Forensic News May 2016

Financial/Accounting Fraud

SEC Awards More Than $5 Million to Whistleblower

The Securities and Exchange Commission announced that it will award between $5 million and $6 million to a former company insider whose detailed tip led the agency to uncover securities violations that would have been nearly impossible for it to detect but for the whistleblower’s information. ”Employees are often best positioned to witness wrongdoing,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement. “When they report specific and credible tips to us, we will leverage that inside knowledge to advance our enforcement of the securities laws and better protect investors and the marketplace.” The award is the SEC’s third highest to a whistleblower. In September 2014, the agency announced a more than $30 million whistleblower award, exceeding the prior highest award of more than $14 million announced in October 2013. Since the inception of the whistleblower program in 2011, the SEC has awarded more than $67 million to 29 whistleblowers, including one for more than $3.5 million announced last week. “The whistleblower program has seen tremendous growth since its inception and we anticipate the continued issuance of significant whistleblower awards in the months and years to come,” said Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower. By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. Whistleblowers may be eligible for an award when they voluntarily provide the SEC with unique and useful information that leads to a successful enforcement action. Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million. All payments are made out of an investor protection fund established by Congress that is financed through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards.

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Mitsubishi Motors’ Scandal Was an Accident Waiting to Happen

It’s a familiar Japanese corporate ritual: a deep bow before the cameras to atone for wrongdoing. And when it comes to the art of public mea culpas, few companies can top scandal-prone Mitsubishi Motors Corp. President Tetsuro Aikawa announced his resignation effective June 24, to take responsibility for the automaker overstating the fuel economy of its minicars and improperly testing other models as far back as 1991. The revelations have cost the company about 35 percent, or 303 billion yen ($2.8 billion), of its market value. In another blow to the reputation of Japanese automakers, Suzuki Motor Corp. said it used measurement methods not compliant with local regulations, after the transport ministry directed other carmakers to investigate their practices. The scandal has damaged the Mitsubishi Motors brand and opened the way for Nissan Motor Co. to buy more than one third of the company at a deep discount, giving it veto power over major strategic decisions. Chairman Osamu Masuko said Nissan would send in its own engineers to straighten out the Mitsubishi unit responsible for fudging the mileage data. Surrendering effective control to a rival is the latest in a decades-long line of embarrassments at Mitsubishi Motors, a troubled also-ran among Japanese carmakers with just one-tenth the sales of Toyota Motor Corp. It’s also a stunning fall for a company at the heart of one of Japan’s most powerful corporate constellations, the almost 150-year-old Mitsubishi group, maker of the famed World War II Zero bomber and the nation’s first jetliner. Mitsubishi Motors’ propensity for trouble, current and former employees say, is partly the result of an insular corporate culture that never fully absorbed the lessons of its last major scandal back in the early 2000s. The company covered up safety problems and ignored customer complaints that resulted in unsafe vehicles being left on the road to avoid the embarrassment and costs of recalls. Nissan’s injection of capital will give Mitsubishi Motors time and resources to investigate a scandal Aikawa, 62, said last month could threaten its very existence. Japan’s transport ministry has twice rejected the company’s explanations for the misconduct as insufficient.

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U.K. Banks Face Money Laundering Crackdown Under Cameron

Prime Minister David Cameron said the U.K. plans to make financial services companies liable for their employees’ complicity in money laundering and fraud, in an extension of proposed laws against tax evasion. Announced to coincide with an anti-corruption summit in London, Cameron said the developed world must “get its house in order” and gave further details of a register of owners of high-value properties in London to prevent it being used as a hiding place for plundered money. “In addition to prosecuting companies that fail to prevent bribery and tax evasion, we will consult on extending the criminal offence of ‘failure to prevent’ to other economic crimes such as fraud and money laundering,” the premier wrote in an article for the Guardian newspaper. Cameron said he had reached “the conclusion that the things we want to see – countries moving out of poverty, people benefiting from their nation’s natural resources, the growth of genuine democracies – will never be possible without an all-out assault on corruption.” Cameron’s government said last month that companies whose staff help people evade tax would face unlimited fines under proposed U.K. rules creating a new corporate crime of failing to prevent tax evasion. Employers would be liable for the actions of staff unless they put “reasonable” precautions in place to prevent such behavior. The Ministry of Justice said it will publish the consultation on extending the measures to other economic crimes this summer. “We now want to carefully consider whether the evidence justifies any further extension of this model to other areas of economic crime, so that large corporations are properly held to account,” the Ministry of Justice said in a statement. The consultation on the proposed law said current legislation had the effect of encouraging management in large corporations to “turn a blind eye to the criminal acts of its representatives in order to shield the corporation from criminal liability.” By making them liable by default, the aim is to encourage them to understand what staff are up to. “Action is necessary by developed countries as well as developing countries,” Cameron told lawmakers in the House of Commons in London. “One of the steps we are taking, to make sure that foreign companies that own U.K. property have to declare who the beneficial owner is, will be one of the ways we make sure that plundered money from African countries cannot be hidden in London.” Foreign companies own about 100,000 properties in England and Wales and 44,000 of them are in the capital.

