Forensic News September 2015
Financial/Accounting Fraud
The DOJ Is Finally Conceding It Prosecutes Corporate Crime All Wrong
The most amazing thing about the Justice Department’s new guidelines on prosecution of corporate crime is that the DOJ is effectively acknowledging there was a big problem with how it did things before. In a memo released by the Deputy Attorney General, Sally Quillian Yates, the DOJ said it plans to focus on prosecuting the actual individuals who commit corporate crime, no matter how senior they may be within a company, rather than focusing only on civil cases against the companies themselves. “One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing,” the memo reads. This “deters future illegal activity, it incentivizes change in future corporate behavior, it ensures that the proper parties are held responsible for their actions, and it promotes the public’s confidence in our justice system.” These statements may seem glaringly obvious. But they represent a revolutionary cry on the part of the DOJ, which has spent the years since the 2008 financial crisis leveling billions of dollars in fines against banks around the world while charging almost zero actual bank executives with wrongdoing. Even in cases where financial institutions were forced to plead guilty to criminal charges, it seemed that no actual people were inside the companies who could be held responsible for breaking the law. In 2013, to name one example of many, JPMorgan Chase agreed to pay $13 billion to settle civil fraud charges relating to the sale of mortgage securities leading into the financial crisis. The fine amounted to more than half of the bank’s profit for the prior year, and the burden of paying it fell mainly to the bank’s shareholders, rather than on traders or mortgage specialists, or their bosses, or their bosses’ bosses, who apparently perpetrated the supposed fraud or ignored signs that it was happening. After several years of harsh criticism about the way the DOJ was handling financial cases, former Attorney General Eric Holder seemed to respond by announcing in 2014 that “no company was too big to jail” and that his department wasn’t going to be timid about charging big important banks with criminal conduct. The only problem with that idea was that it is difficult, if not impossible, to put a company in prison. To that end, the DOJ will require that companies under investigation provide names of individual wrongdoers to get credit for cooperating. The public has become hardened and cynical, and the Justice Department will have to show through its actions that it plans to do things differently. The statute of limitations has run out on the majority of the most egregious cases stemming from the financial crisis, but there is always more to do.
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Putting a Price on Volkswagen’s Emission-Fraud Mess
An $18 billion liability figure attached itself to Volkswagen’s diesel disaster. Media outlets have reported that the German carmaker has set aside $7.3 billion (€6.5 billion) to cover a scandal spreading worldwide. Volkswagen has apologized for selling hundreds of thousands of diesel cars in the U.S. with software specifically designed to evade government pollution tests. As regulators in multiple countries have weighed in to say they would also investigate VW imports, the company disclosed that the irregularities on diesel-emission readings extend to some 11 million vehicles globally. The $18 billion liability figure reflects the maximum per-car clean-air penalty the Environmental Protection Agency could, in theory, assess. For those who like to see the math: Some 482,000 four-cylinder VW and Audi cars, sold in the U.S. since 2008, multiplied by $37,500 for each non-compliant vehicle. That’s the way a very angry American judge might calculate civil damages, if there were a trial. But there won’t be a trial. Volkswagen Chief Executive Officer Martin Winterkorn said that his company is “deeply sorry” for the emissions-cheating scandal and will do “everything necessary in order to reverse the damage this has caused.” Michael Horn, head of the brand in the U.S., elaborated at an ill-timed promotional event in New York. “Our company was dishonest with the EPA, and the California Air Resources Board, and with all of you,” Horn told reporters. Horn’s German words can also be translated as: We will settle this fiasco as rapidly as possible. In exchange for sending their lawyers promptly to the negotiation table, Volkswagen will probably get a significant discount from the EPA on the maximum statutory pollution penalty. Just how much of a discount, though, will turn in part on the criminal investigation. Prosecutors from the Justice Department’s Environment and Natural Resources Division will look for evidence of knowing fraud by VW engineers and executives. Since the company has admitted that it rigged diesel vehicles to pass lab tests, even though they emitted as much as 40 times the legal limit of pollutants on the road, it seems highly likely that investigators will find fraud.
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Former Kit Digital executives arrested on U.S. fraud charges
U.S. prosecutors announced charges against the former chief executive and chief financial officer of Kit Digital Inc for a scheme to deceive investors and regulators about the video technology provider’s financial health. Kaleil Isaza Tuzman, the former CEO, was arrested in Colombia on charges including securities and wire fraud contained in an indictment filed in federal court in Manhattan. Robin Smyth, Kit Digital’s former CFO, was arrested on charges including securities fraud, Manhattan U.S. Attorney Preet Bharara said in a statement. Prosecutors said that from 2008 to 2011, Tuzman, 43, oversaw a scheme with a hedge fund manager to manipulate Kit Digital’s stock in order to artificially inflate its share price and trading volume. The hedge fund manager was not identified. Prosecutors said Tuzman personally invested in the fund and arranged to have Kit Digital invest $1.15 million in it, turning the hedge fund into a vehicle by which the company invested in itself without disclosing that fact to shareholders. Tuzman, working with Smyth, meanwhile from 2010 to 2012 sought to deceive Kit Digital’s investors and auditors into believing the company was more profitable than it was in reality, prosecutors said. That scheme involved the improper recognition of revenue for “perpetual license” contracts for software and the execution of fraudulent round-trip transactions, prosecutors said. Bharara’s statement said the scheme’s aim was to “mislead investors and regulators about the financial health of the publicly traded company they oversaw.” After Tuzman and Smyth resigned in 2012, the company announced it would restate financial results going back to 2009.
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Dewey executives innocent of fraud in law firm’s collapse, defense says
The collapse of Dewey & LeBoeuf, once one of the biggest U.S. law firms, was due not to fraud by top executives but defections by its highest-earning partners, defense lawyers told jurors at the close of a criminal trial in New York. Former Chairman Steven Davis, who helped build Dewey into a 1,000-lawyer firm before it went bankrupt in 2012 under a crushing debt burden, had no reason to believe the firm’s books was false in any way, lawyer Elkan Abramowitz said in state court. “Let me be as clear as I can: Dewey & LeBoeuf’s bankruptcy did not occur because of any alleged criminal conduct committed by Steven Davis,” Abramowitz said. Along with former executive director Stephen DiCarmine and former chief financial officer Joel Sanders, Davis faces dozens of counts including grand larceny, fraud and falsifying records. The most serious charge carries up to 25 years in prison. Over nearly four months of testimony, the office of Manhattan District Attorney Cyrus Vance has argued the three men directed subordinates to conceal the firm’s teetering finances from lenders like Bank of America Corp and Citigroup Inc through false accounting adjustments from 2008 to 2012. Dewey’s bankruptcy was the largest in history for a U.S. law firm. But Abramowitz laid the blame at the feet of a handful of partners who fled the firm out of “greed and anger” as the financial crisis took its toll on revenue. As more lawyers abandoned the firm, taking clients with them, Dewey was left unable to climb out of the hole. Austin Campriello, DiCarmine’s lawyer, began his summation and also blamed Dewey’s collapse on the “treacherous” abandonment by high-earning partners, saying they “ripped the heart out of the firm.” Throughout the trial, Abramowitz and Campriello have emphasized the lack of evidence against their clients. The star prosecution witness, former finance director Frank Canellas, conceded he did not recall discussing any false accounting changes with Davis, Abramowitz said. Canellas pleaded guilty and agreed to cooperate with authorities.
