Forensic News October 2016
FINANCIAL/ACCOUNTING FRAUD
Attorney General Kamala Harris authorized a seizure warrant against the bank that seeks customer records and other documents, saying there is probable cause to believe the bank committed felonies. The probe marks the latest setback for the bank in a growing scandal that led to the abrupt retirement of its chief executive officer, monetary penalties, compensation clawbacks, lost business and damage to its reputation. Wells Fargo spokesman Mark Folk did not immediately provide a comment in response to requests from Reuters, but was quoted in the Los Angeles Times as saying the bank is “cooperating in providing the requested information.” A spokeswoman for the California Department of Justice said she could not comment on the probe. The bank’s downward spiral kicked into high gear last month. The U.S. Consumer Financial Protection Bureau and other regulators ordered the United States’ third-largest bank by assets to pay $190 million in fines and restitution to settle civil charges that its branch staff created as many as 2 million accounts without customers’ knowledge in order to meet internal sales targets. The CFPB said that high pressure sales tactics and financial incentives fueled the fraud, which was largely carried out by low-level branch employees. About 5,300 of those employees were fired. Shortly after the civil settlement was made public, CEO John Stumpf was called to testify before Congress. Observers have widely criticized his performance, with many saying he appeared ill-prepared to deal with tough questioning by lawmakers including Massachusetts Democratic Senator Elizabeth Warren, who called for his resignation and accused him of him “gutless” leadership.
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South African prosecutors ordered Finance Minister Pravin Gordhan on Tuesday to appear in court on November 2 to hear fraud charges against him, news that sent the rand and share prices reeling. The rand dropped as much as 3.4 percent against the dollar amid fears Gordhan’s legal troubles could damage investor confidence in South Africa, where he has stood out as a reliable figure for financial markets against a backdrop of corruption. The banking index fell as much as 5.12 percent, wiping 46.3 billion rand ($3.3 billion) off the market capitalization of South Africa’s six biggest banks. Prosecutor Shaun Abrahams said Gordhan, in his previous role as head of the South African Revenue Service (SARS), had cost the tax agency around 1.1 million rand ($79,000) by approving early retirement for tax agency deputy commissioner Ivan Pillay and re-hiring him as a consultant. Gordhan was served a summons to attend a court hearing at which he would acknowledge the charges against him, as outlined in the summons, the National Prosecuting Authority (NPA) said. It was not a plea hearing, the NPA told Reuters. Gordhan said he would remain in his post despite the court summons. He has denied the allegations, saying they are part of a politically motivated campaign against him. In a statement late on Tuesday, President Jacob Zuma reaffirmed his support for Gordhan, adding that the decision to prosecute him came at a sensitive time when the minister was successfully leading initiatives toward economic revival. Perceived rifts between Gordhan and Zuma have previously rattled markets in Africa’s most industrialized economy, which faces the risk of ratings downgrades later this year. Speaking to reporters, Abrahams said: “I can assure you there has been no political interference in this matter.” Gordhan is already being investigated for his role in setting up a surveillance unit at the tax department a decade ago that is suspected of spying on politicians including Zuma. He was first questioned about this in February by an elite police unit but in August ignored a police summons on the inquiry, saying he had done nothing wrong. Analysts say Gordhan has urged fiscal prudence to appease ratings agencies while factions close to Zuma want to push through expensive projects. The president has denied any rift with Gordhan. Gordhan confirmed prosecution officials had delivered the summons to appear in court to his house on Tuesday morning.
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Patriarch Partners founder Lynn Tilton is a character but she’s no fraud, her lawyer told an SEC judge at the start of a trial over claims that the firm misled investors about the value of assets backing three debt funds worth $2.5 billion. The U.S. Securities and Exchange Commission’s fraud case, which Tilton has been trying to dodge for more than a year, seeks to force her to give up $200 million in fees collected on the debt funds plus additional penalties. She’s denied wrongdoing, and her lawyers claim she’s been wrongly targeted by the agency. If she loses, the 57-year-old financier could be barred from the securities industry. “She’s a character, she’s larger than life and she’s all woman,” lawyer Randy Mastro said Monday during a hearing in Manhattan. The trial is taking place as part of the SEC’s in-house enforcement process before Administrative Law Judge Carol Fox Foelak. SEC lawyer Dugan Bliss began laying out the case against Tilton by telling the judge she “hid the truth” about how she manipulated the underlying categorization of the funds’ assets. Tilton founded Patriarch in 2000 after working at Goldman Sachs Group Inc. and other big Wall Street investment banks. She built a business empire selling structured finance bonds before the market for such debt blew up in the 2008 financial crisis. In March 2015, a five-year SEC investigation culminated in an administrative lawsuit accusing the private-equity firm of fraud. Tilton went on the offensive, filing lawsuits to force the case into federal court and away from an in-house SEC hearing officer. She argued the agency’s enforcement process was unfair and violated the U.S. Constitution. Last month, the U.S. Supreme Court rejected her request to stop the case pending a review of her constitutional challenge. And last week, she dropped a lawsuit seeking to delay the SEC hearing. “I’ve never fit the mold of Wall Street and the private equity industry, and it appears that this has made me a target,” Tilton said in an e-mailed statement before the start of the trial. “But I believe that ultimately the truth will prevail.” Patriarch invests in distressed companies such as Dura Automotive Systems Inc., Spiegel Catalog Inc., MD Helicopters Inc. and Rand McNally & Co., in hopes of restructuring and improving their value. Tilton pioneered a form of financial engineering allowing her to bundle loans to distressed companies, turn the debts into securities and then sell them to investors.