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Liberty Reserve Founder Sentenced to 20 Years For Laundering Hundreds of Millions of Dollars

Arthur Budovsky, 42, was sentenced in the Southern District of New York to 20 years imprisonment for running a massive money laundering enterprise through his company Liberty Reserve S.A. (“Liberty Reserve”), a virtual currency once used by cybercriminals around the world to launder the proceeds of their illegal activity. In January, Budovsky pleaded guilty to one count of conspiring to commit money laundering. In imposing sentence, the court noted that Budovsky ran an “extraordinarily successful” and “large-scale international money laundering operation.” U.S. District Judge Denise L. Cote also ordered Budovsky to pay a $500,000 fine. “The significant sentence handed down shows that money laundering through the use of virtual currencies is still money laundering, and that online crime is still crime,” said Assistant Attorney General Caldwell. “Together with our American and international law enforcement partners, we will protect the public even when criminals use modern technology to break the law.” “Liberty Reserve founder Arthur Budovsky ran a digital currency empire built expressly to facilitate money laundering on a massive scale for criminals around the globe,” said Manhattan U.S. Attorney Bharara. “Despite all his efforts to evade prosecution, including taking his operations offshore and renouncing his citizenship, Budovsky has now been held to account for his brazen violations of U.S. criminal laws.” According to the indictment, Liberty Reserve billed itself as the Internet’s “largest payment processor and money transfer system” and allowed people all over the world to send and receive payments using virtual currency. At all relevant times, Budovsky directed and supervised Liberty Reserve’s operations, finances, and business strategy and was aware that digital currencies were used by other online criminals, such as credit card traffickers and identity thieves. Liberty Reserve grew into a financial hub for cybercriminals around the world, trafficking the criminal proceeds of Ponzi schemes, credit card trafficking, stolen identity information and computer hacking. By May 2013, when the government shut it down, Liberty Reserve had more than 5.5 million user accounts worldwide and had processed more than 78 million financial transactions with a combined value of more than $8 billion. United States users accounted for the largest segment of Liberty Reserve’s total transactional volume – between $1 billion and $1.8 billion – and the largest number of user accounts – over 600,000.

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Philadelphia congressman orchestrated series of frauds: prosecutor

Representative Chaka Fattah of Pennsylvania and several associates orchestrated a series of fraudulent schemes to enrich the congressman and preserve his political career, federal prosecutors said at the start of his corruption trial. “The congressman stole from federal agencies, from taxpayers, from nonprofit educational groups he created,” Assistant U.S. Attorney Paul Gray told a Philadelphia jury. “He even stole from his own political campaigns.” But defense lawyers said the government’s case relied almost entirely on the word of two convicted felons who received favorable plea deals. “Congressman Fattah had nothing to do with any of it,” said Mark Lee, a lawyer for Fattah. The 59-year-old Fattah, an 11-term congressman who represents parts of Philadelphia, lost the Democratic primary in April under the cloud of a wide-ranging indictment charging him with racketeering, bribery and fraud. Some of the alleged schemes stemmed from Fattah’s unsuccessful 2007 mayoral campaign, when prosecutors say he accepted a secret and illegal $1 million loan from Al Lord, former chief executive officer of student loan servicer SLM Corp, known as Sallie Mae. Following the race, Fattah convinced Karen Nicholas, who ran his nonprofit educational organization, to transfer charitable and federal grant money to pay Lord back, Gray said. Separately, Fattah owed consultant Thomas Lindenfeld more than $100,000. With no funds to repay him, Fattah encouraged Lindenfeld to apply for federal money for a nonprofit that didn’t exist, prosecutors said. In a third scheme, Fattah funneled campaign money through another consultant, Gregory Naylor, to pay off his son’s student debt, prosecutors said. The son, Chaka Fattah Jr., was convicted in an unrelated fraud case and sentenced earlier this year to five years in prison. Both Lindenfeld and Naylor have pleaded guilty in exchange for testifying against Fattah. Prosecutors also said Fattah accepted bribes from a close friend, retired businessman Herb Vederman, who was seeking a U.S. ambassadorship. Fattah personally appealed to President Barack Obama to appoint Vederman to an international post. “Congressman Fattah used Herb Vederman as a human ATM machine whenever he needed a little money,” Gray said. But lawyers for Fattah and Vederman said prosecutors had “cherry-picked” evidence to suggest a bribery scheme when the two men simply acted out of friendship. Nicholas, Vederman and two other Fattah associates, consultant Robert Brand and campaign treasurer Bonnie Bowser, are co-defendants in the trial, which is expected to last eight weeks.