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Tens of thousands rally in Moldova against $1 bln bank fraud
Tens of thousands of Moldovans rallied in the heart of the capital Chisinau in the biggest street protests in memory, demanding the resignation of the president and early elections over a $1 billion bank fraud that has hit living standards. The protesters streamed into the capital from all regions of the small, largely rural, ex-Soviet state in answer to an appeal by a new mass organisation called “Da!” to demonstrate in a central square outside the main government building. Police put their numbers at between 35,000 and 40,000 – bigger even than mass anti-communist protests of April 2009 – though the organisers put their estimates at three times as many. In an egregious scam that has exposed endemic corruption and highlighted the power of oligarch groups in the country of 3.5 million, $1 billion has disappeared from the banking system – roughly one eighth of Moldova’s gross domestic output. The fraud has caused a rapid depreciation in the national currency, the leu, stoking inflation and hurting living standards. It has also tarnished the image of the pro-Europe ruling class for ordinary Moldovans, many of whom struggle by on a family income of about $300 a month, though many protesters carried pro-EU flags indicating they were not against the country’s policy of European integration. Protesters, who directed much of their verbal fire at the country’s super-wealthy oligarchs who control key sectors of the economy, threatened to stage a non-stop demonstration in central Chisinau until their demands were met. EU and other Western officials based in Chisinau say that successive pro-Western governments have done little to halt gross economic mismanagement and stamp out widespread corruption in the political system. The banking scam has also shaken the confidence of Western allies and international lenders which help keep Moldova’s economy afloat and EU budgetary support for the country has been put on hold until the affair has been cleared up. One Prime Minister, Chiril Gaburici, resigned earlier this year in a bizarre row over the validity of his school diplomas that was linked to the banking scam. The mass rallies will be a setback for Valeriu Strelet, whose appointment in July to succeed Gaburici opened the door to renewed dealings with international lenders including the IMF.
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Criminal investigators hired by charities as pressure mounts over fraud
Rising mistrust of international charities and a public push for greater transparency on spending in corruption-prone crisis zones are compelling some non-government organizations (NGOs) to hire a new recruit – the criminal investigator. In a bid to prevent as well as report fraudulent activity, Plan International, Oxfam GB, Americares and International Medical Corps are among those to have appointed trained counter-fraud directors at their head offices. Others, such as Medicins Sans Frontieres, Handicap International and Action Against Hunger use auditors and finance officers to handle cases of fraud. The growing trend to hire criminal investigators comes after the NGO sector has doubled in size in the past decade with a Thomson Reuters Foundation survey finding 50 of the world’s biggest humanitarian NGOs spent $18 billion in 2013–14. This rapid growth has fueled concerns over a lack of accountability with the annual Edelman Trust Barometer finding NGOs were the most trusted of four institutions but trust slipped in the past year with a perception they had become too money focused. One forensic expert said the lack of experienced investigators can be a barrier to financial probity as NGOs faced a unique set of issues such as ghost employees, fictitious invoices, kickback arrangements and “double-dipping to get funds from more than one donor for a project. “External auditors, unlike [counter-fraud] officers, are not necessarily looking for evidence of fictitious receipts or inappropriate spending in the field,” said Matthias Kiener, Zurich-based forensic officer with the consultancy, KPMG. “Sometimes the due diligence is not done. That might be because many charities are founded on the principle of trust. An NGO might be reluctant to ask tough questions of some of those it employs,” said Kiener, whose clients include large humanitarian organizations. In July a Thomson Reuters Foundation survey revealed a third of humanitarian NGOs with budgets greater than $150 million were not prepared to reveal their annual fraud figures. Others, such as BRAC, Direct Relief, Americares, Oxfam US and Sightsavers all said they had not experienced any fraud greater than $10,000 in the last five years. But critics question the rationale in not reporting fraud data, speculating that it could be an indication of under detection and less effective management. Oliver May, Oxfam GB’s head of counter-fraud and a former UK organized crime investigator, said NGOs were reluctant to share fraud data, partly for fear of jeopardizing donations, but an increase in NGO fraud reporting would be a welcome change. Oxfam GB said it lost 0.16 percent of its income to fraud and corruption in 2014–15, although some was recovered.
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U.S. charges ex-Nomura mortgage bond traders for defrauding investors
U.S. prosecutors charged three former traders at Nomura Holdings Inc with misleading investors by lying about mortgage bond prices after the financial crisis. Ross Shapiro, Michael Gramins, and Tyler Peters, who had worked for Nomura since 2009, were charged in an indictment filed in federal court in New Haven, Connecticut, with counts including securities and wire fraud. “This indictment alleges that, for several years, these three defendants handsomely profited by repeatedly lying to Nomura’s customers in violation of federal law,” Connecticut U.S. Attorney Deirdre Daly said in a statement. The case marked the latest in a series of enforcement actions by federal prosecutors in Connecticut against traders accused of cheating their customers on prices of mortgage-backed securities. A U.S. appeals court is weighing whether to reverse the 2014 conviction in a similar case of former Jefferies Group Inc managing director Jesse Litvak, who was sentenced to two years in prison. A former Royal Bank of Scotland Group Plc trader, Matthew Katke, meanwhile, pleaded guilty in March and agreed to cooperate with authorities. In the Nomura case, authorities said that Shapiro, Gramins and Peters conspired to defraud customers to generate millions of dollars in additional revenue for the bank. Prosecutors said the trio fraudulently inflated and deflated the prices at which Nomura could buy or sell mortgage bonds to induce customers to either pay higher prices or sell them for cheaper. The indictment said the three men trained their subordinates to lie to customers and created fake third parties to increase their profits. The U.S. Securities and Exchange Commission filed a related civil lawsuit in Manhattan against the three men. Daly said in a statement that her office’s investigation into “corrupt practices in the mortgage bond market continues.
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Amid post-Katrina generosity came $1.4B in fraud
Hurricane Katrina brought out the best in people, with volunteers and donations pouring in to help. But it also brought out the worst—scammers, cheats and fly-by-night contractors with their hands on some of the billions of relief and insurance dollars. Greed appeared to overcome common sense for many. Over the last 10 years, mayors, county officials, FEMA officials, police officers—at least one police chief—pastors, prison inmates, and people from Alabama to Hawaii have been busted for what would become synonymous with the storm: Katrina fraud. Money intended for victims paid for tattoos, massages, yachts, an engagement ring, a $200 bottle of Dom Perignon at a Hooters, a divorce attorney, strippers, gambling, hotel rooms for $438 a night in New York City and extended stays in Hawaii. More than 1,170 state and federal inmates received assistance payments of more than $10 million. The U.S. Department of Justice said it had charged 1,439 people through 2011 in cases nationwide related to Hurricanes Katrina and Rita. The U.S. attorney’s office in Mississippi has prosecuted 336 cases through this year, and Mississippi Attorney General Jim Hood said his office has prosecuted nearly 100 cases, mostly repair fraud, price gouging and scams. A Mississippi Katrina Fraud Unit led by the state auditor investigated more than 2,000 reports and has “closed” 619 cases, with four remaining open. These cases resulted in 68 indictments, 54 guilty pleas and five guilty verdicts. There have been high-profile convictions: former Gulfport Mayor Brent Warr, former New Orleans Mayor Ray Nagin, former Lumberton Police Chief Maurice Hammond and former Hancock County Road Manager Roger Ladner. The GAO has estimated up to $1.4 billion of the initial $7 billion FEMA provided in Katrina assistance was lost to fraud. As of last year, GAO reported only $60 million had been recovered. Industry estimates as much as $6 billion in private insurance fraud for about $40 billion paid in claims. And while the American Red Cross hasn’t provided a clear estimate of losses for $2 billion in Katrina donations it collected, fraud appeared to be rampant in early efforts. Overwhelmed by more than 16,000 calls a day, ARC handed out payments of $360 to individuals, and $1,500 to families, requiring only a name, address and date of birth. There were even reports of ARC workers having friends or family make false claims. Rental cars and generators disappeared as did 3,000 of 9,000 donated air mattresses. Some fraud is expected with disaster. But as with most other systems, Katrina overwhelmed the safeguards for agencies, charities and insurance. Loose oversight initially also meant thousands of undeserving folks collected, while those most devastated lacked the means to apply. Conversely, oversight and red tape later meant deserving victims faced hurdles and long waits. Mississippi kept a tighter reign on the money over which it had authority, particularly $5.4 billion in CDBG money for a homeowner bailout and other longer-term projects. Fraud, waste and abuse loss was estimated at half a percent. Federal officials have praised the state’s work, and other states have since consulted with Mississippi. The state auditor’s office led in the creation of the state Katrina Fraud Unit, which included a partnership with the FBI, HUD and Homeland Security inspectors general, the U.S. attorney’s office and others. It set up office in Hattiesburg in early 2006, and is winding down its work this summer, with only four investigations remaining open. State Auditor Stacey Pickering, who took office in 2008, said much of the unit’s work has been overseeing local governments’ debris cleanup spending and a multibillion-dollar federal homeowner bailout. Katrina fraud prevention and investigation work has become a national model, lauded by the GAO.