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A slew of banks in India are replacing or asking their customers to change security codes of as many as 3.25 million debit cards due to fears that the card data may have been stolen in one of the country’s largest-ever cyber security incidents. Card network providers Visa (V.N), MasterCard (MA.N), and home-grown RuPay run by the National Payments Corp of India (NPCI) swung into action in September after receiving complaints from some banks that their clients’ cards had been fraudulently used mainly in China and the United States even though they were in India, said the chief of NPCI, which also runs the biggest network of shared ATMs. There was a possible compromise of one of the payment switch provider’s systems, NPCI Chief Executive A.P. Hota said in a statement. A switch is part of the back-end network aiding ATM operations. Hota said the card network providers had alerted all affected banks and the advice to banks to replace cards was a “preventive exercise”, adding: “Necessary corrective actions already have been taken and hence there is no reason for bank customers to panic.” Of the debit cards affected, about 2.65 million are on Visa and MasterCard platforms, while 600,000 are on RuPay, Hota earlier told CNBC TV18, adding the breach involved some 90 ATMs. Visa and Mastercard said in separate statements their own networks had not been compromised, but they were aware of the issue and were working with banks, regulators and others to support investigations. While the potential breach impacts a large number of debit card holders, the number of cards affected accounts for just 0.5 percent of the nearly 700 million debit cards issued by banks in India. While the NPCI did not name the payment switch provider whose systems it found had been compromised, banking industry sources with direct knowledge said the issue stemmed from a breach in systems of Hitachi Ltd (6501.T) subsidiary Hitachi Payment Services, which manages ATM network processing for Yes Bank Ltd (YESB.NS).
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A former SAP SE executive and two Indiana car wash owners have been indicted on charges that they engaged in an insider trading scheme that resulted in hundreds of thousands of dollars in profits. Christopher Salis, a former global vice president at the software company’s SAP America unit, was charged along with brothers Douglas Miller and Edward Miller in an indictment filed in federal court in Hammond, Indiana made public on Thursday. The criminal charges followed a civil lawsuit filed by the U.S. Securities and Exchange Commission in June against the trio and a fourth man over trades the regulator said were placed ahead of SAP’s acquisition of Concur Technologies in 2014. Salis, who was representing himself in the SEC lawsuit, did not immediately respond to a request for comment. Thomas Kirsch, a lawyer for the Millers, said his clients will plead not guilty and deny the charges. “They did not engage in any insider trading or commit any crimes at all,” Kirsch said. “The allegations are meritless, and the Millers look forward to fighting these allegations in court and to a full acquittal.” Prosecutors said while employed at SAP in Palo Alto, California, Salis, 39, before the Concur deal was announced tipped his friend Douglas Miller of Dyer, Indiana, off to information about the acquisition so Miller could make trades. Douglas Miller, 40, in turn told his brother, Edward Miller, who co-owned a car wash with him, and also recruited his parents into the scheme by offering to share in any proceeds from the trading, the indictment said. Douglas Miller also recruited two unnamed sales managers at a national energy drink company into the scheme, directing them to open brokerage accounts, which Miller then accessed to buy call options in Concur, the indictment said. By trading ahead of the acquisition’s announcement, Douglas Miller made about $119,000 and Edward Miller, 43, made about $149,000, prosecutors said. Other traders who used the information made $237,000, prosecutors said. In return, Salis received nearly $90,000 from his co-conspirators, prosecutors said, with the Millers taking steps to conceal their payments to avoid suspicion.