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Westpac, ANZ investigating suspected home loan fraud

Two of Australia’s biggest banks said they are investigating suspected fraud involving false declarations by a number of home loan borrowers who rely on foreign income. ANZ Banking Group and Westpac Banking Corp said the alleged fraud was discovered during internal investigations and posed no credit risk. The announcement follows moves by ANZ, Westpac and Commonwealth Bank last month to clamp down on mortgage lending to non-residents, following regulatory concerns about lax lending standards and soaring house prices driven partly by foreign investment. The alleged fraud is another headache for the country’s major banks as they battle slowing earnings growth, and could fuel calls for political action to improve housing affordability with a general election looming on July 2. “When fraudulent activity is discovered we take action against those involved, including the broker, which normally results in termination,” Westpac spokesman David Lording told Reuters in an e-mail. “Our delinquency rate on foreign income loans is lower than the portfolio average, and a large proportion of these loans are ahead on repayments.” ANZ and Westpac discovered they had each approved hundreds of home loans backed by fraudulent Chinese income documents, allegedly manufactured with the help of mortgage brokers, The Australian Financial Review (AFR) newspaper reported. The banks did not say whether the suspected fraud was linked to Chinese clients, some of the biggest buyers of Australian property. China has become the largest source of foreign investment in Australia, overtaking the United States, according to official figures. “We have identified issues with the income documentation of a small percentage of Australian resident borrowers who rely on foreign income,” an ANZ spokesman said in an e-mail to Reuters. “Policy changes have been made to address this and we are also reviewing a number of brokers.” The AFR noted that the total value of ANZ and Westpac loans afflicted by allegedly fraudulent income information is likely to be less than A$1 billion, or 0.12 per cent of their combined A$837 billion of residential mortgages.

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Ex-Areva CEO Said to Be Embroiled in Tax-Fraud Investigation

Former Areva SA Chief Executive Officer Anne Lauvergeon, who faces an inquiry over her role in a $2.5 billion mine acquisition that turned sour, is also embroiled in a probe into possible tax fraud, according to two people familiar with the fiscal case. The preliminary inquiry was triggered last September by a complaint from France’s tax authority, said one of the people who asked not to be named because the status of the probe is confidential. Lawyers for Lauvergeon and her husband, Olivier Fric, said they were unaware of the tax-fraud probe but speculated that it could be related to inquiries from the French fiscal authorities in relation to a tax audit. “While there is indeed a request for clarification by the French tax authorities, the Direction nationale des finances has never mentioned anything suggesting there could be reasons to file a criminal complaint,” Fric’s lawyer Mario Pierre Stasi said. That investigation concerns money that Fric earned in Switzerland nearly a decade ago, the lawyer said. At issue is whether it should have been declared in a French tax return or whether he can prove he was a Swiss fiscal resident at the time, Stasi said. “He was truly a Swiss tax resident, he had all the authorizations.” “This has nothing to do with Areva or Anne Lauvergeon,” her lawyer Jean-Pierre Versini-Campinchi said in a text message response to questions from Bloomberg. He said she may be tangled up in the matter because she’s married to Fric. Separately, investigative judges quizzed Lauvergeon to determine whether there was a cover-up of Areva’s losses in 2010, Versini-Campinchi said. She could either be formally charged at the end of the questioning or she may be treated as a material witness in the case. The questioning is related to Areva’s acquisition in 2007 of mining firm UraMin Inc. with exploration permits in Namibia, the Central African Republic and South Africa. The transaction was meant to allow Areva to produce an extra 7,000 metric tons of uranium a year starting in 2012. But the deal soon turned sour and Areva took a net loss of 2.42 billion euros ($2.7 billion) in 2011 mostly linked to the writedowns at its UraMin mining operations. As the UraMin fiasco unfolded Lauvergeon was denied a third term at Areva in 2011 amid increased distrust toward nuclear energy power after the Fukushima disaster and slump uranium prices. Since then, she’s not been named to head any other large, listed companies. In 2001, Lauvergeon engineered the three-way merger that turned Paris-based Areva into a one-stop shop selling nuclear technology, fuels and services. Since then, its fortunes have turned. The troubled French state-controlled nuclear group posted in February a fifth year of losses as it made new provisions for the completion of an atomic plant in Finland and wrote down the value of assets amid sluggish demand for its services from utilities.

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Foreign Corrupt Practices Act (FCPA)