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New Mexico’s prosecutor charges state official with embezzlement
New Mexico’s Democratic attorney general filed a 64-count criminal case against Republican Secretary of State Dianna Duran, accusing her of embezzlement, money-laundering, campaign finance violations and other offenses, his office said. A spokesman for Attorney General Hector Balderas said in a statement his office would provide evidence to support the allegations through a preliminary hearing. Spokesman James Hallinan declined to release further information. Duran’s attorney, Erlinda Johnson, told the Albuquerque Journal newspaper in a statement they had just received the complaint and were reviewing it. “We ask the public not to jump to conclusions, and we look forward to addressing the allegations in court,” Johnson said, according to the newspaper. The complaint said Duran misused campaign contributions for personal expenses, adding that the investigation was sparked by a tip that she deposited large amounts of money into her personal bank account that did not line up with her known income streams. The complaint said funds were then transferred between her personal and campaign-affiliated accounts, culminating in “large debits for cash expenditures occurring at casinos throughout the state of New Mexico.” The complaint said more than $430,000 was withdrawn from Duran’s bank accounts from eight casinos between 2013 and 2014, roughly as much as she reported on her joint tax returns from 2010 to 2013 combined. In addition to embezzlement, money laundering and violations of the state’s Campaign Practice Act, the complaint includes charges of fraud, conspiracy, tampering with public records and government misconduct. The criminal case marks an escalation of tensions between Balderas and Duran over the reporting and enforcement of state campaign finance laws. In February, the two announced a joint task force to study the issue, but Duran accused Balderas months later of submitting three late campaign finance reports.
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India probing Kingfisher Airlines over alleged financial irregularities
India’s financial fraud investigating agency has sought information from drinks company United Spirits Ltd in connection with a probe into former group firm Kingfisher Airlines Ltd over alleged diversion of funds. The agency is looking into alleged financial irregularities from 2005, when liquor baron Vijay Mallya’s UB Group controlled both companies. United Spirits, India’s largest spirits company and now controlled by Britain’s Diageo, said in a statement to the Bombay Stock Exchange that it was cooperating with the investigating authority, the Serious Fraud Investigation Office (SFIO), in a probe of Kingfisher Airlines and was providing the required information. Kingfisher has not flown since 2012 due to a lack of cash. The airline owes about $1.5 billion to lenders. An auditor’s inquiry into United Spirits’ financial accounts, conducted after Diageo took control, showed that between 2010 and 2013, funds were allegedly diverted illegally from the company to some of Mallya’s group firms, including Kingfisher. As a result, the board of United Spirits, under the new Diageo management, began a procedure in April to remove Mallya from his position as chairman. “The SFIO noted that the company (United Spirits) had conducted an inquiry wherein possible fund diversions were identified, and requested some information from the company in relation to that,” United Spirits said in the statement.
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Foreign Corrupt Practices Act (FCPA)
FBI raids Palm Springs city hall in corruption probe
An estimated 75 federal and state investigators effectively shut down City Hall to serve search warrants as part of a public corruption inquiry. Investigators also intermittently knocked at an apartment that Mayor Steve Pougnet listed as his home address in county voter registration records. Pougnet lives part of the year with his husband and two children in Colorado, and part in California. Later, the agents met with Pougnet and seized items in his possession that had been included in a City Hall warrant, according to FBI spokeswoman Laura Eimiller. Eimiller said the warrants are sealed so she can’t comment on their nature. She said the investigation is part of an Inland Empire public corruption task force that also involves the San Bernardino District Attorney’s Office and the Internal Revenue Service. The agents began serving the warrants at various locations inside Palm Springs City Hall. The raid comes roughly three months after the Fair Political Practices Commission announced it was investigating a vote by Mayor Steve Pougnet that awarded the sale of city property at a questionable price to developer Richard Meaney and his partner. The FPPC began investigating after The Desert Sun published a series of stories linking the mayor to more than $200,000 in consulting work to Union Abbey, a company owned by Meaney. At the time the company’s business license had been suspended by the State of California for five years. California was seeking more than $47,000 in unpaid taxes from Union Abbey when Pougnet began working for the company. When The Desert Sun first asked Pougnet about the consulting contract, he said it was only for development work outside of Palm Springs. He later changed his story and said Union Abbey paid him to explain the city’s economic development plans. In December, Pougnet participated in a City Council vote selling a plot of land on North Palm Canyon Drive to Meaney and an investor named Yokang Zhou. Six months later, after a reporter questioned Pougnet about the vote, the mayor said he’d made a mistake. The City Council later voted to rescind the land sale to Meaney and Zhou. A Desert Sun analysis found that the city set a price for the land it sold to Meaney without an appraisal and by comparing it to land sales outside Palm Springs. Meaney and Zhou purchased the property for $195,561 not long after purchasing a similar adjacent lot from a private owner for $1 million.
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Almost $20 billion in dirty money left Myanmar in five decades
Almost $20 billion in dirty money linked to corruption, crime and tax evasion has left Myanmar in the past five decades, slashing government revenue and driving a thriving underground economy, a money-laundering watchdog said. Fraudulent invoicing of trade deals and physical smuggling of drugs, timber, gems and other goods pose big challenges to Myanmar, which will hold its first general elections next month since the end of military rule, U.S.-based Global Financial Integrity said in a report. Illicit financial inflows have accelerated in the past few years as the economy has opened up, and over the past five decades were four times as big as outflows, it said. “Myanmar must be one of the most porous countries in the world,” GFI economist Joseph Spanjers, the report’s co-author, told the Thomson Reuters Foundation. “It is a serious challenge for the country as tax losses due to illicit flows are robbing it of crucial public funds.” Long isolation and trade restrictions during the nearly 50-year-long reign of a military government until 2011 and attempts to regulate currency exchange rates have combined to drive a substantial part of Myanmar’s economy underground, GFI said. The Southeast Asian country, one of the poorest in the region, is not alone in grappling with the negative impacts of illicit financial flows. GFI estimates almost $1 trillion in dirty money leaves poor nations each year, an outflow that has grabbed the attention of anti-poverty groups and world leaders because, by cutting tax revenue needed to fund areas such as health and education, it has a corrosive impact on development. Illicit financial flows from Myanmar totalled $18.7 billion from 1960 to 2013, averaging 6.5 percent of the country’s annual economic output, GFI said. In the same period $77.7 billion of illicit money enteredMyanmar, an inflow typical of countries where smuggling is a major part of the economy. Total illicit financial flows were the equivalent of up to 172 percent of health expenditure and up to 73 percent of education spending, the researchers found, showing how both movements of money deprive the government of crucial tax revenue. Myanmar’s tax collection rates are among the lowest in the world at 7 percent of economic output.