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Maurice “Hank” Greenberg told a judge that he was just too busy to commit fraud. After 4 1/2 days of intense questioning by a government lawyer, Greenberg finally got to elaborate on his defense to civil fraud allegations through friendly questioning by his own attorney, David Boies. The former American International Group Inc. chairman told a judge that he relied on underlings to handle the details of individual deals. He said he was busy elsewhere, visiting as many as 30 countries in a typical year and spending each day reviewing hundreds of pages of documents, participating in as many as 70 telephone calls and attending numerous meetings. “It was such a big company,” Greenberg said. “It was hard for me to cover all the bases.” “Did you have confidence in the AIG people on whom you were relying on for the two transactions at issue?” Boies asked. “Absolutely,” Greenberg replied. The 91-year-old spent has spent much of his time on the witness stand in often-testy exchanges while defending his decision to enter into two transactions in 2000 that New York Attorney General Eric Schneiderman alleges were orchestrated to hide AIG’s true financial condition from shareholders. Greenberg said he trusted his underlings to structure the transactions and relied on the company’s lawyers and accountants to make sure they conformed with regulations. The lawsuit, originally filed by then-Attorney General Eliot Spitzer in 2005, accuses Greenberg and former AIG Chief Financial Officer Howard Smith of arranging two transactions in 2000 to conceal the insurer’s real fiscal health. One was a $500 million deal with Berkshire Hathaway Inc.’s General Reinsurance Corp. allegedly used to offset a decline in loss reserves. The second was an agreement with a Barbados-based re-insurer, CAPCO Reinsurance Co., allegedly used to offload underwriting losses from a failed auto-warranty program. Greenberg and Smith resigned earlier that year amid an accounting scandal, and New York-based AIG then restated its earnings, lowering them by $3.4 billion and agreeing to pay $1.64 billion to settle the claims without admitting or denying wrongdoing. Greenberg and Smith have said both transactions were properly accounted for and reported on financial statements.
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Art dealer Guy Wildenstein should get a four-year prison sentence and pay a 250 million-euro ($276 million) fine for concealing paintings in an attempt to avoid taxes, French prosecutors said in their closing speech at a month-long fiscal fraud trial. Guy Wildenstein fraudulently hid assets worth hundreds of millions of euros in offshore trusts to underestimate inheritance taxes, prosecutor Monica d’Onofrio said Thursday at the Paris criminal court. Two years of the prison sentence should be suspended, she said. “This is the most sophisticated tax fraud” seen in France for many decades, d’Onofrio said. “It’s thanks to the Wildenstein fiscal fraud we’ve learned the impressionist art of defrauding the tax collector.” The Paris trial, which will last until Oct. 20, has provided insight on the family’s business secrets, which were so fiercely held that Guy Wildenstein said he didn’t learn of many of the financial machinations until the death of his father Daniel in 2001. According to a banker who has intricate financial knowledge of the clan’s dealings, the Wildensteins sold more than 600 pieces since the turn of the century, generating around $300 million in cash to fund their lifestyle. The family has works worth nearly three times that much in storage. Daniel Wildenstein created an offshore trust in the Bahamas in 1998 to lodge about 2,500 works from his collection. A Royal Bank of Canada unit managed it, and a representative told a Paris court last month that its sole purpose was to provide funds for the family. The assets held in trusts weren’t legally Daniel’s, Guy’s lawyers have said. Instead, they belonged to the trusts and therefore shouldn’t count for estate taxes. French prosecutors argue that the trusts aren’t truly independent, pointing to evidence that the Delta Trust became a source of bounty for Guy and his brother Alec, who died in 2008. “The purpose of the trusts has been perverted and they became piggy banks,” d’Onofrio said.
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Aircraft manufacturer Embraer has agreed to pay over $205 million as settlement with American and Brazilian authorities for resolving corruption charges in India and three other countries. The corruption charges in India relate to alleged payment of $5.76 million to an agent in India in kickbacks for clinching a deal for the sale of three aircraft for the IAF’s Airborne Early Warning and Control System (AWACS). The CBI has already registered an FIR in the case. “The Securities and Exchange Commission (SEC) today announced a global settlement along with the U.S. Department of Justice and Brazilian authorities that requires aircraft manufacturer Embraer SA to pay more than $205 million to resolve alleged violations of the Foreign Corrupt Practices Act (FCPA),” an official statement said. The SEC’s complaint alleges that Embraer made more than $83 million in profits as a result of bribe payments from its U.S.-based subsidiary through third-party agents to foreign government officials in the Dominican Republic, Saudi Arabia, and Mozambique. Embraer allegedly created false books and records to conceal the illicit payments, and also engaged in an alleged accounting scheme in India, the statement said. According to the SEC’s complaint, $3.52 million were paid in bribes to an official in the Dominican Republic’s air force to secure a military aircraft contract in that country, and $1.65 million in bribes were routed to an official in Saudi Arabia to win business there. An alleged payment of $800,000 was made at the behest of a Mozambican government official as a condition of obtaining a contract with a state-owned airline in that country. Approximately $5.76 million was allegedly paid to an agent in India in connection with the sale of three highly specialized military aircraft to Indian Air Force, and the payments were falsely recorded in Embraer’s books and records as part of a consulting agreement that was not legitimate. “As alleged in our complaint, Embraer realized significant revenues by surreptitiously using third parties to mask bribes paid to government officials with influence over contracts it was competing to win,” said Andrew J Ceresney, Director of the SEC Enforcement Division. Kara N Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, added, “Embraer’s alleged misconduct spanned multiple continents, and it has taken significant ongoing coordination among international regulators and law enforcement agencies to uncover the company’s complex bribery schemes.”