It’s Up to Governments to Stop Enabling Corruption

It will take more than a “Global Declaration Against Corruption“ to rid the world of an age-old scourge, but don’t dismiss last week’s anti-corruption summit in London too quickly. The surge of interest in the issue is all to the good – and an opportunity that shouldn’t be wasted. Graft may always be with us, but governments can choose either to tolerate and even assist it, or to confront it vigorously. One of the simplest and best ways to fight back is through sharing information. Letting the fruits of bribery, embezzlement and tax evasion be hidden away enables the crime. Ahead of the meeting, more than 300 economists called on world leaders to restrict the use of shell companies and vehicles that conceal the ownership of assets. They make a good case. There’s nothing wrong with owning assets abroad, and investors are entitled to expect appropriate confidentiality – but that doesn’t justify a policy of hiding information from other tax and law enforcement authorities. Pressure on governments that offer such invisibility can yield results. Following the outcry over the so-called Panama Papers, for example, Panama and four other jurisdictions have promised to share information on nonresidents’ holdings of assets. Yet tax havens aren’t necessarily poor or small. British Prime Minister David Cameron was recently caught on camera calling Nigeria “fantastically corrupt.” At the summit, Nigerian President Muhammadu Buhari, elected on an anti-corruption platform, didn’t dissent. Instead, he asked for Britain’s help in finding stolen Nigerian assets parked in London. Real estate is one of the easiest ways to launder ill-gotten wealth, and in this regard, Britain has developed a reputation it shouldn’t want. More than 100,000 properties in England and Wales, and more than 44,000 in London alone, are owned by foreign companies. Cameron has promised changes, such as making foreign companies that own property in the U.K. declare their assets on a new public register. He’s also announced plans for a new anti-corruption coordination center in London, and tougher treatment for executives who fail to prevent fraud or money laundering in their companies. The U.S. is another haven for offshore wealth. “How ironic – no, how perverse – that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour,” wrote one Swiss lawyer recently. Earlier this month, the White House said it would act to restrict the use of shell companies in the U.S.;

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Petrobras Corruption Investigation Said to Ramp Up in U.S.

U.S. authorities are investigating more than a dozen companies as part of an international bribery probe that has already led to more than 150 arrests in Brazil, according to people familiar with the matter.

Prosecutors in the U.S. and Brazil are effectively dividing the investigation to suit their respective strengths as they pursue suspected graft related to Brazil’s state-run oil giant. Brazilian law allows authorities to file criminal graft charges against people but not companies, whereas the U.S. has been more successful pursuing companies accused of corruption. The U.S. Justice Department and Securities and Exchange Commission have been speaking with their Brazilian counterparts and gathering information from companies, said three people who spoke on the condition of anonymity. The U.S. is hoping the exchange of documents and other information will allow it to mount a case against Petroleo Brasileiro SA, known as Petrobras, and companies that it had contracts with, two of the people said. “There is certainly coordination ratcheting up between the Brazilians and the U.S.,” said Eric Snyder, a partner at Jones Day who represents Brazil-based individuals and companies in the U.S. He is not involved with either government’s investigation, and he declined to say if any of his clients were being looked at. “My understanding, my belief, is that it’s probably turned from being Brazilians requesting bank account information from the U.S., for instance. Now it’s going the other way.” An SEC spokeswoman, Judy Burns, declined to comment. Peter Carr, a Justice Department spokesman, declined to comment. The intensified scrutiny of companies linked to Petrobras inserts the U.S. more heavily in investigating the scandal known as Operation Carwash, which Brazilian prosecutors have tracked across four continents. It has toppled construction chiefs, helped tip the country into recession and ensnared key members of President Dilma Rousseff’s inner circle, including members of her Workers’ Party. Rousseff, who was chairwoman of Petrobras when some of the kickbacks occurred but hasn’t been accused of any wrongdoing in the scandal, was suspended from office in a Senate vote on allegations she doctored fiscal accounts to mask the size of a budget deficit. She now faces an impeachment trial in the Senate. Rousseff pledged to use all legal instruments in her defense, reiterating that she committed no crime and that the impeachment process amounted to a coup that is a threat to Brazil’s democracy. Brazilian prosecutors investigating Operation Carwash – named after a service station used to launder money that was identified early in the investigation – say contractors for Petrobras bribed executives of the company in exchange for lucrative contracts and then inflated the costs. Petrobras has said it has improved its compliance standards and has fully cooperated with the investigations.

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Panama Papers whistleblower says global corruption behind rationale for massive data leak

The person who claims to have disclosed the Panama Papers, a trove of financial data that has implicated politicians and business leaders around the world in large-scale tax evasion, issued a statement explaining the motives behind the massive leak. The leaker said the documents reveal how global income inequality is fed by “massive, pervasive corruption,” which the leaker blamed primarily on failings by the legal profession, while condemning the roles played by banks, financial regulators, tax authorities, the courts and the media. Echoing the release of the papers themselves, the whistleblower gave the statement to the German newspaper Sueddeutsche Zeitung, which shared it with the International Consortium of Investigative Journalists, which is working with Kyodo News and other media partners. The internal files taken from Panama-based law firm Mossack Fonseca & Co., which specializes in creating shell companies, contain information on more than 200,000 offshore entities connected to people in more than 200 countries and territories. “I decided to expose Mossack Fonseca because I thought its founders, employees and clients should have to answer for their roles in these crimes, only some of which have come to light thus far,” the leaker said in the statement. “Thousands of prosecutions could stem from the Panama Papers, if only law enforcement could access and evaluate the actual documents,” the person said, adding that inadequate legal protections and a history of harsh punishment for whistleblowers discouraged him or her from releasing the documents in full. The leaker raised the example of Edward Snowden, who sought asylum in Russia after being charged under U.S. espionage law for exposing National Security Agency surveillance practices. The ICIJ has signaled it will refrain from supplying the full Panama Papers to law enforcement agencies, a move the whistleblower hailed. The leaker condemned global media for largely ignoring the Panama Papers until the story picked up speed, saying several major media outlets had access to some of the documents at an earlier juncture but chose not to report on them. The person also called for fundamental reforms in the way lawyers are regulated and for radically increasing the transparency of corporate data, particularly in Britain’s offshore territories, which he or she described as “unquestionably the cornerstone of institutional corruption worldwide.” The leaker said developments in information technology mean governments are becoming progressively less able to suppress information to conceal tax inequalities and similar issues from citizens. “The next revolution will be digitized. Or perhaps it has already begun,” the leaker said.

