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Forensic News January 2017

State Street to pay $64.6 million to resolve U.S. fraud probes
State Street Corp (STT.N) will pay $64.6 million to resolve U.S. investigations into what prosecutors said was a scheme to defraud six clients through secret commissions on billions of dollars of trades, authorities said on Wednesday. Under the deal, State Street entered into a deferred prosecution agreement with federal prosecutors in Boston and agreed to pay $32.3 million. The bank has agreed to pay an equal amount to the U.S. Securities and Exchange Commission. As part of the deal, State Street admitted to conspiring to add secret commissions on trades performed for the six clients, prosecutors said. It also agreed to enhance its compliance program and retain a corporate monitor. “Banks that defraud their clients in this way must be held accountable, no matter how big they are,” acting U.S. Attorney William Weinreb in Boston said in a statement. The settlement came after prosecutors in April announced the indictment of two ex-Street Street executives, Ross McLellan, a former executive vice president, and Edward Pennings, a former senior managing director in the bank’s London office. The case followed a 2014 settlement between State Street and the UK Financial Conduct Authority in which the Boston-based bank paid a fine of £22.9 million (about $37.8 million) for charging the six clients mark-ups on certain transactions. State Street said in a statement that it cooperated in the investigations, had reimbursed the six clients at issue, had fired employees in connection with the matter and had implemented stronger controls. “State Street deeply regrets this matter and accepts responsibility for the actions of its former employees,” it said. State Street has faced other allegations of overcharging. In July, it announced it would pay $530 million to resolve U.S. probes and lawsuits involving claims that it overcharged clients on foreign-currency transactions. Prosecutors said that from 2010 to 2011, McLellan, Pennings and others conspired to add secret commissions to fixed income and equity trades performed for the six clients.
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Former Los Angeles investment banker pleads guilty to fraud
A former Los Angeles investment banker once dubbed “Porn’s New King” pleaded guilty on Thursday for the second time in a year to engaging in securities fraud, admitting to participating in a scheme that cheated investors and a Native American tribe. Jason Galanis, 46, entered his plea in Manhattan federal court to charges that included securities fraud and conspiracy to commit investment adviser fraud in connection with what prosecutors called a multimillion-dollar scheme. Under a plea deal, Galanis, who is scheduled to be sentenced on May 5, agreed to forfeit over $43 million and not appeal any prison term of about 19-1/2 years or less. His sentence would be on top of whatever he receives as punishment in a separate case, in which Galanis admitted in July to manipulating the market for reinsurer Gerova Financial Group Ltd. In that case, he agreed not to appeal a prison term of 12-1/2 years or less and is scheduled to be sentenced on Feb. 16. Galanis was dubbed “Porn’s New King” by Forbes magazine in 2004 after buying the nation’s largest processor of credit card payments for internet pornography. Three years later, the SEC fined him $60,000 after alleging he prepared false accounting information for Penthouse International Inc, in which he held a large stake. According to prosecutors, beginning in 2014, Galanis and his father, John, persuaded the Wakpamni Lake Community Corp, an affiliate of the Oglala Sioux Nation in South Dakota, to issue $60 million in municipal bonds. Together with his father and five associates, Galanis and his co-defendants then misappropriated the bond proceeds, prosecutors said. They said he obtained $8.5 million for himself, which he spent on items such as his home, jewelry and travel.
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No ‘joke’: SocGen admits fault, pays $50 million in U.S. fraud case
Societe Generale (SOGN.PA) agreed to pay a $50 million civil fine and admit to misconduct to settle U.S. claims that it fraudulently concealed from investors the poor quality of residential mortgage-backed securities it marketed and sold. In a statement on Friday, the U.S. Department of Justice said the French bank concealed problems in a $780 million debt issue it arranged in 2006, and which has since left investors with “significant losses” that may grow further. The debt issue, SG Mortgage Securities Trust 2006-OPT2, was backed by subprime loans from Option One Mortgage Corp, then a unit of tax preparer H&R Block Inc (HRB.N). Societe Generale admitted to concealing how many of the loans were not underwritten properly and should not have been securitized, and that no borrowers owed more on their loans than their homes were worth. The settlement papers quote from a senior Societe Generale banker who used a profanity in characterizing industrywide subprime lending practices at the time, and declared that “the whole process is a joke.” U.S. investigators were not amused. “It was not a ‘joke,’” Robert Capers, the U.S. Attorney for the Eastern District of New York, said in a statement. “SocGen’s acknowledgment of its misconduct in the securitization of SG 2006-OPT2 was a critical component of this resolution,” he added. “We will not tolerate investment banks making false representations to investors.” Jim Galvin, a Societe Generale spokesman, said: “Societe Generale is pleased to have resolved this legacy matter involving a business that the firm exited in 2008.” U.S. regulators have won tens of billions of dollars of fines, restitution and other relief from banks worldwide that were accused of helping fuel the 2008 global financial crisis by selling shoddy mortgage-backed securities.