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Wal-Mart Stores Inc (WMT.N) rebuffed a proposal by U.S. prosecutors to pay at least $600 million to settle a corruption probe into the company’s practices in markets including Mexico, India and China, Bloomberg reported, citing people familiar with the matter. Prosecutors have now gone back to seek more evidence about the company’s alleged bribery in Mexico to put pressure on the retailer to settle, Bloomberg reported. Some of Wal-Mart’s actions in Mexico may be too old to prosecute, the report said. Officials are working to strike a deal with the Bentonville, Arkansas-based company before a new U.S. administration takes over in January, according to the Bloomberg report. Wal-Mart is cooperating fully with the government and compliance with the US Foreign Corrupt Practices Act (FCPA) and other anti-corruption laws is a key priority, company spokesman Greg Hitt said. The U.S. Department of Justice has been conducting a long-running investigation into potential misconduct by Wal-Mart, including violations of FCPA, in some overseas markets, including China, Brazil, India and Mexico. Wal-Mart is also facing a class-action lawsuit filed by its shareholders including a Michigan pension fund, accusing it of defrauding shareholders by concealing suspected bribery to help it expand faster in Mexico.
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The New Jersey Investment Council is redeeming $190 million from Och-Ziff Capital Management LLC, according to materials from its Sept. 28 meeting. The withdrawal from OZ Domestic Partners is one of 11 listed in the materials for the monthly Directors Report and is part of a restructuring of the hedge fund portfolio at the pension, which voted in August to cut its target allocation to the industry by 52 percent. New Jersey still had $2 billion committed to Och-Ziff through real estate, energy and credit funds as of the end of June, according to a separate document. The meeting occurred the day before Och-Ziff announced the settlement of a five-year bribery probe with the U.S. Securities and Exchange Commission and Department of Justice. The firm agreed to pay more than $400 million in fines, penalties and disgorgements, and enter into a deferred prosecution agreement with the Justice Department. Its OZ Africa Management GP unit pleaded guilty to conspiring to bribe officials of the Democratic Republic of Congo. Joseph Perone, a spokesman for the New Jersey Treasury, confirmed the redemption as part of a broader effort to reduce exposure to hedge fund strategies. Joe Snodgrass, a spokesman from Och-Ziff, declined to comment. New Jersey’s other redemptions include about $300 million from Canyon Partners, $252 million from Brevan Howard Asset Management and $62 million from Omega Advisors.
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The Securities and Exchange Commission (SEC) has announced Anheuser-Busch InBev will pay $6 million after allegations it violated the Foreign Corrupt Practices Act (FCPA) and threatened a whistleblower who reported the misconduct. According to the SEC, the company used third-party sales promoters that made improper payments to government officials in India in order to increase the sale and production of Anheuser-Busch products in that country. When an employee began the whistleblowing process, Anheuser-Busch InBev allegedly attempted to stop the employee from doing so by threatening a financial penalty. “Anheuser-Busch InBev recorded improper payments by its sales promoters in India as legitimate expenses in its financial accounting, and then exacerbated the problem by including language in a separation agreement that chilled an employee from communicating with the SEC,” said Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA unit. The company will pay $2,712,955 in disgorgement plus interest of $292,381 and a penalty of $3,002,955. Additionally, Anheuser-Busch will cooperate with the SEC and report its FCPA compliance efforts for a two-year period. “Threat of financial punishment for whistleblowing is unacceptable,” said Jane Norberg, acting chief of the SEC’s Office of the Whistleblower. “We will continue to take a hard look at these types of provisions and fact patterns.”
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Volkswagen AG and drivers suing the company in the U.S. over its diesel-cheating scandal won final approval of their $14.7 billion settlement to resolve what’s likely to be the largest portion of VW’s civil liability worldwide. The accord requires VW to buy back cars with 2.0-liter diesel engines armed with so-called defeat devices used to beat emissions tests. Under the deal VW reached in June with consumers and regulators including the EPA and Federal Trade Commission, car owners will be offered $5,100 to $10,000 each in compensation along with the option of a buyback or a fix. The automaker has earmarked $19.5 billion (17.9 billion euros) to cover costs stemming from the scandal. With Tuesday’s approval by U.S. District Judge Charles Breyer in San Francisco, VW has committed to almost $16.6 billion in settlements, including $1.2 billion for U.S. franchise dealers and $603 million to U.S. states over violations of consumer protection laws. Breyer set aside objections to the agreement, noting that few VW owners complained “and their substance does not call into doubt the settlement’s fairness.’’ Breyer called the settlement fair, reasonable and adequate and it accomplishes the primary goal of getting the polluting cars off the road. ‘There is no just reason for delay,” Breyer said in the order, which allows the buybacks to begin immediately. Volkswagen’s payout for settlements is among the largest in corporate history, exceeded by the $246 billion agreement between the tobacco industry and U.S. states in 1998 and the $38 billion BP Plc has spent so far over the 2010 oil spill in the Gulf of Mexico to resolve government probes as well as claims for private property and economic losses. “VW got itself in a lot of trouble on both sides of the Atlantic, basically lying to a host of governmental regulators, its ultimate customers and its many dealers in between,” said Anthony Sabino, a law professor at St. John’s University in New York and an expert on complex litigation. “They’re not getting off cheap, but they’re stopping the bleeding.” The president of VW’s U.S. unit called the settlement “an important milestone in our journey to making things right.”