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Brazil suspends leniency deals with companies in corruption probe

Brazil’s new Minister of Transparency and Oversight said he was suspending negotiations of leniency agreements sought by engineering and construction companies caught up in a massive corruption investigation. The minister, Fabiano Silveira, said in a Globo News television interview aired that interim President Michel Temer’s government wants prosecutors and the federal audit court to be part of the negotiations. That would require the new government to sponsor legislation that would have to pass Congress before talks can resume. Thirty-one contractors, including Brazil’s largest builders, have been banned from signing new contracts with state-run Petrobras since late 2014 due to accusations they colluded to overcharge the oil company and used the extra funds to bribe politicians. About half of those, including Latin America’s largest engineering conglomerate Odebrecht, were known to be negotiating leniency agreements with the federal government, a measure permitted under Brazil’s anti-corruption law. The agreements would allow companies to bid for new government contracts as long as they admitted wrongdoing, collaborated with investigators and paid a fine. Companies that do not ink deals risk the same fate as Mendes Junior Engenharia, which was banned on April 28 from public tenders for at least two years, the first builder to be punished by the government. Suspended President Dilma Rousseff, whom the Senate voted to put on trial on charges of breaking budget laws, last year proposed a measure to speed up the leniency deals. Her government argued the deals were needed to avoid further damage to an economy already deep in recession. But prosecutors who discovered the graft scheme at Petroleo Brasileiro SA, as Petrobras is formally known, criticized the scheme. They argued that without their participation in the negotiations, the government would let companies off too easily and give them no incentive to avoid committing crimes. “The more legitimate actors that participate in this process, the better. This offers more security for the prevention and prosecution of the offense,” Silveira said. Temer folded the comptroller general’s office, which was negotiating leniency deals, into a new Transparency and Oversight ministry, which went into action with federal police in an anti-fraud operation in Santa Catarina state. The ministry said in its first press release that four people were arrested and document seized in the investigation of graft in municipal sanitation contracts.

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FIFA Compliance Chief Quits, Saying Corruption Fight Threatened

FIFA’s head of audit and compliance, Domenico Scala, quit to protest changes at the top of global soccer’s governing body that he said will imperil efforts to eliminate corruption. Scala, who was with the organization for four years, said a vote by FIFA to let the ruling council dismiss members of its independent advisory bodies would leave them “in danger of becoming auxiliary agents of those whom they should actually supervise.” The changes were made at the first congress under new President Gianni Infantino. Scala said the change “destroys a substantial achievement” of FIFA’s reforms since last year’s scandal ended Sepp Blatter’s 17-year rule of the Zurich-based soccer body, officially known as the Federation Internationale de Football Association. In addition to his audit role, Scala chaired a panel that makes pay offers to FIFA executives. Former FIFA ethics adviser Mark Pieth told Bloomberg News that Infantino and Scala had disagreed over a $2 million annual pay offer made to Infantino, lower than former President Blatter’s $3 million. Pieth, who remains close with Scala, says Infantino is “offended because maybe he thinks he is not getting enough money.” Infantino said he has not been paid since joining FIFA in February, and has not yet agreed to a contract. A FIFA spokesman told Bloomberg News that Infantino has nothing to add to what he said the day before about pay. Bloomberg News sent an e-mail to Scala for comment on Pieth’s assertion of a disagreement over Infantino’s compensation terms, but did not receive an answer. Committee members tasked with oversight of the ruling council could be dismissed or kept acquiescent through the threat of losing their post, according to a statement issued by Scala. FIFA’s ethics investigators and Scala have been busy since last May’s arrests of several senior soccer leaders and sports marketing executives sparked the biggest crisis in the governing body’s history. Under previous rules only the full FIFA Congress had the power to appoint or remove independent officials. Several former FIFA vice presidents and members of its governing executive are among the officials charged in the U.S.’s sprawling corruption investigation. FIFA accepted Scala’s resignation, calling his claims “baseless.” The new powers were granted to more easily fill vacancies and swiftly remove members who have “breached their obligations.” Scala’s deputy, Sindi Mabaso Koyana, will serve as acting chairman of the Audit and Compliance Committee until a replacement is found, according to FIFA.