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Citigroup unit to pay $25 million over ‘spoofing’ in U.S. Treasury futures
Citigroup Inc on Thursday became the first-ever bank to get hit with civil “spoofing charges,” after U.S. derivatives regulators said one of its units entered U.S. Treasury futures market orders with the intent of canceling them. The Commodity Futures Trading Commission said that Citigroup will settle the case without admitting or denying the charges and pay a $25 million fine. “We are pleased to have resolved this matter,” Citigroup spokeswoman Danielle Romero-Apsilos said in a statement. The CFTC first won new powers to go after manipulative “spoofing” in the 2010 Dodd-Frank Wall Street reform law. The term refers to efforts by traders to create a false appearance of market interest in a commodity or other financial instrument by placing orders and then immediately canceling them. The first person to be charged, both criminally and civilly, with spoofing, was Michael Coscia, a New Jersey-based trader who was accused of making illegal profits through spoofing the markets. Coscia went to trial and was found guilty by a jury. He was sentenced to three years in prison. He is appealing his conviction. To date, the most high-profile spoofing case, however, involved Navinder Sarao, a London-based trader whom the Justice Department and CFTC said helped contribute to the May 2010 “flash crash.” Sarao pleaded guilty last fall to spoofing and wire fraud. In the CFTC’s civil case against Citigroup, the regulator said five traders at Citigroup Global Markets Inc engaged in spoofing more than 2,500 times in various Treasury futures. The bank was also charged with failing to supervise its employees and provide adequate training to avoid the violations. The CFTC said the bank cooperated during the investigation and also self-reported some of the spoofing orders after CME Group inquired about a number of suspicious orders.
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Takata to plead guilty, pay $1 billion U.S. penalty over air bag defect
Japan’s Takata Corp (7312.T) on Friday agreed to plead guilty to criminal wrongdoing and to pay $1 billion to resolve a U.S. Justice Department investigation into ruptures of its air bag inflators linked to at least 16 deaths worldwide. The deal was announced hours after prosecutors in Detroit charged three former senior Takata executives with falsifying test results to conceal the inflator defect, which triggered the world’s biggest automotive safety recall. Takata will pay a $25 million fine, $125 million in a victim compensation fund, including for future incidents, and $850 million to compensate automakers for massive recall costs, the Justice Department said. The auto parts supplier will be required to make significant reforms and be on probation and under the oversight of an independent monitor for three years. The company’s shares rose 16.5 percent in trading in Japan on news of the anticipated settlement, in which it agreed to plead guilty to a single felony count of wire fraud. The settlement, which must still be approved by a federal judge in Detroit, could help Takata win financial backing from an investor to potentially restructure and pay for massive liabilities from the world’s biggest automotive safety recall. “Reaching this agreement is a major step toward resolving the airbag inflator issue and a key milestone in the ongoing process to secure investment in Takata,” Shigehisa Takada, chairman and chief executive of Takata, said in a statement. He added that the company “deeply regrets the circumstances that have led to this situation and remains fully committed to being part of the solution.” Starting in 2000, Takata submitted false test reports to automakers to induce them to buy faulty air bag inflators, according to the Justice Department. Takata made more than $1 billion on the sale of the inflators and Takata executives fabricated test information about their performance, the department said in a statement.