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United Ousts CEO Smisek Amid Corruption Probe at Port Authority
United Continental Holdings Inc. ousted Chief Executive Officer Jeff Smisek and two of his lieutenants while federal investigators probe the airline’s ties to the former chairman of the Port Authority of New York & New Jersey. Smisek’s abrupt exit added a dramatic new element to the inquiry by U.S. prosecutors into whether ex-Port Authority chief David Samson got the carrier to restart a money-losing route to his weekend home in South Carolina in exchange for political favors. United dropped that service, once known as “the chairman’s flight,” days after Samson left the agency in 2014. Samson’s apparent request for the New Jersey-to-South Carolina flight, at a dinner with Smisek at a Manhattan Italian restaurant, was the subject of an April story by Bloomberg News. Also attending that dinner, Bloomberg reported at the time, were the two other United officials: Nene Foxhall, executive vice president of communications and government affairs, and Mark R. Anderson, senior vice president of communications and government affairs. United agreed to add the flight to Columbia, South Carolina, from the airline’s Newark hub after Samson twice threatened to block Port Authority consideration of one or more of the airline’s favored projects, according to details gleaned from Port Authority records, people involved in talks between United and the authority, and others close to the investigation. Smisek is eligible for separation payments worth at least $28.6 million, according to data compiled by Bloomberg from the company’s statement and regulatory filings. That includes a $4.88 million cash severance and restricted shares that will vest early, worth $3.5 million. It also includes performance-based awards worth $19.5 million at the company’s December 31 fiscal year-end. He’s eligible to receive a pro-rated portion of his annual incentive award, which paid out $2.34 million to him last year. He’ll receive perks including flight benefits, tax reimbursements on those benefits, and parking privileges for the remainder of his life, in addition to the title to his company vehicle, according to the statement.
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U.S. pressed Guatemala’s Perez to back corruption probes that toppled him
In a series of meetings that began early this year, the U.S. government pressured Guatemala’s then-President Otto Perez to rid his administration of corrupt officials and to renew the mandate of a U.N. Commission charged with investigating corruption in Guatemala, according to officials with direct knowledge of the talks. In April, Perez reluctantly approved the continued operation of the Commission against Impunity in Guatemala (CICIG), and in May he fired key members of his cabinet and accepted the resignation of his vice president. The meetings between Perez and U.S. officials, including U.S Ambassador Todd Robinson, took place as Guatemala and other Central American nations were seeking $20 billion in U.S. aid, as part of a so-called “Alliance for Prosperity,” two sources with direct knowledge of the meetings said, and the U.S. used the lure of that aid to push Perez to act. The Guatemalan president was a vocal proponent of the proposed assistance plan, which was conceived in 2014 as a way to stimulate regional growth and help stem a burgeoning exodus of Central American migrants fleeing violence at home. The United States had a strong interest in insuring that any aid it provided would not be diverted to corrupt officials. “The United States insisted that the government renew CICIG’s mandate, and they said that the Alliance For Prosperity depended on it,” said one of the officials with direct knowledge of the discussions. During talks with Perez, the U.S. ambassador explicitly urged him “to get Vice President (Roxana) Baldetti to resign” and “to rid his cabinet of those linked to corruption, but to do it in a staggered way to avoid an image of a collapsing government,” the official added. In the months since Perez renewed CICIG’s mandate, the group’s probes have brought down a number of high-ranking officials, including the central bank president. Perez’s own resignation came after CICIG’s commissioner and Guatemala’s attorney general publicly accused the president of directing a multi-million dollar customs fraud scheme known as ‘La Linea’ or ‘the line’, in which importers paid bribes to avoid customs duties. Guatemalan prosecutors working with CICIG said they expect to charge the former president with illicit association, accepting bribes and customs fraud. “We found that in the whole organization ... there was an upper level with the regrettable participation of the president and Baldetti,” said Ivan Velasquez, commissioner of CICIG. As pressure on him grew, Perez lambasted CICIG and also took a swipe at unidentified sectors of the international community for “seeking to intervene” in Guatemalan democracy.
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Russian Nuclear Energy Official Pleads Guilty to Money Laundering Conspiracy Involving Violations of the Foreign Corrupt Practices Act
A Russian official residing in Maryland pleaded guilty to conspiracy to commit money laundering in connection with his role in arranging over $2 million in corrupt payments to influence the awarding of contracts with the Russian state-owned nuclear energy corporation. Vadim Mikerin, 56, of Chevy Chase, Maryland, pleaded guilty before U.S. District Judge Theodore D. Chuang of the District of Maryland. Sentencing is scheduled before Judge Chuang on Dec. 8, 2015. According to court documents, Mikerin was the president of TENAM Corporation and a director of the Pan American Department of JSC Techsnabexport (TENEX). TENAM, based in Bethesda, Maryland, is a wholly-owned subsidiary and the official representative of TENEX in the United States. TENEX, based in Moscow, acts as the sole supplier and exporter of Russian Federation uranium and uranium enrichment services to nuclear power companies worldwide. TENEX is a subsidiary of Russia’s State Atomic Energy Corporation. In connection with the scheme, Daren Condrey, 50, of Glenwood, Maryland, pleaded guilty on June 17, 2015, to conspiring to violate the Foreign Corrupt Practices Act (FCPA) and conspiring to commit wire fraud, and will be sentenced on Nov. 2, 2015. Boris Rubizhevsky, 64, of Closter, New Jersey, pleaded guilty on June 15, 2015, to conspiracy to commit money laundering and will be sentenced on Oct. 19, 2015. According to court documents, between 2004 and October 2014, Mikerin conspired with Condrey, Rubizhevsky and others to transmit funds from Maryland and elsewhere in the United States to offshore shell company bank accounts located in Cyprus, Latvia and Switzerland. Mikerin admitted the funds were transmitted with the intent to promote a corrupt payment scheme that violated the FCPA. Specifically, he admitted that the corrupt payments were made by conspirators to influence Mikerin and to secure improper business advantages for U.S. companies that did business with TENEX. Mikerin further admitted that he and others used consulting agreements and code words such as “lucky figure,” “LF,” “cake” and “remuneration” to disguise the corrupt payments. According to court documents, over the course of the scheme, Mikerin conspired with Condrey, Rubizhevsky and others to transfer approximately $2,126,622 from the United States to offshore shell company bank accounts. As part of his plea agreement, Mikerin has agreed to the entry of a forfeiture money judgment in that amount.
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Litigation Matters
Dole CEO, Ex-President Must Pay $148 Million Over Buyout
Dole Food Co. Chief Executive Officer David Murdock and a former executive of the fresh-fruit producer were ordered to pay $148.1 million over allegations they drove down the value of the company so Murdock could take it private on the cheap in a $1.2 billion deal. Murdock received an “improper personal benefit” from the deal, in which he paid $13.50 a share to regain control of one of the world’s largest sellers of fresh fruit and vegetables, Delaware Chancery Court Judge Travis Laster ruled. The judge also found Michael Carter, Dole’s ex-president and chief counsel, should be held personally liable for investors losses on the buyout. The two executives’ actions “deprived shareholders of the ability to consider the merger on a fully informed basis,” the judge ruled. Laster also cleared officials at Deutsche Bank AG, who advised Murdock on the deal, of wrongdoing in connection with the buyout. Morgan Evans, a Dole spokeswoman, said that the company didn’t have any comment on Laster’s ruling. Murdock has a net worth of $2.9 billion, according to the Bloomberg Billionaires Index. The billionaire announced last year he would donate $15 million annually to a North Carolina-based research facility he founded that focuses on nutritional health. Murdock, Dole’s CEO from 1985 to 2007, returned to the role in 2013. He took the company private once before, in 2003, and then sold 60 percent to the public in 2009. The 91-year-old Murdock, who has vowed to live to 125, testified in February at trial that unhappy investors were unfairly painting him “as a skunk” and that he didn’t engineer the deal to enrich himself. “Dole stockholders are pleased with the judge’s decision to rein in what a controlling shareholder like Mr. Murdock can do in a management-led buyout,” Stuart Grant, an attorney for investors who sued over the deal, said in an interview. Shareholders accused Murdock of conspiring with Carter and Deutsche bankers to drive down the value of the food company so he could buy the 60 percent of Dole he didn’t already own. That would allow him to take the company private for the second time in his career. While Laster cleared Deutsche officials of acting improperly as part of the deal, he found Murdock and Carter engaged in disinformation campaign to convince directors that Dole wasn’t worth more. Murdock didn’t disclose to directors that he’d talked to Deutsche bankers for more than a year about a management-led buyout before he made an offer, the judge noted. Prior to Murdock’s bid, Carter canceled a stock buy-back program, which hurt the value of Dole shares, Laster said. The executive, whom the judge described as Murdock’s “right-hand man,” also provided low-ball projections to directors about the company’s value.