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Litigation Matters

Wall Street Faces New Front for Lawsuits After Supreme Court Ruling

The U.S. Supreme Court dealt a blow to financial services firms trying to fend off allegations that they facilitate illegal short selling, affirming the rights of investors to make their case in plaintiff-friendly state courts. With the court’s ruling, plaintiffs may find that such suits have a greater chance of advancing in a state court, potentially exposing brokerages to more expensive litigation, said Sam Lieberman, a partner at Sadis & Goldberg LLP. “It’s easier to have your case thrown out for procedural reasons in federal court,” Lieberman said. “In state courts, you’re more likely to get closer to trial, and get closer to trial means you’re more likely to get closer to settling.” New Jersey and other states also have Racketeer Influenced and Corrupt Organizations Act statutes aimed at organized crime that could be applied broadly enough to cover the conduct of financial services firms, said David Zaring, a professor of legal studies and business at University of Pennsylvania’s Wharton School of Business. “New Jersey’s RICO statute might look like an easier route to a jury,” he said. In a unanimous ruling, the Supreme Court sided with investors who sued Bank of America Corp.’s Merrill Lynch and other brokerage firms. At issue was whether the plaintiffs, who alleged they lost money because of the brokers’ involvement in illegal short selling, could use New Jersey state court to sue over their losses – even if the litigation cited federal laws. The ruling forces Merrill Lynch, Bank of America’s corporate and investment banking division, and other firms to mount a defense in New Jersey state court. The plaintiffs in the case are using the state’s RICO statute as part of their complaint. While concerned with so-called naked short selling, the ruling could potentially be applied in other securities matters, said Gary Aguirre, a former SEC enforcement attorney with Aguirre Law APC in San Diego. Plaintiffs may get a fuller airing in such cases in state courts than they would in federal venues, other attorneys said. While that regulation makes it illegal to use naked short sales to manipulate a security, cases against the practice haven’t fared well in federal court, attorneys said. That’s in part because the Supreme Court has required plaintiffs in federal court to cite specific statutes that they believe have been violated, Wharton’s Zaring said..

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Investors Win at U.S. Supreme Court on Securities-Fraud Suit Sites

Investors can press some securities-fraud suits in plaintiff-friendly state courts, the U.S. Supreme Court ruled in a setback to the financial-services industry. The court unanimously sided with investors on the proper forum for a suit that blames securities firms including Bank of America’s Merrill Lynch for driving down the stock price of Escala Group Inc., a seller of collectible stamps and coins. The court said the 1934 Securities Exchange Act lets state courts handle claims filed under their own investor-protection laws even if the litigation might involve the interpretation of federal law. “Congress likely contemplated that some complaints intermingling state and federal questions would be brought in state court,” Justice Elena Kagan wrote for the court. Kagan said that federal courts have exclusive power only over suits “arising under” the 1934 law – typically suits seeking to enforce that statute’s requirements. The ruling may have implications for natural gas and electric-power suppliers. Industry trade groups filed a brief saying the laws governing those businesses have almost identical provisions as the 1934 securities-fraud statute. The Escala investors, led by company founder Greg Manning, say the company’s market capitalization fell by $800 million over 11 months. They contend the cause was a practice known as “naked short-selling” by several large financial institutions. A short sale is a way of using borrowed shares to bet that a stock or other security will fall in price. In a “naked short,” the trader never borrows the shares needed to complete the transactions. Manning and other shareholders say the firms – a group that also includes units of KCG Holdings Inc., UBS AG and E*Trade Financial Corp. – made money through a scheme that used naked shorts to manipulate the Escala stock price. Escala cut ties with Manning in 2007 and later changed its name to Spectrum Group International Inc.

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China Market

China tightens oversight of bank bill business after fraud

China has told banks to step up checks on their bill financing businesses to curb risks, after the sector was hit by several cases of bill fraud costing many millions of dollars. Chinese officials have warned against systemic risks as banks struggle to cope with rising bad loans as the economy slows. Some banks have suffered heavy losses due to lax internal controls and other irregularities in bill financing, the People’s Bank of China (PBOC) said in a document jointly issued with the China Banking Regulatory Commission (CBRC). Banks must take steps “effectively control risks in bill businesses and promote the development of the bill market in a healthy and orderly way”, the document said. Banks usually accept and discount bills for clients and rediscount bills for other banks, according to the central bank. Banks will be strictly banned from accepting and discounting bills for companies whose bill activities are found incompatible with their actual operations, according to the rules. Banks will be barred from using loans to cover up non-performing assets incurred in bill businesses and they are not allowed to deal with illegal “bill intermediaries”, it said. The statement comes after reports of multi-million dollar bill frauds at Agricultural Bank of China Ltd (AgBank) (601288.SS) (1288.HK) and CITIC Bank Corp (601998.SS), among others. China CITIC Bank Corp said in January it had discovered a fraud involving 969 million yuan ($147.37 million) in funds illicitly drawn from its bill financing business. The AgBank has said it could lose as much as 3.9 billion yuan from a similar fraud.