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The end of the smartphone wars is almost here. Six years after Apple Inc. filed its first lawsuit alleging unauthorized copying of the iPhone, the company will square off at the U.S. Supreme Court Tuesday against rival Samsung Electronics Co. They will argue over how much of a $399 million patent infringement award Samsung must pay. The fight will be one of the last showdowns between two antagonists that have filed four dozen lawsuits against each other and spent hundreds of millions of dollars on legal fees. Samsung says the award, which represents its entire profit from 11 disputed phones, is a “disproportionate” sum for infringement of Apple’s patented design features. Apple says the full award is warranted given Samsung’s “blatant copying” of the iPhone’s iconic look. The case comes as both companies grapple with more pressing legal concerns -- Apple’s $15 billion European tax fight and Samsung’s exploding-battery crisis. It will be the Supreme Court’s first examination in 120 years of design patents, which cover the ornamental look of an object rather than any functional aspect. The court last looked at design patents in disputes involving spoon handles in the 1870s and carpets in the 1890s. Apple’s design patents cover the rounded corners of its phones, the rim that surrounds the front face and the grid of icons that users view. A federal appeals court upheld the award, saying U.S. patent law lets Apple recoup Samsung’s total profit from the phones, and not just the part attributable to the copied design. In urging the Supreme Court to take up the appeal, Samsung said the ruling was akin to awarding the entire profits on a car because of an infringing cup-holder. Apple rejects that analogy, saying that its patented features are more like the design of the entire car. The case has narrowed since the high court accepted it in March. In court papers, Apple says it accepts that in some cases the patent holder can collect only the profit attributable to a particular component, and not the earnings from the entire product.
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Royal Bank of Scotland may have to pay out as much as $27 billion (21.74 billion pounds), roughly the market value of the bank, in misconduct fines and lawsuits over the next few years, lawyers and analysts said. That bill represents the upper end of estimates to settle a range of claims related to RBS’s alleged misconduct before and during the financial crisis, including mis-selling mortgage backed securities (MBS) in the United States. Investor concern over RBS’s outstanding legal and compliance woes increased after news last month that the DOJ is seeking up to $14 billion from Deutsche Bank for its role in the mis-selling of MBS in the run up to the financial crisis. “The concern is that it could be another Deutsche Bank-style situation where the fines that come in are higher than the market expects,” said Laith Khalaf, an analyst at Hargreaves Lansdown, Britain’s largest retail stockbroker. “Litigation is a real Sword of Damocles hanging over the bank at the moment and until that is out of the way it is very difficult to see a reason to invest in RBS.” An RBS spokeswoman declined to comment on the potential size of the legal bill. If RBS wins the court cases and the fines are at the lower end of analyst estimates, the total would be around $5.5 billion, most of which it has set aside to cover those damages. However, analysts say the bank could have to pay the U.S. Department of Justice as much as 9 billion pounds in the next few months. Even the lowest estimate of 2 billion pounds would make it largest fine in the bank’s history. In addition, analysts estimate RBS will have to pay between $3.5 to $5 billion to settle a similar case with the U.S. Federal Housing Finance Agency, after it sold $32 billion of MBS before the financial crisis. A total settlement bill at the high end of estimates would eat into RBS’s core capital levels, currently 14.5 percent. A JPMorgan analyst said last month that the bank will have to pay $9.8 billion in U.S. fines and that every additional $1 billion will cut the bank’s capital by 0.34 percentage points. Although at a healthy level, the analysts are keeping a close eye on capital levels following a disappointing performance in stress tests ordered by the European Banking Authority earlier this year.
