015, the United States and AstraZeneca reached a $7.9 million settlement to resolve kickback allegations arising out of the same conduct. “By this agreement we are making important strides in holding pharmacy benefit managers accountable not only in Delaware but nationwide,” said U.S. Attorney Charles M. Oberly III of the District of Delaware. “I am proud of the tireless work by this office to investigate this case.” “Pharmacy benefit managers that seek or accept kickbacks will be held accountable for their improper conduct,” said Special Agent in Charge Nick DiGiulio of the U.S. Department of Health and Human Services-Office of Inspector General (HHS-OIG). “We will continue to crack down on kickback arrangements, which can undermine drug choices for patients and corrode the public’s trust in the health care system.” This civil settlement resolves a lawsuit filed under the qui tam, or whistleblower, provision of the False Claims Act, which allows private citizens with knowledge of false claims to bring civil actions on behalf of the government and to share in any recovery. The lawsuit was filed by former AstraZeneca employees Paul DiMattia and F. Folger Tuggle, whose share of the settlement has not been determined.
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DaVita to pay $450 mln in Medicare fraud lawsuit over wasted drugs
DaVita HealthCare Partners Inc, one of the largest U.S. kidney dialysis providers, said it agreed to pay $450 million to settle a whistleblower lawsuit accusing it of deliberately wasting medicines in order to receive higher Medicare payments. The lawsuit alleged that DaVita, whose largest shareholder is Warren Buffett’s Berkshire Hathaway Inc (http://www.reuters.com/finance/stocks/overview?symbol=BRK.A), used larger-than-necessary medicine vials or unnecessarily spread medicine dosages across multiple treatments, knowing that Medicare would pay for what it considered “unavoidable” waste. An agreement in principle to settle was disclosed in an April 16 filing with the U.S. federal court in Atlanta. DaVita made the terms public when it reported a first-quarter loss that reflected a $298 million after-tax charge for the settlement. The Denver-based company set aside $495 million for the accord, including $45 million for legal fees and costs. “Although we believe strongly in the merits of our case, we decided it was in our stakeholders’ best interests to resolve it,” DaVita Chief Legal Officer Kim Rivera said in a statement. “The potential mandatory penalties for being found in the wrong in even a small percentage of instances were simply too large.” The named plaintiffs were Alon Vainer, a nephrologist who has worked in dialysis clinics in Georgia, and Daniel Barbir, a registered nurse from that state. Their lawsuit brought under the federal False Claims Act began in October 2007. It was unsealed in July 2011 after the U.S. Department of Justice decided not to join it, often a sign it believes the case is not strong enough. In separate e-mails, L. Lin Wood and Marlan Wilbanks, lawyers for the plaintiffs, said their clients were pleased, and that they believed the settlement is a record for a whistleblower case that lacked government support. “Dr. Vainer and Nurse Barbir exhibited great courage and determination” in pursuing the case, whose result “primarily benefits the taxpayers of the United States,” Wood said.
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Long-Term Care Pharmacy to Pay $31.5 Million to Settle Lawsuit Alleging Violations of Controlled Substances Act and False Claims Act
PharMerica Corporation has agreed to pay the United States $31.5 million to resolve a lawsuit alleging that they violated the Controlled Substances Act by dispensing Schedule II controlled drugs without a valid prescription and violated the False Claims Act by submitting false claims to Medicare for these improperly dispensed drugs, the Justice Department announced. “Pharmacies put patients at risk when they dispense Schedule II narcotics, which have the highest potential for abuse of any prescription drug, without a valid prescription from a physician,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer of the Department of Justice’s Civil Division. PharMerica is a long-term care pharmacy that dispenses medications to residents of long-term care facilities, including nursing homes and skilled nursing facilities. Many of the prescriptions filled by PharMerica are for controlled substances listed in Schedule II under the Controlled Substances Act. Schedule II drugs, such as oxycodone and fentanyl, can cause significant harm if used improperly and have a high potential for abuse. The government’s suit alleged that PharMerica pharmacies operating across the country routinely dispensed Schedule II controlled drugs in non-emergency situations without first obtaining a written prescription from a treating physician. According to the complaint, PharMerica’s actions violated the Controlled Substances Act by enabling nursing home staff to order narcotics, and pharmacists to dispense them, without confirming that a physician had made a medical judgment as to whether the narcotics were necessary and should be administered to the resident. Under the settlement, PharMerica has agreed to pay $8 million to resolve these allegations. The government’s complaint also alleged that PharMerica violated the False Claims Act by knowingly causing the submission of false claims to Medicare Part D for improperly dispensed Schedule II drugs. The False Claims Act imposes treble damages and penalties for the knowing submission of false claims for federal funds. PharMerica has agreed to pay $23.5 million to resolve its alleged False Claims Act violations.