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Trader accused in $100 million hacking scheme pleads not guilty in U.S.
A man charged over his alleged role in a more than $100 million insider trading scheme that involved hacking into networks that distribute corporate news releases pleaded not guilty. Arkadiy Dubovoy, who spoke Russian and used an interpreter, entered his plea to securities fraud, wire fraud and conspiracy charges in a brief appearance before U.S. District Judge Madeline Cox Arleo in Newark, New Jersey. A Nov. 4 trial date was set. Dubovoy’s son, Igor, appeared separately on related charges before U.S. Magistrate Judge Cathy Waldor, also in Newark, and is expected to enter a formal plea. Michael Critchley, a lawyer for Arkadiy Dubovoy, declined to comment. Lawrence Lustberg, a lawyer for Igor Dubovoy, said he hopes within a few days to conclude talks that would allow his client to be released on bail. The Dubovoys were among 32 defendants, including traders and hackers, charged last month by U.S. authorities over an alleged five-year scheme to steal more than 150,000 press releases from Business Wire, Marketwired and PR Newswire before the news became public. Nine of the defendants were criminally charged, including seven who prosecutors said were traders and two who were said to be hackers. The Dubovoys were two of the traders. Five of the nine were arrested in the United States, and four were at large in Ukraine. Prosecutors said traders gave hackers “shopping lists” of press releases they wanted to peek at in advance and then executed trades before more than 800 of the stolen releases were made public. Arkadiy Dubovoy was among the more successful traders, accounting for more than $11 million of illegal profit through trades in companies such as Align Technology Inc and Caterpillar Inc, prosecutors said. Another trader, Morgan Stanley alumnus and hedge fund manager Vitaly Korchevsky, made more than $17 million of illegal profit, prosecutors said. A federal judge in Brooklyn, New York, on Aug. 26 ordered Korchevsky’s release on $2 million bond. Igor Dubovoy had last week been unable to post a $3 million bond set by a federal judge in Atlanta. Prosecutors said the Dubovoys are from Alpharetta, Georgia, an Atlanta suburb.
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Wilmington Trust fraud lawsuit is now a class action
Former Wilmington Trust Co shareholders may pursue their securities fraud lawsuit over mounting loan losses that led to the company’s discounted sale to M&T Bank Corp as a class action, a Delaware federal judge ruled. U.S. District Judge Sue Robinson in Wilmington agreed with the plaintiffs that there is a common means to calculate damages from Wilmington’s alleged concealing of several hundred million dollars worth of troubled construction loans and commercial mortgages in 2009 and 2010. Class actions let plaintiffs sue as a group, and can lead to larger recoveries and lower costs than individual lawsuits. Mounting loan losses led to Wilmington’s Nov. 1, 2010 agreement to sell itself to Buffalo, New York-based M&T Bank Corp at a 46 percent discount to its market value, ending more than a century in business. Several pension funds are leading the Wilmington lawsuit, which covers shareholders from Jan. 18, 2008 to Nov. 1, 2010. Thomas Allingham, a lawyer representing Wilmington and several individual defendants including former Chief Executive Ted Cecala and President Robert Harra, declined to comment. M&T spokesman Michael Zabel also declined to comment. Four former Wilmington executives, including Harra, were criminally charged on Aug. 5 with lying to regulators about the health of the bank’s loans. Harra pleaded not guilty on Aug. 20. Cecala has not been criminally charged. Wilmington last September agreed to pay $18.5 million to settle U.S. Securities and Exchange Commission civil charges that it concealed delinquent loans and did not set aside enough money for loan losses.
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Credit Suisse Ordered to Pay Highland Capital $287.5 Million
Credit Suisse Group AG was ordered by a Texas judge to pay Highland Capital Management LP $287.5 million for losses on a $540 million refinancing of a shaky real estate development. Highland had sought $377 million in damages in one of two disputes with the bank over failed luxury developments in the American West. Highland’s Claymore Holdings LLC accused Credit Suisse of providing an inflated appraisal for a loan for Lake Las Vegas, a 3,592-acre residential and resort community in Henderson, Nevada. The resort, 17 miles (27 kilometers) east of the Las Vegas Strip, went bankrupt in 2008. Echoing arguments in other fights that arose after the 2008 financial crisis, Credit Suisse countered that Highland’s losses on $250 million in debt it acquired resulted from the real estate crash and not its appraisal. The ruling by state court Judge Dale Tillery in Dallas follows a jury’s December verdict awarding Highland $40 million on its claim that Credit Suisse used a faulty appraisal to dupe it into investing. Tillery began a nonjury trial May 27 on Highland’s claims that Credit Suisse broke a contract by providing a flawed appraisal. Tillery didn’t issue an opinion explaining in any detail why he ruled in favor of Highland. Tillery said he took earlier settlements into account, deducting them before reaching the $211.9 million damages award, plus interest. The $40 million jury award won’t be added to the judgment. The lawsuit is one of multiple legal disputes between Highland and Credit Suisse. Two other Highland entities sued the bank in New York state court claiming it marketed loans for the luxury Yellowstone Club resort in Montana and other developments based on fraudulent appraisals. A New York judge dismissed much of that lawsuit. Those units, Highland’s Allenby LLC and Haygood LLC, filed a separate action in state court in Dallas in May alleging breach of contract. Drew Benson, a Credit Suisse spokesman, said then that the new suit was a “frivolous attempt to revive failed arguments that were already rejected by a New York court.” That case remains pending in Dallas. In the Lake Las Vegas case, Highland, with $21.7 billion of assets under management, accused the bank of violating a contract by using a flawed appraisal that inflated the value of collateral backing loans for a refinancing in 2007.
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‘London Whale’ Testimony Sought in JPMorgan Shareholder Suit
A judge in Manhattan asked French authorities to order the former JPMorgan Chase & Co. trader known as the “London Whale” to testify in a lawsuit accusing the bank of misleading investors about its high-risk trading and losses. U.S. District Judge George B. Daniels signed a request that Bruno Iksil, a resident of France, be questioned in a seven-hour deposition in that country about the bank’s synthetic derivatives trading. Iksil’s huge trading bets lost $6.2 billion in 2012. The investors, led by a group of pension funds, claim the bank turned its chief investment office into a “secret hedge fund” that took speculative, high-risk bets rather than managing risk as the bank claimed to the public. In July, the U.K. Financial Conduct Authority abandoned efforts to pursue a fine of about 1 million pounds ($1.5 million) and an industry ban against Iksil. The former trader signed a non-prosecution agreement that prevents him from being charged by U.S. prosecutors in exchange for his cooperation. Iksil’s former boss, Javier Martin-Artajo, and a junior trader, Julien Grout, were indicted in the U.S. in 2013. Prosecutors alleged the pair committed securities fraud by hiding the true extent of the losses from bank management. Spain and France have rejected U.S. requests to extradite the two men. JPMorgan was fined more than $1 billion by U.S. and U.K. regulators in 2013 for management failings in the London Whale case. The scandal erased as much as $51 billion of shareholder value and led to the departure of four senior managers, including Chief Investment Officer Ina Drew.