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China wealth management firm executive confesses to Ponzi scheme

A top executive at a Shanghai investment firm, Zhongjin Capital Management, confessed on state television to operating a Ponzi scheme, a sign of the authorities’ increasing scrutiny of systematic financial fraud. Police accused Zhongjin last month of “illegal fundraising” a loosely defined term applied to irregular behavior in China’s energetic but opaque shadow-banking sector. At the time, he and 20 other executives with ties to the firm were arrested. “The way we operated our fund was with a Ponzi scheme method,” Xu Qin, a man described by domestic media as a high roller, said on China’s official state broadcaster, China Central Television (CCTV). Xu has not been formally tried in court. Rights activists have said that public confessions in China are often forced and violate the accused’s right to due process. Media said last month that Xu had been arrested at Shanghai’s airport on his way to get married in the Vatican. “We used money from investors who came later to pay the interest owed to earlier investors,” said Xu. “It was actually an extremely typical Ponzi scheme.” Part of the broadcast showed police scouring a building, remarking on piles of money, a Hermes brand handbag and other luxury goods. Defaults and fraud cases in China’s shadow banking sector have risen in the past few years as the economy has slowed and struggling companies have been forced to pay higher interest rates to raise cash as they try to stay afloat. Police in Shanghai, China’s main financial hub, have also set up a new securities crime unit, China’s Wenhui Daily reported.

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China arrests one of most-wanted telecoms fraud suspects: Xinhua

China has arrested one of its top 10 most-wanted fraud suspects, who is accused of conspiring with others to swindle 35 million yuan ($5.4 million) in a telecoms scam, state news agency Xinhua has reported. Wen Longjian, 32, is accused of defrauding a corporate accountant by impersonating the head of a company on an instant messaging app last December, Xinhua said, quoting the Ministry of Public Security. Wen evaded arrest after an earlier police operation detained 39 suspects and froze bank accounts containing more than 28 million yuan but was caught in China’s southwestern province of Guangxi, the report quoted police as saying. China is battling an explosion of telecoms fraud that has cost billions of dollars in losses and driven some victims to suicide, say authorities in Beijing who blame many of the scams on criminal gangs based in rival Taiwan. Despite political tensions, the two sides have in recent years cooperated on investigating such scams, but Taiwan says mainland authorities sometimes do not provide enough evidence for them to do anything.

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Healthcare Industry

Medicare Program Paid $125 Billion Improperly Over Three Years

The U.S. Medicare program sent out more than $125 billion in improper payments over three years for a plan that insures hospital and medical services for the elderly, including home health care, possibly triggering a congressional review. Improper payments from the plan, called Medicare Fee-For-Service, exceeded a threshold of 10 percent of total payments from fiscal 2013 through 2015, according to a report released by the Health and Human Services Department’s Office of Inspector General. After three consecutive years over the limit, the program is required by law to submit plans to Congress for re-authorization or returning to compliance, the report said. Government watchdogs are urging a crackdown on waste and fraud in Medicare and other health programs. A study by the Government Accountability Office, Congress’s investigative arm, found that a related program that contracts with private insurers to provide benefits, called Medicare Advantage, made more than $14 billion in improper payments in fiscal 2013 that the companies didn’t return. Improper payments are most often made in response to insufficient coding or paperwork, or when medical need hasn’t been established, and typically aren’t fraudulent, said Patrick Conway, chief medical officer for the Centers for Medicare and Medicaid Services, in a blog post. Health and Human Services failed to address earlier recommendations for reducing the rate and bringing it under the compliance threshold, the report said. Improper payment rates in the Medicare Fee-For-Service program were 10.1 percent in 2013, or about $36 billion; 12.7 percent in 2014, or $45.8 billion; and 12.1 percent in 2015, or $43.3 billion, according to Don White, a spokesman for OIG, in an e-mail. Insufficient documentation for home health claims was one of the primary causes of improper payments, according to the report. In his blog post, CMS’s Conway said he was “pleased” to see that the rate of improper payments fell in 2015 from the previous year in the Medicare Fee-For-Service program. The agency is taking steps to encourage states and organizations to help reduce improper payments, he said. The report was based on an audit, conducted by Ernst & Young LLP, which the inspector general’s office hired to study payments in several HHS programs. HHS “met many requirements but did not fully comply” with the regulations in 2015, according to a letter from the auditor to OIG included in the report. “HHS has taken, and continues to take, a number of actions to address root causes” of improper payments, Ellen Murray, HHS assistant secretary for financial resources, said in a letter to HHS Inspector General Daniel Levinson dated May 9.