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China’s cabinet and major financial regulators on Thursday published details of rules aimed at stamping out fraud and illegal fundraising in the country’s fast-growing online finance sector. The State Council document, which dates from April, provides guidelines and more far-reaching oversight for regulation of online financial activity, including peer-to-peer (P2P) lending, crowd-funding and third-party payments. The goal is to provide “market order” and safeguard the “vital interests” and “legitimate rights” of financial consumers, an unnamed senior official told the state-run Xinhua News Agency. China’s banking regulator in August issued the first set of regulations under the guidance. Those rules were aimed at cracking down on fraud in the country’s $93 billion peer-to-peer (P2P) lending market. Beijing has abandoned its earlier hands-off approach to overseeing online financial services following a slew of scandals, frauds and high-profile P2P failures. The documents published on Thursday by government bodies, including China’s central bank, banking regulator and securities regulator, gave detailed fresh rules to tighten regulations on online asset management services, third-party payments, crowd-funding and advertisements on the online financial sector. The rules prohibit P2P companies from engaging in a range of businesses, and require the platforms to maintain distinct sub-accounts for their clients, while utilizing mandated third-party depository to hold funds. The rules also forbid P2P platforms from engaging in asset management activities, debt or equity transfers, or marketing of high-risk securities. Real estate development enterprises and real estate intermediaries also are barred from using Internet platforms to engage in financial businesses without relevant licenses. In addition to stricter regulation on the P2P industry, the authorities also laid out rules to overhaul other online finance services, including third-party payment channels, crowd-funding platforms, asset management and advertisement. The clean-up of the sector involves 17 government departments, including China’s central bank and banking regulator, the central propaganda department, and the Supreme People’s Court, the People’s Bank of China said.
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The China Securities Regulatory Commission said Friday it’s investigating six companies over alleged wrongdoings related to initial public offerings and disclosures. Longbao Ginseng & Antler Co., which is applying for a listing, is among the companies, the CSRC said in a statement posted on its official Weibo account. The five other companies, which have already gone public, are Guangdong Guangzhou Daily Media Co., Ingenious Ene-Carbon New Materials Co., Infotmic Co., P2P Financial Information Service Co. and Shenzhen Ecobeauty Co. The six are the first batch of cases announced following the start of a CSRC enforcement campaign targeting IPO frauds. Chinese regulators have stepped up supervision of IPOs this year. The regulator told brokerages in July to do better due diligence on prospective clients when arranging initial public offerings, secondary share sales and bond issues, people with direct knowledge of the matter said at the time, and vowed to punish rule breakers. The agency started a compulsory delisting of Dandong Xintai Electric Co. after finding the company gave false financial data in its 2011 IPO application, as well as annual and semi-annual reports from 2013 to 2014. The CSRC will “persistently keep the high pressure” on IPO and information disclosure-related violations, it said in Friday’s statement. The alleged wrongdoings in the six cases include false representation in IPO prospectuses and fabrication of revenue and net income. The regulator will also go after intermediaries including underwriters, auditors and lawyers, it said in the statement.
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A major Chinese education company has paid thousands of dollars in perks or cash to admissions officers at top U.S. universities to help students apply to American schools. And according to eight former employees of Shanghai-based Dipont Education Management Group, the company’s services didn’t end there. Six told Reuters that Dipont employees wrote application essays for students. Another said she altered recommendation letters that teachers had written for students. One student was given access to his high school transcript and erased bad grades, one of the former employees said. Dipont denies the allegations of application fraud but boasts of its special relationship with some 20 U.S. colleges, which include Vanderbilt University, Wellesley College, Tulane University and the University of Virginia. Their admissions officers have visited China since 2014, personally advising Dipont students at an annual summer program on how to successfully apply to U.S. colleges. “Just once a year, current admissions officers become your exclusive consultants,” an ad from Dipont tells prospective clients. The same ad features a Wellesley student crediting the Dipont program for her early acceptance. Dipont and an affiliated charity picked up travel expenses for admissions officers attending the program. Some officers have received cash as well – sometimes dispensed in $100 bills, according to e-mails Reuters reviewed. Given the prevalence of application fraud in China, the arrangement troubles Philip G. Altbach, founding director of the Center for International Higher Education at Boston College. “Shame on the admissions people from these top schools who are doing this,” Altbach said. Dipont’s success in gaining access to leading American colleges underscores how people on both sides of the Pacific are hungry to capitalize on Chinese students’ desire to study in the United States. Hundreds of thousands of Chinese students are enrolled in U.S. institutions. And hundreds of companies in China have sprung up to cater to these students, charging large sums for services that sometimes include help in cheating on standardized tests and falsifying applications. Some American colleges have tried to boost revenue by hiring brokers to recruit international students, who tend to pay full tuition.