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Interior, Justice Departments Announce $940 Million Landmark Settlement with Nationwide Class of Tribes and Tribal Entities
The U.S. Department of Justice and the U.S. Department of the Interior (Interior) announced a $940 million proposed settlement with a nationwide class of Native American Tribes and tribal entities that, if approved by the federal district court, would resolve a 25-year-old legal dispute related to contract support costs for tribal agencies. The proposed settlement would address claims that the United States contracted with tribes to run programs but did not pay the full amounts required by law. The proposed settlement, announced by Interior Secretary Jewell, Assistant Secretary for Indian Affairs Kevin Washburn and Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division, would address claims that the government contracted with tribes and tribal agencies to run Bureau of Indian Affairs (BIA) programs like law enforcement, forest management, fire suppression, road maintenance, housing, federal education and other support programs, but failed to appropriate sufficient funds to pay the costs under the agreements. Native American tribal agencies manage these programs under the Indian Self-Determination Act of 1975. The claims arose because of a mismatch between federal self-determination laws and available appropriations. While the federal government has signed contracts that provided for certain amounts to cover administrative costs of implementing contracts – such as workers’ compensation costs for tribal employees – Congress capped appropriated funds available to pay for these costs. This funding gap was one of the sources of the claims, which were raised in a class action lawsuit filed in 1990.
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China Market
China uncovers more accounting problems with Three Gorges Dam
Chinese government auditors have found more accounting problems with projects linked to the $59-billion Three Gorges dam, the world’s biggest hydropower scheme, following a critical report last year that revealed nepotism and other corrupt practices. The state audit office has conducted 21 inspections since construction began in 1992, uncovering issues such as embezzlement, but continues to find problems, it said in a statement. The National Audit Office found accounting problems amounting to almost 2 billion yuan in the final accounts for a 7.1-billion-yuan ($1.11 billion) underground hydroelectric plant, it said. These included 1.54 billion yuan from improper bidding and 337 million yuan in duplicate calculations, it said, adding that too much money had been spent on some equipment, while management oversight was lax. The Three Gorges Corporation, which runs the dam, is now “proactively organizing rectifications” having received the report, the auditor said, adding that it would watch developments. “China Three Gorges Corporation attaches a great degree of importance to the problems pointed out by the audit,” the company said in a statement on its web site. “At present all the problems pointed out by the audit have already been finished or rectified.” The dam has long been controversial. Between 1992 and 2009, all citizens had to pay a levy built into power prices across China to channel money towards its construction, a project overshadowed by compulsory relocations of residents and environmental concerns. Last year the ruling Communist Party’s anti-graft watchdog slammed the Three Gorges Corporation for shady property deals and dodgy bidding procedures. In 2011, then-premier Wen Jiabao presided over a government meeting that said that despite the benefits from the dam, it had spawned a myriad of urgent problems, from the relocation of more than a million residents to risks of geological disasters. In 2000, six years before the project was completed, authorities busted a ring of officials who had siphoned off hundreds of millions of yuan in resettlement funds.
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N.Y. financier charged with fraud in Chinese ‘reverse mergers’
U.S. authorities arrested the chief executive of a New York investment firm for engineering so-called Chinese “reverse mergers” and then manipulating stock prices to earn tens of millions of dollars in illegal profits. Benjamin Wey, the head of New York Global Group, was taken into custody at his Manhattan home and was expected in federal court later. The office of U.S. Attorney Preet Bharara in Manhattan charged Wey and his banker in Switzerland, Seref Dogan Erbek, with conspiracy, securities fraud, wire fraud and other crimes. Wey, 43, made tabloid headlines in June when a federal jury ordered him to pay $18 million to a former employee for sexual harassment and defamation. According to an indictment, Wey hid his control of U.S. companies traded over-the-counter by using family members and New York Global Group employees to obtain shares. He structured their stakes to ensure no single entity held more than 5 percent, which would have triggered mandatory disclosure to regulators, prosecutors said. Through a Beijing-based subsidiary of his firm, prosecutors said, Wey offered to help Chinese companies seeking to raise U.S. capital by arranging reverse mergers, in which the Chinese companies took control of the U.S. shell companies and then had them listed on Nasdaq. The U.S. companies were SmartHeat Inc, Deer Consumer Products Inc and CleanTech Innovations Inc, the indictment said. Wey also manipulated the stock prices by causing two brokers to solicit customers to buy shares while discouraging sales, the indictment alleged. In addition, Wey instructed Erbek, who directed trades for Wey’s relatives and other shareholders, to ensure the price remained high so he could later sell at a profit, prosecutors said.
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China central bank shuts down payment firm for fraud
China‘s central bank has shut down a payments firm specializing in prepaid cards for misusing customers’ money, forging documents and operating beyond its scope, the People’s Bank of China (PBOC) said in a posting on its web site. The PBOC said it revoked the license of Zhejiang Yi Shi Enterprise Management Services Co Ltd after discovering the fraudulent activity. The incident exposes the risks inherent in opening up payment services to non-bank institutions as China liberalizes its financial system and could lead authorities to tighten regulations. Some cards were unusable as a result of misappropriated funds at Yi Shi, which had held a payment business license since 2011, the PBOC said. The central bank directed the company to raise funds to ensure that cards could still be used and said customers and business partners could resolve any losses through the court system.
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Fraud, financial distress fuel Asian corporate blow-ups
Rising cases of accounting manipulation and financial distress caused by Asia’s economic downturn are driving record levels of corporate blow-ups in the region, according to a report by investment bank CLSA published. The level of value-destroying companies in Asia, defined as offering poor return on investors’ money, has risen to a record level of 38 percent, CLSA analysts said in the report, highlighting the rising risks posed to investors. High levels of insider share ownership, sometimes weak corporate disclosure rules and varying accounting standards all contribute to Asia’s rising levels of companies whose stocks can be suddenly wiped out, the report said. “In the current low-return environment, avoiding such accounting blow-ups overwhelms all other considerations,” CLSA said. CLSA analysed 100 cases of alleged accounting manipulation or bankrutpcy-related blow-ups to identify common factors that investors could use to try and avoid investment in similar companies. The report comes amid growing investor scrutiny of Chinese companies after months of market turmoil and renewed attention from short-sell research firms hoping to sniff out corporate fraud in Asia. The report also comes the week after ratings agency Moody’s fought a landmark appeal in Hong Kong against the city’s financial regulator over a similarly-titled July 2011 ‘Red Flags’ report that raised concerns about corporate governance at 49 Chinese companies.
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Healthcare Industry
Adventist Health System Agrees to Pay $115 Million to Settle False Claims Act Allegations
The Justice Department announced that Adventist Health System has agreed to pay the United States $115 million to settle allegations that it violated the False Claims Act by maintaining improper compensation arrangements with referring physicians and by miscoding claims. Adventist is a non-profit healthcare organization that operates hospitals and other health care facilities in 10 states. “Unlawful financial arrangements between heath care providers and their referral sources raise concerns about physician independence and objectivity,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. “Patients are entitled to be sure that the care they receive is based on their actual medical needs rather than the financial interests of their physician.” The settlement announced resolves allegations that Adventist submitted false claims to the Medicare and Medicaid programs for services rendered to patients referred by employed physicians who received bonuses based on a formula that improperly took into account the value of the physicians’ referrals to Adventist hospitals. Federal law restricts the financial relationships that hospitals and clinics may have with doctors who refer patients to them. The settlement also resolves allegations that Adventist submitted bills to Medicare for its employed physicians’ professional services containing certain improper coding modifiers, and thereby obtained greater reimbursement for these services than entitled. The allegations settled arose from two lawsuits filed respectively by whistleblowers Michael Payne, Melissa Church and Gloria Pryor, who worked at Adventist’s hospital in Hendersonville, North Carolina, and Sherry Dorsey, who worked at Adventist’s corporate office, under the qui tam provisions of the False Claims Act. The act permits private parties to file suit on behalf of the United States for false claims, and to share in any recovery. The whistleblowers’ share of the settlement has not yet been determined.