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Western Union admits to aiding wire fraud, to pay $586 million
Western Union Co (WU.N), the world’s biggest money-transfer company, agreed to pay $586 million and admitted to turning a blind eye as criminals used its service for money laundering and fraud, U.S. authorities said on Thursday. Western Union, which has over half a million locations in more than 200 countries, admitted “to aiding and abetting wire fraud” by allowing scammers to process transactions, even when the company realized its agents were helping scammers avoid detection, the U.S. Department of Justice and the Federal Trade Commission said in statements. With the help of Western Union agents, Chinese immigrants used the service to send hundreds of millions of dollars to pay human smugglers, wiring the money in smaller increments to avoid federal reporting requirements, U.S. authorities said. Fraudsters offering fake prizes and job opportunities swindled tens of thousands of U.S. consumers, giving Western Union agents a cut in return for processing the payments, authorities said. Between 2004 and 2012, the Colorado-based company knew of fraudulent transactions but failed to take steps that would have resulted in disciplining of 2,000 agents, authorities said. “Western Union is now paying the price for placing profits ahead of its own customers,” said Acting Assistant Attorney General David Bitkower. A Western Union spokesman said that the company didn’t “do as much as it should have” to oversee its agents between 2004 and 2012 but is committed to improving its procedures. Western Union, which helped clients move over $150 billion in 2015, said in a press release that more than one-fifth of its work force is currently devoted to compliance. It also said consumer fraud accounts for less than one-tenth of 1 percent of consumer-to-consumer transactions. The settlement will fund refunds for customers who were victims of scams, authorities said. It will also implement a comprehensive anti-fraud program to train agents to identify and stop transactions that result from fraud.
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Ex-Visium Manager Found Guilty of Fraud in About 90 Minutes
A onetime portfolio manager for hedge fund firm Visium Asset Management LP was convicted of federal securities-fraud charges in the culmination of a three-year case that included the suicide of a fellow executive who was also charged. The jury deliberated for a little more than 90 minutes before finding Stefan Lumiere guilty on all three counts related to inflating the price of bonds in the firm’s credit fund to hide losses from investors. His conviction comes as the U.S. steps up efforts to police multitrillion-dollar bond markets, where securities are traded between parties and not over an exchange. Lumiere, 46, didn’t react as the verdict was read. His sentencing is scheduled for May 23, and he could face as much as 45 years in prison and a $5 million fine, though maximum penalties are rarely imposed. Jurors declined to comment. “I can tell you he’s innocent,” said Alexandra Lumiere Gottlieb, as she left the courtroom after the verdict was read. She sat behind her brother during the trial. “This is not a court looking for the truth.” A Visium spokesman declined to comment. In the week-long trial, prosecutors said Lumiere solicited sham quotes from brokers to justify inflated valuations on distressed-debt holdings. Jurors rejected his claim that he thought the prices he was assigning were legitimate and done at the behest of his boss, who pleaded guilty and testified against him. The case was launched after Jason Thorell, a junior trader who told jurors he was asked to field fake quotes from brokers to justify the portfolio’s inflated prices, became a confidential informant for authorities. The U.S. investigation grew to include charges of insider trading based on leaks of pending health-care policy changes by the government. The government claimed the firm reaped more than $32 million from trades on drug companies.
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Rolls-Royce settles bribery probes in UK, U.S. and Brazil
British engineering group Rolls-Royce Plc (RR.L) said on Monday that it had reached settlements with authorities in Britain, the United States and Brazil relating to bribery and corruption involving intermediaries, which would result in a series of payments totaling 671 million pounds ($809 million). Rolls also said in a statement that it would report its financial results for 2016 on Feb. 14 when “an appropriate update on the implications of these agreements will be provided at that time”. It said there were early indications that its full-year profits and cash for 2016 would be ahead of expectations. The settlement and the profit outlook come about a month after the maker of aero engines said it would cut 800 jobs in its marine business, responding to weak demand from shipping and energy customers. The settlement with British authorities, for 497.25 million pounds, was the biggest ever for Britain’s Serious Fraud Office. Rolls said the deals with the three authorities would see the group pay about 293 million pounds in the first year. Under the terms of the agreements with the U.S. Department of Justice, Brazil’s Ministerio Publico Federal (MPF) Rolls said it has agreed to make payments to the DoJ totaling nearly $170 million and to the MPF totaling $25.58 million. Under the terms of a deferred prosecution agreement with Britain’s Serious Fraud Office the company said it will pay 497.253 million pounds plus interest under a schedule lasting up to five years, plus a payment in respect of the SFO’s costs. The proposed agreement with SFO was still subject to court approval. “These agreements relate to bribery and corruption involving intermediaries in a number of overseas markets, concerns about which the company passed to the SFO from 2012 onwards,” the company said in its statement. ”These are voluntary agreements which result in the suspension of a prosecution provided that the company fulfils certain requirements, including the payment of a financial penalty.” Since the concerns were brought to light, Rolls-Royce has set up an audit committee at each of its units in a bid to curb bribery and corruption, according to the company’s latest annual report.