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New York City to pay U.S. $4.3 million in Medicare fraud case

New York City agreed to pay the U.S. government $4.3 million to settle a civil fraud lawsuit accusing the city’s fire department of accepting tens of thousands of improper Medicare reimbursements for emergency ambulance services. The accord resolves claims that the city cheated the U.S. Department of Health and Human Services out of millions of dollars from October 2008 to October 2012 by submitting claims for services that were not medically necessary, violating the federal False Claims Act. According to court papers, part of the problem may have been linked to the New York City Fire Department’s (“FDNY”) ambulance billing contractor. The U.S. Department of Justice said that in a review sought by the FDNY, the contractor in June 2010 found just one Medicare reimbursement denial for unnecessary services over a period of several months, though the number of improper reimbursements was at the time averaging more than 1,000 a month. The FDNY alerted the office of U.S. Attorney Preet Bharara in Manhattan to the improper reimbursements in December 2012, and adopted new claims procedures nine months later. “As a result of this joint look into Medicare billing practices at the FDNY, the agency has completely revamped its policies and has stronger procedures in place to reduce the risk of recurrence and to immediately correct erroneous or improper payments,” the city’s law department said in a statement.

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SEC Regulatory Actions

SEC Charges Shell Factory Operators With Fraud

The Securities and Exchange Commission announced fraud charges against a California stock promoter and a New Jersey lawyer who allegedly were creating sham companies and selling them until the SEC stopped them in their tracks. The SEC alleges that Imran Husain and Gregg Evan Jaclin essentially operated a shell factory enterprise by filing registration statements to form various startup companies and misleading potential investors to believe each company would be operating and profitable. The agency further alleges that their secret objective all along was merely to make money for themselves by selling the companies as empty shells rather than actually implementing business plans and following through on their representations to investors. Moving quickly to protect investors based on evidence collected even before its investigation was complete, the SEC issued stop orders and suspended the registration statements of the last two created companies – Counseling International and Comp Services – before investors could be harmed and the companies could be sold. “Issuers of securities offerings must make truthful disclosures about the company and its business operations so investors know what they’re getting into when they buy the stock,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. “We allege that Husain drummed up false business plans and created a mirage of initial shareholders while Jaclin developed false paperwork to depict emerging companies that later sold as just empty shells.”

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SEC Charges Two Attorneys With Defrauding Escrow Clients

The Securities and Exchange Commission announced fraud charges against two attorneys accused of making undisclosed risky investments and in some instances outright stealing money they obtained in escrow accounts from small business owners seeking commercial loans. The SEC alleges that Jay Mac Rust and Christopher K. Brenner collected $13.8 million acting as escrow agents between their clients and a purported loan company called Atlantic Rim Funding. Rust and Brenner assured clients that their deposits of 10 percent of the desired loan amount would be held safe and only used to purchase liquid, government-backed securities that Atlantic would then leverage to obtain their loans. According to the SEC’s complaint, Atlantic had no ability or intention to obtain these loans. Yet when that became obvious to Rust and Brenner they each continued to make misrepresentations to clients and collected more money anyway. Rust siphoned $662,000 and Brenner took $595,000 in client funds to pay themselves and others, and they gambled on risky securities derivatives with the remainder of the money. Rust and Brenner each opened numerous securities accounts at broker-dealers to make these trades, and avoided scrutiny by lying that the money being used was their own cash rather than client assets. SEC examiners detected the scheme when examining one of the brokerage firms where trades were being placed.

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SEC Charges Unregistered Brokers with Pocketing Investor Money

The Securities and Exchange Commission charged two men with pocketing investor money they raised for limited liability companies they owned and controlled that purportedly held warrants to purchase the common stock of a technology startup company. The SEC alleges that James R. Trolice and Lee P. Vaccaro raised approximately $6 million from more than 100 investors by creating a false sense of urgency and exclusivity around the offering, claiming that only a limited amount of warrants were available and that they eventually could be exercised at a very profitable price. Trolice further lured investors by showcasing his apparent wealth and hosting elaborate investor parties at his multi-million-dollar home. He also touted his purported track record of bringing startup companies public and obtaining high returns for investors. Meanwhile, Trolice allegedly used investor funds to pay his mortgage along with other bills for a credit card, car lease, college tuition, and landscaping. Vaccaro allegedly spent at least a quarter-million dollars in investor funds at Las Vegas casinos. The SEC further alleges that neither Trolice nor Vaccaro was registered with the SEC or any state regulator. Investors can quickly and easily check whether people selling investments are registered by using the SEC’s investor.gov web site. “We allege that Trolice and Vaccaro lied to investors about the nature of the investment, created a phony aura of success, and ultimately funded their own lifestyles rather than investing all the money as promised,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. ”The SEC continues to pursue and investors should continue to be aware of unregistered brokers selling investments.” The SEC’s complaint, filed in federal court in Newark, N.J., also charges former stockbroker Patrick G. Mackaronis, who received commissions for bringing prospective investors to Trolice and Vaccaro so they could close the sales. Mackaronis ignored fraud risks and blindly touted the opportunity to family members, friends, and brokerage clients while knowing very little about the investments themselves. Mackaronis has agreed to settle the SEC’s charges by disgorging the $85,000 in commissions he received plus paying $8,486.91 in interest and a $50,000 penalty. Mackaronis also agreed to a three-year bar from the securities industry. The settlement is subject to court approval.

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