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SEC Regulatory Actions
SEC Charges Deutsche Bank With Misstating Financial Reports During Financial Crisis
The Securities and Exchange Commission charged Deutsche Bank AG with filing misstated financial reports during the height of the financial crisis that failed to take into account a material risk for potential losses estimated to be in the billions of dollars. Deutsche Bank agreed to pay a $55 million penalty to settle the charges. An SEC investigation found that Deutsche Bank overvalued a portfolio of derivatives consisting of “Leveraged Super Senior” (LSS) trades through which the bank purchased protection against credit default losses. Because the trades were leveraged, the collateral posted for these positions by the sellers was only a fraction (approximately 9 percent) of the $98 billion total in purchased protection. This leverage created a “gap risk” that the market value of Deutsche Bank’s protection could at some point exceed the available collateral, and the sellers could decide to unwind the trade rather than post additional collateral in that scenario. Therefore, Deutsche Bank was protected only up to the collateral level and not for the full market value of its credit protection. Deutsche Bank initially took the gap risk into account in its financial statements by adjusting down the value of the LSS positions. According to the SEC’s order instituting a settled administrative proceeding, when the credit markets started to deteriorate in 2008, Deutsche Bank steadily altered its methodologies for measuring the gap risk. Each change in methodology reduced the value assigned to the gap risk until Deutsche Bank eventually stopped adjusting for gap risk altogether. For financial reporting purposes, Deutsche Bank essentially measured its gap risk at $0 and improperly valued its LSS positions as though the market value of its protection was fully collateralized. According to internal calculations not for the purpose of financial reporting, Deutsche Bank estimated that it was exposed to a gap risk ranging from $1.5 billion to $3.3 billion during that time period.
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SEC Charges Four Former Officers of Delaware Bank Holding Company With Disclosure Fraud
The Securities and Exchange Commission filed fraud charges against four former officers of Wilmington Trust for intentionally understating past due bank loans during the financial crisis. The former Delaware-based bank holding company was acquired by M&T Bank in May 2011 and paid $18.5 million in September 2014 to settle related SEC charges (http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542911779) of improper accounting and disclosure fraud. The SEC’s complaint, filed in federal district court in Wilmington, Delaware, alleges the four took part in a scheme to mask the impact of real estate market declines on the bank’s portfolio of commercial real estate loans. According to the SEC’s complaint, the former officials improperly excluded hundreds of millions of dollars of past due real estate loans from financial reports filed by Wilmington Trust in 2009 and 2010, violating a requirement to fully disclose the amount of loans 90 or more days past due. “Corporate officials bear important responsibility for ensuring that corporate filings provide the investing public with accurate information about the company’s financial condition. We allege these defendants doctored a key financial metric to make it appear to investors that the bank was financially sound, when the reality was quite the contrary,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. The complaint names the bank’s former Chief Financial Officer David R. Gibson, former Chief Operating Officer and President Robert V.A. Harra, former Controller Kevyn N. Rakowski, and former Chief Credit Officer William B. North. The complaint alleges that Gibson, Rakowski, and North omitted approximately $351 million of matured loans 90 days or more past due from Wilmington Trust’s disclosures in the third quarter of 2009, so that the bank disclosed only $38.7 million of such loans. The four former officials allegedly omitted approximately $330.2 million of these loans in the fourth quarter of 2009, so that the bank’s annual report disclosed just $30.6 million in matured loans 90 days or more past due. In addition, the complaint alleges that Gibson, Rakowski and North schemed to materially misreport this category of past due loans in the first half of 2010. Gibson also is alleged to have materially understated the amount of non-accruing loans in Wilmington Trust’s portfolio in the third quarter of 2009 and the bank’s loan loss provision and allowance for loan losses in the fourth quarter of 2009. Gibson, Harra, Rakowski and North are each charged with violating or aiding and abetting violations of the antifraud provisions of the federal securities laws. Each also is charged with aiding and abetting violations of the reporting, recordkeeping, and internal controls provision of the federal securities laws. The SEC is seeking to have all four return allegedly ill-gotten gains with interest and pay civil monetary penalties, and to have Gibson and Harra barred from serving as corporate officers or directors.