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U.S. investigating Herbalife over foreign bribery in China
The U.S. government is investigating dietary supplement maker Herbalife (HLF.N) over whether it violated foreign bribery laws while conducting business in China, the company revealed in a regulatory filing on Friday. Herbalife, in which a billionaire investor and adviser to President Donald Trump is the single largest shareholder, said that the U.S. Securities and Exchange Commission had asked the company for records as part of its civil anti-corruption probe. The company is conducting its own independent review, and it has also separately discussed the matter with the U.S. Justice Department, which is responsible for investigating criminal violations of the Foreign Corrupt Practices Act (FCPA). “The company is cooperating with the SEC’s investigation and cannot predict the eventual scope, duration or outcome of the matter at this time,” Herbalife said. The probe into Herbalife’s overseas activities comes as Carl Icahn, who owns more than $1.2 billion worth of Herbalife shares, or a 24.18 percent stake, will be serving as an unpaid special adviser on regulatory reform to Trump. Icahn previously helped Trump’s transition team weigh candidates such as Treasury Department nominee Steve Mnuchin, and he is expected to help guide the new administration on regulatory reforms, including potentially Wall Street regulations. Trump has also referred to the FCPA, which is at the heart of the SEC’s Herbalife probe, as a “horrible law” that he said puts U.S. companies at a disadvantage. The general counsel for Icahn Enterprises (IEP.O) could not immediately be reached for comment. The SEC’s probe of Herbalife comes on the heels of a July settlement with the Federal Trade Commission, which ordered the company to pay $200 million to resolve charges it deceived consumers into believing they could earn a lot of money by selling the company’s products. Prior to the FTC settlement with Herbalife, hedge fund activist investor William Ackman had repeatedly accused Herbalife of being a pyramid scheme and placed a $1 billion short bet on the stock in 2012.
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Las Vegas Sands pays $7 million to end U.S. criminal bribery case
Las Vegas Sands Corp agreed to pay a $6.96 million criminal penalty to end a U.S. Department of Justice probe into whether it violated a federal anti-bribery law by making payments to a consultant to help it do business in China and Macau. The casino operator run by billionaire Sheldon Adelson on Thursday also entered a non-prosecution agreement, in which it admitted that executives knowingly failed to set up accounting controls to ensure that the payments were legitimate, and were properly recorded in its books and records. From 2006 to 2009, Las Vegas Sands transferred about $60 million to the consultant to promote its business and brands, and paid him about $5.8 million without any “discernable legitimate business purpose,” according to settlement papers. The resolution of the Foreign Corrupt Practices Act case follows Las Vegas Sands’ related $9 million civil settlement last year with the U.S. Securities and Exchange Commission over its dealings with the consultant. Investigators said the consultant was used in part to conceal the company’s effort to buy a team in the Chinese Basketball Association, which barred gaming companies from ownership, and part of a Beijing building despite a casino gambling ban there. Thursday’s fine is 25 percent below the minimum recommended under federal guidelines, in part reflecting Las Vegas Sands’ cooperation and “extensive” remedial measures, including revamped compliance controls, the Justice Department said. “The company is pleased that its cooperation and long-term commitment to compliance were recognized in reaching this resolution. We are equally pleased that all inquiries related to these issues have now been completely resolved,” Las Vegas Sands spokesman Ron Reese said in an e-mail to Reuters. Adelson, 83, was not accused of wrongdoing. He is worth $31 billion, according to Forbes magazine.