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Georgia Hospital System and Physician to Pay More than $25 Million to Settle Alleged False Claims Act and Stark Law Violations
Columbus Regional Healthcare System (Columbus Regional) and Dr. Andrew Pippas have agreed to pay more than $25 million to resolve allegations that they violated the False Claims Act by submitting claims in violation of the Stark Law. The settlement also resolves allegations that Columbus Regional and Pippas submitted claims for payment to federal health care programs that misrepresented the level of services they provided. Under the settlement agreement, Columbus Regional has agreed to pay $25 million, plus additional contingent payments not to exceed $10 million, for a maximum settlement amount of $35 million, and Pippas has agreed to pay $425,000. The Stark Law prohibits physician referrals of certain health services for Medicare and Medicaid patients if the physician has a financial relationship with the entity to which he or she refers the patient. The United States alleged that between 2003 and 2013, Columbus Regional provided excessive salary and directorship payments to Pippas that violated the Stark Law. The United States also alleged that from May 2006 through May 2013, Columbus Regional submitted claims to federal health care programs for services at higher levels than supported by the documentation, and between 2010 and 2012, they submitted claims to federal health care programs for radiation therapy at higher levels than the therapy that was provided. Of the $25.425 million that Columbus Regional and Pippas have agreed to pay to resolve their respective civil claims, they will pay $24,666,040 to the federal government for federal healthcare program losses and $758,960 to the state of Georgia for the state share of its Medicaid losses. Also as part of the settlement, Columbus Regional will enter into a Corporate Integrity Agreement (CIA) with the Department of Health and Human Services-Office of the Inspector General (HHS-OIG) that requires Columbus Regional to implement measures designed to avoid or promptly detect future conduct similar to that which gave rise to this settlement. “Increasing referrals by self-dealing and violating the Stark statute – as the government contended in this case – undermines impartial medical judgment at the expense of patients and taxpayers,” said Special Agent in Charge Derrick L. Jackson of HHS-OIG. “Charging federal health care programs for pricier services than those actually provided will not be tolerated.” The settlements resolve allegations filed in two lawsuits by Richard Barker, a former Columbus Regional executive, in federal court in Columbus, Georgia. The lawsuits were filed under the qui tam, or whistleblower, provisions of the federal False Claims Act and the Georgia False Medicaid Claims Act, which permit private individuals to sue on behalf of the federal and state governments, respectively, for false claims and to share in any recovery. Mr. Barker’s share of the settlement has not yet been determined.
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Genzyme Corporation to Pay $32.5 Million to Resolve Criminal Liability Relating to Seprafilm
Genzyme Corporation, a wholly-owned biotechnology subsidiary of French pharmaceutical company Sanofi, agreed to resolve criminal charges that it violated the federal Food, Drug and Cosmetic Act (FDCA) with regard to the unlawful distribution of Seprafilm, a surgical device it markets and promotes, the Justice Department announced. As part of the agreed resolution, the department filed a two-count criminal information in the U.S. District Court for the Middle District of Florida charging that between 2005 and 2010, Genzyme caused a medical device to become adulterated and misbranded while being held for sale. The conduct occurred prior to Sanofi’s acquisition of Genzyme, based in Cambridge, Massachusetts, in 2011. To resolve these charges, Genzyme agreed to enter into a deferred prosecution agreement with the government for a term of at least two years. As part of the agreement, Genzyme agreed to admit to and accept responsibility for the facts underlying the charges and pay a monetary penalty of $32,587,439. It further agreed to undertake several groundbreaking measures to enhance its internal compliance program. The agreement also acknowledges the significant level of cooperation Genzyme provided to the government during its investigation as well as the company’s independent remediation efforts. Along with the information, the government also filed a consent motion with the court, requesting that its case against Genzyme be stayed during the term of the agreement. If Genzyme fulfills its obligations under the agreement, the government will dismiss the charges at the end of the agreement’s term. During the course of the government’s investigation regarding Seprafilm slurry, Genzyme voluntarily disclosed to the government that it had distributed promotional material for Seprafilm that implied that Seprafilm had been proven safe and effective for use in gynecologic cancer surgeries, even though Seprafilm’s FDA-approved label cautioned that the device had not been clinically evaluated in the presence of malignancies. Genzyme based its claim on a study that involved only fourteen patients, which was far too few to support such an assertion. A separate count in the government’s information charges that Genzyme’s use of this misleading promotional material caused Seprafilm to become misbranded while held for sale.
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SEC Regulatory Actions
SEC Charges Retailer for Improper Valuation and Inadequate Internal Accounting Controls
The Securities and Exchange Commission charged Stein Mart Inc. for materially misstating its pre-tax income due to improper valuation of inventory subject to price discounts and for having inadequate internal accounting controls. An SEC investigation found that the Jacksonville, Florida-based retailer often offered its merchandise to customers at retail price reductions referred to as Perm POS markdowns and that merchandise subject to such a markdown never reverted back to its original retail price. Stein Mart reduced the value of inventory subject to these markdowns at the time the item was sold rather than immediately at the time the markdown was applied. As a result, Stein Mart materially misstated its pre-tax income in certain quarterly public filings with the SEC, including an overstatement of almost 30 percent in the first quarter of 2012. Stein Mart agreed to settle the SEC’s charges by paying an $800,000 penalty. According to the SEC’s order instituting a settled administrative proceeding, Stein Mart’s internal accounting controls over Perm POS markdowns were inadequate. For example – until at least the middle of 2011–the decision to characterize a markdown as Perm POS resided solely with Stein Mart’s merchandising department, which did not understand the impact that Stein Mart’s markdowns could have on inventory valuation accounting.
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SEC Charges Investment Adviser With Failing to Adopt Proper Cybersecurity Policies and Procedures Prior To Breach
The Securities and Exchange Commission announced that a St. Louis-based investment adviser has agreed to settle charges that it failed to establish the required cybersecurity policies and procedures in advance of a breach that compromised the personally identifiable information (PII) of approximately 100,000 individuals, including thousands of the firm’s clients. The federal securities laws require registered investment advisers to adopt written policies and procedures reasonably designed to protect customer records and information. An SEC investigation found that R.T. Jones Capital Equities Management violated this “safeguards rule” during a nearly four-year period when it failed to adopt any written policies and procedures to ensure the security and confidentiality of PII and protect it from anticipated threats or unauthorized access. The firm’s web server was attacked in July 2013 by an unknown hacker who gained access and copy rights to the data on the server, rendering the PII of more than 100,000 individuals, including thousands of R.T. Jones’s clients, vulnerable to theft. The firm failed entirely to adopt written policies and procedures reasonably designed to safeguard customer information. For example, R.T. Jones failed to conduct periodic risk assessments, implement a firewall, encrypt PII stored on its server, or maintain a response plan for cybersecurity incidents. After R.T. Jones discovered the breach, the firm promptly retained more than one cybersecurity consulting firm to confirm the attack, which was traced to China, and determine the scope.
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SEC Charges BDO and Five Partners in Connection With False and Misleading Audit Opinions
The Securities and Exchange Commission charged national audit firm BDO USA with dismissing red flags and issuing false and misleading unqualified audit opinions about the financial statements of staffing services company General Employment Enterprises. The SEC also charged five of the firm’s partners for their roles in the deficient audits, and filed fraud charges against the client company’s then-chairman of the board and majority shareholder Stephen B. Pence, who is a former U.S. attorney and a former lieutenant governor of Kentucky. BDO agreed to admit wrongdoing, pay disgorgement of its audit fees and interest totaling approximately $600,000, and pay a $1.5 million penalty in addition to complying with undertakings related to its quality controls. The five partners also agreed to settle the charges against them. Two former CEOs of General Employment agreed to settle separate charges, and the litigation continues against Pence.