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Blood-testing startup Theranos Inc. is under legal siege. After being sanctioned by U.S. regulators, the company now faces at least eight lawsuits filed in federal courts in California and Arizona by patients who claim that faulty blood tests led to heart attacks or other issues. It’s also facing fraud claims in state court in Delaware from one of its investors. The lawsuits are the latest challenge to the once high-flying startup, which claimed it could run multiple lab tests on a few drops of blood. In July, Chief Executive Officer Elizabeth Holmes was banned from owning or operating a clinical laboratory in the U.S., a sanction that Theranos is appealing. This month, the Palo Alto, California-based company said it would shut down its patient-testing labs and fire 340 workers. Theranos has said that the investor lawsuit is “without merit” and that the firm behind it, Partner Fund Management, “is engaging in revisionist history.” Patrick Ryan, a spokesman for Theranos at Hill & Knowlton Strategies, didn’t immediately have a comment on the patient cases. In one of the suits, a male patient said he got a Theranos test related to heart issues in February 2015, which returned results indicating things were normal. The next month, the patient said he’d had a heart attack. Theranos’s tests for the patient had initially come back normal, according to the suit, only to be invalidated by the company later. Theranos, which is closely held, touted its blood analysis technology as “fast, easy, and the highest level of quality” testing for hundreds of diseases and conditions, according to one of the patient suits. The company, and partner Walgreens Boots Alliance Inc., became the target of the legal claims after Theranos said in April that federal prosecutors and the U.S. Securities and Exchange Commission were investigating whether it misled consumers about the validity of the tests. In January, U.S. regulators released a letter to the company saying that conditions at Theranos’s lab in Newark, California, posed “immediate jeopardy to patient health and safety.” Then, in May, Theranos said it was voiding or correcting data from thousands of test results. Walgreens terminated its partnership with Theranos in June, and shut down testing sites in the pharmacy chain’s Arizona stores. Michael Polzin, a spokesman for Walgreens, declined to comment. As the number of suits against Theranos grows, Holmes and the other executives may consider filing for Chapter 11 bankruptcy protection for the company to deal with the claims, said Hank Greely, a Stanford law professor who teaches about health law and biomedical technologies.
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Life Care Centers of America Inc and its owner Forrest Preston agreed to pay $145 million to resolve federal lawsuits accusing one of the largest privately held U.S. nursing home chains of Medicare fraud, the U.S. Department of Justice said on Monday. The accord with the Cleveland, Tennessee-based company is the Justice Department’s largest with a skilled nursing facility chain, according to Benjamin Mizer, who heads the department’s civil division. As part of the settlement resolving claims under the federal False Claims Act, Life Care also entered a five-year corporate integrity agreement requiring independent annual reviews of its Medicare billings, the department said. Life Care owns and operates more than 220 skilled nursing facilities nationwide, it added. A spokesman for Life Care had no immediate comment. The settlement resolves allegations that from January 2006 to February 2013, Life Care submitted false claims to Medicare and Tricare, which serves military personnel, for rehabilitation therapy services that were not reasonable, necessary or skilled. Life Care was accused of systematically trying to qualify more patients for “ultra high” reimbursements for the longest possible periods, regardless of their medical needs. By 2008, for example, Life Care billed Medicare nearly 68 percent of therapy days at the “ultra high” level, nearly twice the 35 percent industry average that year, court papers show. Medicare paid Life Care more than $4.2 billion from 2006 to 2011 for inpatient services at its facilities, the papers show. The settlement resolves whistleblower lawsuits by two former Life Care employees, nurse Glenda Martin and occupational therapist Tammie Taylor, and a government lawsuit accusing Preston of being unjustly enriched by the fraudulent scheme. False Claims Act cases let whistleblowers bring claims on behalf of the government and share in any rewards. The Justice Department said the whistleblower reward in the Life Care case will be $29 million.
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U.S. hospital chain Tenet Healthcare Corp and two of its Atlanta-area units will pay more than $513 million to resolve criminal charges and civil claims relating to a scheme to defraud the United States and pay kickbacks in exchange for patient referrals, the Justice Department said on Monday. Tenet had disclosed in August that it had reached an agreement in principle on the matter. Tenet shares fell 5 percent, or $1.26, to $21.40 in Monday trading. The scheme involved primarily undocumented, expectant mothers who were told at prenatal care clinics that Medicaid would cover their costs if they gave birth at one of the Tenet hospitals. The clinics received bribes and kickbacks from the hospitals and involved about 20,000 women who received Medicaid benefits, the Justice Department said. Tenet said in a statement that the conduct in the matter was “unacceptable” and that it has amended and expanding policies around referral source arrangements. Tenet subsidiaries Atlanta Medical Center Inc and North Fulton Medical Center Inc agreed to plead guilty to conspiracy to defraud the United States and to pay those healthcare kickbacks and bribes in plea agreements that remain subject to court approvals, the department said in a statement. Tenet agreed to pay $244 million to the federal government, $122 million to Georgia and $892,125 to South Carolina to resolve claims. Ralph Williams, a Georgia resident who filed a whistleblower suit against Tenet, will receive $84 million of the civil settlement.