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SEC Announces Fraud Charges Against ITT Educational Services
The Securities and Exchange Commission announced fraud charges against ITT Educational Services Inc., its chief executive officer Kevin Modany, and its chief financial officer Daniel Fitzpatrick. The SEC alleges that the national operator of for-profit colleges and the two executives fraudulently concealed from ITT’s investors the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed. ITT formed both of these student loan programs, known as the “PEAKS” and “CUSO” programs, to provide off-balance sheet loans for ITT’s students following the collapse of the private student loan market. To induce others to finance these risky loans, ITT provided a guarantee that limited any risk of loss from the student loan pools. According to the SEC’s complaint filed in the U.S. District Court for the Southern District of Indiana, the underlying loan pools had performed so abysmally by 2012 that ITT’s guarantee obligations were triggered and began to balloon. Rather than disclosing to its investors that it projected paying hundreds of millions of dollars on its guarantees, ITT and its management took a variety of actions to create the appearance that ITT’s exposure to these programs was much more limited. Over the course of 2014 as ITT began to disclose the consequences of its practices and the magnitude of payments that ITT would need to make on the guarantees, ITT’s stock price declined dramatically, falling by approximately two-thirds. “Our complaint alleges that ITT’s senior-most executives made numerous material misstatements and omissions in its disclosures to cover up the subpar performance of student loans programs that ITT created and guaranteed,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “Modany and Fitzpatrick should have been responsible stewards for investors but instead, according to our complaint, they engineered a campaign of deception and half-truths that left ITT’s auditors and investors in the dark concerning the company’s mushrooming obligations.” The SEC’s complaint alleges that ITT, Modany, and Fitzpatrick engaged in a fraudulent scheme and made a number of false and misleading statements to hide the magnitude of ITT’s guarantee obligations for the PEAKS and CUSO programs. For example, ITT regularly made payments on delinquent student borrower accounts to temporarily keep PEAKS loans from defaulting and triggering tens of millions of dollars of guarantee payments, without disclosing this practice. ITT also netted its anticipated guarantee payments against recoveries it projected for many years later, without disclosing this approach or its near-term cash impact. ITT further failed to consolidate the PEAKS program in ITT’s financial statements despite ITT’s control over the economic performance of the program. ITT and the executives also misled and withheld significant information from ITT’s auditor.
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SEC Charges Nationwide Life Insurance Company With Pricing Violations
The Securities and Exchange Commission charged Nationwide Life Insurance Company with routinely violating pricing rules in its daily processing of purchase and redemption orders for variable insurance contracts and underlying mutual funds. Nationwide agreed to settle the charges and pay an $8 million penalty. Pricing rules for mutual fund shares require an investment company to compute the value of its shares at least once daily at a specific time set by its board of directors and disclosed to investors. According to the SEC’s order instituting a settled administrative proceeding, Nationwide’s prospectuses stated that mutual fund orders received before 4:00 p.m. at its home office in Columbus, Ohio, would receive the current day’s price. Orders received after 4:00 p.m. would receive the next day’s price. An SEC investigation found that when regular postage mail became available for retrieval early each morning from its P.O. boxes, Nationwide arranged for the pickup and delivery of mail directed to other business units but intentionally delayed the retrieval of mail related to its variable contracts business. Therefore, in spite of receiving customer orders and other variable contract mail in its P.O. boxes at least several hours before the 4:00 p.m. cut-off time, Nationwide sought to avoid its requirement to process the orders contained in this mail using the current day’s price by ensuring this mail wasn’t delivered to its offices until after 4:00 p.m. Meanwhile, Nationwide did arrange for prompt pickup and delivery of U.S. Postal Service Priority Mail or Priority Express Mail that enabled contract owners to track an order’s time of delivery to the P.O. boxes. Those orders were assigned the current day’s price. “For more than a 15-year period, Nationwide intentionally delayed the delivery of untracked mail containing orders from customers and processed them at the next day’s prices in violation of the law,” said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office.
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