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SEC Charges Bankrate and Former Executives With Accounting Fraud
The Securities and Exchange Commission announced that Bankrate Inc. has agreed to pay $15 million to settle accounting fraud charges. Three former executives also are charged in the case that involves fraudulent manipulation of the company’s financial results to meet analyst expectations. The SEC alleges that Bankrate’s then-CFO Edward DiMaria, then-director of accounting Matthew Gamsey, and then-vice president of finance Hyunjin Lerner engaged in a scheme to fabricate revenues and avoid booking certain expenses to meet analyst estimates for a key financial metric: adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Bankrate consequently overstated its second quarter 2012 net income. Bankrate’s stock rose when the company announced the inflated financial results, and DiMaria allegedly proceeded to sell more than $2 million in company stock. Lerner agreed to pay more than $180,000 to settle the SEC’s charges. The litigation continues against DiMaria and Gamsey. “We allege that at the highest levels of its accounting department, Bankrate improperly inflated its financial performance to avoid falling short of Wall Street’s expectations,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “Bankrate manipulated its financial results through numerous small accounting entries in order to meet analyst estimates on a key metric.” Bankrate and Lerner consented to an order to cease and desist from violating the antifraud, reporting, books-and-records, and internal controls provisions of the federal securities laws. Without admitting or denying the SEC’s findings, Bankrate agreed to pay a $15 million penalty and Lerner agreed to pay a $150,000 penalty as well as full disgorgement of his ill-gotten gains of $30,045 from selling Bankrate stock after the company announced false financial results. Lerner also agreed to be barred from serving as an officer or director at a public company for five years and from public company accounting for at least five years.
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SEC Charges Sports Nutrition Company With Failing to Properly Disclose Perks for Executives
The Securities and Exchange Commission charged a sports supplements and nutrition company with committing a series of accounting and disclosure violations, including the failure to properly report perks provided to its executives as compensation. Denver-based MusclePharm Corporation agreed to settle the charges along with three current or former executives and the company’s former audit committee chair who were found to have been involved in various aspects of the company’s misconduct. An SEC investigation found that MusclePharm omitted or understated nearly a half-million dollars’ worth of perks bestowed upon its executives, including approximately $244,000 paid to CEO Brad Pyatt related to automobiles, apparel, meals, golf club memberships, and his personal tax and legal services. Even after the company began an internal review of undisclosed executive perks and then-audit committee chair Donald Prosser became directly involved in the process, MusclePharm continued filing financial statements that failed to disclose private jet use, vehicles, and golf club memberships for its executives. “Executive compensation is material information for investors, and companies must ensure that perks it pays for executives are properly recorded and disclosed in public filings,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “Prosser, MusclePharm’s audit committee chair, subjected himself to liability when he substituted his wrong interpretation of SEC rules for the views of experts the company had hired, resulting in an incorrect disclosure.”
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SEC Charges Seattle-Area Hedge Fund Adviser With Taking Unearned Management Fees
The Securities and Exchange Commission charged a Bellevue, Wash.-based investment advisory firm and its CEO with fraudulently inflating the values of investments in the portfolio of a private fund they advised so they could attain unearned management fees. The SEC also charged the fund’s outside auditors with performing a deficient audit that enabled the firm to send misleading financial statements to investors. Chris Yoo and his firm Summit Asset Strategies Investment Management agreed to settle the fraud charges arising from Summit Stable Value Fund. Yoo and another of his advisory firms Summit Asset Strategies Wealth Management agreed to settle fraud charges related to his failure to inform clients that Summit Asset Strategies Wealth Management received significant fees when referring them to invest in the fund. “Yoo manipulated the value of certain fund assets to manufacture millions of dollars in illusory profits that he used to line his pockets with fees he did not truly earn. He also failed to disclose a conflict of interest involving his other firm,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. Yoo and Summit Asset Strategies Investment Management were entitled to withdraw as compensation Summit Stable Value Fund’s net profits, which were calculated by determining realized and unrealized gains and losses. They also were required to return any excess net profits to the fund as determined in an annual audit. Beginning in 2011, Yoo directed the firm to withdraw purported fees that were based on fraudulently inflated investment values or were otherwise disproportionate from the fund’s actual profits. As part of the scheme, Yoo falsely claimed that the fund owned a specific bank asset that had appreciated to approximately $2 million in value. In reality, the fund owned an entirely different asset that was worth less than $200,000. As a result of Yoo’s false claim, the fund’s 2013 financial statements materially overstated the fund’s investment values. In total, Yoo and Summit Asset Strategies Investment Management withdrew nearly $900,000 in purported fees to which they were not entitled.
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SEC Charges Advisory Firm With Fraud for Improperly Retaining Fees
The Securities and Exchange Commission announced that an investment advisory firm in Philadelphia has agreed to pay more than $21 million to settle charges that it fraudulently retained fees belonging to collateralized debt obligation (CDO) clients. An SEC investigation found that Taberna Capital Management did not tell CDO clients it was retaining payments known as “exchange fees” in connection with restructuring transactions. Taberna’s retention of the exchange fees was neither permitted by the CDOs’ governing documents nor disclosed to investors in the CDOs. The fees rightfully belonged to the CDOs and created conflicts of interest that Taberna failed to disclose. The SEC also charged Taberna’s former managing director Michael Fralin and former chief operating officer Raphael Licht for their roles in certain aspects of Taberna’s misconduct. “CDO managers have an obligation to act in the best interests of their CDO clients and communicate fairly with them. Taberna secretly diverted funds owed to CDO clients, and concealed that diversion and the conflicts it created,” said Michael J. Osnato Jr., Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. According to the SEC’s order instituting settled administrative proceedings, from 2009 to 2012, Taberna sought and retained millions of dollars in exchange fees paid by issuers of securities held by the CDOs when Taberna recommended exchange transactions to CDO clients. Under the terms of the CDOs’ governing documents, Taberna was not permitted to retain the exchange fees. Instead, those fees belonged to the CDOs. Taberna obscured its misconduct by improperly labeling the exchange fees as “third party costs incurred” in various documents. But such costs comprised only a minimal portion of the overall exchange fees.
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SEC Obtains $30 Million From Traders Who Profited on Hacked News Releases
The Securities and Exchange Commission announced that Ukrainian-based Jaspen Capital Partners Limited and CEO Andriy Supranonok have agreed to pay $30 million to settle allegations they profited from trading on non-public corporate information hacked from newswire services. The SEC announced charges in August against 34 defendants who allegedly took part in a scheme in which two of the defendants surreptitiously hacked into newswire services and transmitted the stolen data to a web of international traders, including Jaspen and Supranonok. By getting an early look at the information before its public release, the traders allegedly generated more than $100 million of illegal profits over a five-year period. The case was filed in U.S. District Court for the District of New Jersey, which entered an asset freeze and other emergency relief against Jaspen and Supranonok, among others. “Barely a month after we froze tens of millions of dollars in illegal profits from the defendants’ trading on illegal inside information obtained from hacked news releases, we obtained a settlement with foreign traders that deprives them of their wrongful gains,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. According to the SEC’s complaint, Jaspen and Supranonok made approximately $25 million buying and selling contracts-for-differences (CFDs) on the basis of hacked press releases stolen from two newswire services between 2010 and 2014 and made additional profits trading on press releases stolen from a third newswire service in 2015. CFDs are derivatives that allow traders to place highly leveraged bets on the direction of a stock’s price movement. Without admitting or denying the SEC’s allegations, Jaspen and Supranonok agreed to be enjoined from violating the antifraud provisions of U.S. securities laws and related SEC antifraud rules and to return $30 million of allegedly ill-gotten gains. The settlement offers are subject to approval by the court.
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