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The Securities and Exchange Commission today announced that a Houston-based technology solutions company has agreed to pay a $2.5 million penalty to settle charges that it overstated profits in one of its business segments. Two then-executives at the company agreed to settle charges that they caused the violations to meet internal targets. The SEC’s order finds that after being pressured to improve the financial performance of the energy infrastructure segment at FMC Technologies, the segment’s controller Jeffrey Favret and a business unit controller Steven Croft artificially reduced the value of a liability the company recorded for employee paid time off. The improper adjustments overstated the segment’s pre-tax operating profits by $800,000 and enabled an internal target to be met for the first quarter of 2013. Without informing the company’s controller, Favret and Croft also corrected a $730,000 error recorded in 2012 that increased their segment’s operating results for first quarter 2013, yet they later signed management representation letters attesting there had been no out-of-period adjustments larger than $250,000 recorded during that period. “Companies must accurately report their financial performance without regard to internal targets. Favret and Croft manipulated results to create the impression that the business was performing better than reality,” said Stephanie Avakian, Deputy Director of the SEC’s Division of Enforcement. The SEC’s order also finds that Croft failed to comply with internal accounting controls when he directed that his business unit switch to a new accounting system without taking reasonable steps to ensure that errors would not arise as a result. Errors did occur that overstated the segment’s results in two quarterly periods in 2014. FMC Technologies also had another business unit that failed to properly account for employee paid time off, and the company improperly accounted for interest income associated with certain large intercompany loans, resulting in an $8 million out-of-period adjustment in 2014.
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The Securities and Exchange Commission today charged an energy services provider and four executives for their roles in an accounting fraud in which the company recognized revenue earlier than allowed in order to meet internal targets. Lime Energy Co. agreed to pay $1 million to settle the charges, and its four now-former executives also agreed to settlements. The SEC’s complaint alleges that Lime Energy improperly recognized $20 million in revenue from at least 2010 to 2012. Two then-executives in the company’s utilities division – vice president of operations Joaquin Alberto Dos Santos Almeida and director of operations Karan Raina – developed procedures to enable the company to recognize revenue on newly signed contracts based on documentation received before year-end 2010. But when documentation did not arrive in time, they allegedly went ahead and booked the revenue anyway. According to the SEC’s complaint, Almeida and Raina became even more aggressive in 2011 and 2012 as they further recognized revenue earlier than allowed by accounting principles as they faced increasing pressure to produce results. They eventually went so far as to direct internal accountants to book revenue on jobs that didn’t exist. The SEC further alleges that Lime Energy’s then-corporate controller Julianne M. Chandler accepted new accounting entries to book millions of dollars in additional 2011 revenue well after the year-end close. And in February 2012 when Lime Energy still needed $500,000 to meet its 2011 revenue target, the company’s then-executive vice president James G. Smith suddenly sent Chandler new entries that provided the company with even more additional revenue to improperly recognize. “Lime Energy and its then-executives engaged in a wide array of wrongdoing, including the improper reporting of a significant amount of fake revenue,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. “The desire to meet earnings or revenue targets cannot override corporate officers’ responsibilities to public shareholders to assure that the company’s accounting reflects financial reality.” The SEC’s complaint was filed in U.S. District Court for the Southern District of New York, and the settlements are subject to court approval. Smith agreed to pay a $50,000 penalty and be barred from serving as an officer or director of a public company for five years. Chandler agreed to a $25,000 penalty and a five-year officer-and-director bar. Almeida agreed to a permanent officer-and-director bar, and Raina agreed to a $50,000 penalty. They neither admitted nor denied the allegations.
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The Securities and Exchange Commission today announced that Credit Suisse AG has agreed to pay a $90 million penalty and admit wrongdoing to settle charges that it misrepresented how it determined a key performance metric of its wealth management business. A former executive agreed to settle charges that he was a cause of Credit Suisse’s violations. An SEC investigation found that Credit Suisse veered from its publicly disclosed methodology for determining net new assets (NNA), a metric valued by investors in financial institutions to measure success in attracting new business. Disclosures stated that Credit Suisse was individually assessing assets based on each client’s intentions and objectives. But Credit Suisse at times instead took an undisclosed results-driven approach to determining NNA in order to meet certain targets established by senior management. According to the SEC’s orders, Rolf Bögli, who served as chief operating officer of the firm’s private banking division, pressured employees to classify certain high net worth and ultra-high net worth client assets as NNA despite concerns raised by employees most knowledgeable about a particular client’s intent. “Credit Suisse conveyed to the investing community that it followed a structured process for recognizing net new assets when, in fact, the process was reverse-engineered to meet targets,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “Credit Suisse’s failure to disclose this results-driven approach deprived investors of the opportunity to fairly judge the firm’s success in attracting new money.” The SEC’s orders find that Credit Suisse violated Section 17(a)(2) and (3) of the Securities Act of 1933 and Section 13(a) and (b)(2)(A) of the Securities Exchange Act of 1934 and Rules 13a-1, 13a-16, and 12b-20. Bögli neither admitted nor denied the SEC’s findings that he was a cause of certain Credit Suisse violations. Bögli agreed to pay an $80,000 penalty. The SEC’s investigation was conducted by Matthew R. Estabrook and David S. Karp and supervised by Scott W. Friestad and Laura B. Josephs. The SEC appreciates the assistance of the Swiss Financial Market Supervisory Authority.
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