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Apple files $1 billion lawsuit against chip supplier Qualcomm
Apple Inc filed a $1 billion lawsuit against supplier Qualcomm Inc on Friday, days after the U.S. government accused the chip maker of resorting to anticompetitive tactics to maintain a monopoly over key semiconductors in mobile phones. Qualcomm is a major supplier to both Apple and Samsung Electronics Co Ltd for “modem” chips that connect phones to wireless networks. The two companies together accounted for 40 percent of Qualcomm’s $23.5 billion in revenue in its most recent fiscal year. In the lawsuit filed in U.S. District Court for the Southern District of California, Apple accused Qualcomm of overcharging for chips and refusing to pay some $1 billion in promised rebates. Apple said in its complaint that Qualcomm withheld the rebates because of Apple’s discussions with South Korea’s antitrust regulator, the Korea Fair Trade Commission. “If that were not enough, Qualcomm then attempted to extort Apple into changing its responses and providing false information to the KFTC in exchange for Qualcomm’s release of those payments to Apple. Apple refused,” Apple said in its lawsuit. In a statement, Qualcomm General Counsel Don Rosenberg called Apple’s claims “baseless.” “Apple has been actively encouraging regulatory attacks on Qualcomm’s business in various jurisdictions around the world, as reflected in the recent KFTC decision and FTC complaint, by misrepresenting facts and withholding information,” Rosenberg said in the statement. “We welcome the opportunity to have these meritless claims heard in court where we will be entitled to full discovery of Apple’s practices and a robust examination of the merits.” Qualcomm’s stock closed 2.4 percent lower at $62.88 on the news. Qualcomm has patents for chips which include standard essential patents, a term used to describe technology that is required to be licensed broadly and on “reasonable” terms. In its lawsuit, Apple accused Qualcomm of refusing to license the technology to other manufacturers to prevent them from making the chips. It also accused Qualcomm of selling chips while requiring Apple to pay a separate licensing fee for the same chips, in a “no license, no chip” policy.
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Lawsuit in U.S. says Coca-Cola downplays risks of sugary drinks
Coca-Cola Co and the American Beverage Association trade group were sued on Wednesday for allegedly misleading consumers about the health risks from consuming sugary beverages. The nonprofit Praxis Project accused the defendants of downplaying the risks to boost sales, despite scientific evidence linking sugary beverages to obesity, diabetes and cardiovascular disease. Praxis accused both defendants of using euphemisms such as “balance” and “calories in, calories out” to mislead consumers, and Coca-Cola, the world’s largest beverage company, of trying to mislead the public into thinking a lack of exercise was the real cause of obesity. “The notion that Coke’s products can be part of a healthy diet is imprinted on the minds of millions if not billions of people, and requires corrective action,” Maia Kats, litigation director of the Center for Science in the Public Interest, which helped file the lawsuit, said in an interview. Coca-Cola spokesman Kent Landers called the lawsuit “legally and factually meritless. We take our consumers and their health very seriously and have been on a journey to become a more credible and helpful partner in helping consumers manage their sugar consumption.” The American Beverage Association called the lawsuit’s accusations “unfounded.” It also said that, together with its members, it is working with health groups to reduce consumers’ caloric and sugar intake from beverages. Wednesday’s lawsuit seeks to stop misleading marketing and require more consumer warnings, among other remedies. It was filed with the federal court in Oakland, California. Coca-Cola and PepsiCo Inc have pledged to bolster efforts to reduce added sugar in beverages. In October, Coca-Cola Chief Operating Officer James Quincey, slated to succeed Muhtar Kent as chief executive in May, said the Atlanta-based company has more than 200 “reformulation initiatives” toward that end. But according to the complaint, a 16-ounce bottle of Coke has 12 teaspoons of added sugar, a 15.2-ounce bottle of Minute Maid Cranberry Grape Juice drink has 13 teaspoons, and a 20-ounce bottle of Vitaminwater has eight teaspoons. By comparison, the American Heart Association recommends no more than nine teaspoons a day for men, and six for women. A teaspoon of sugar has about 16 calories. Warren Buffett, whose Berkshire Hathaway Inc is Coca-Cola’s largest shareholder, has said he drinks at least five Cokes a day. The CSPI sued PepsiCo in October over health claims for its Naked juices, but did not target that company in Wednesday’s lawsuit.
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CBS, Paramount Settle Suit Over Star Trek Fan’s YouTube Hit
CBS Corp. and Paramount Pictures Corp. settled their copyright-infringement lawsuit against a die-hard Star Trek fan who had channeled his obsession with an obscure character from the original TV series into a professional 20-minute YouTube hit. The studios and filmmaker Alec Peters announced the agreement Friday, 11 days before the case was set for trial in Los Angeles. The deal follows a federal judge’s ruling this month that bolstered CBS and Paramount’s claims by rejecting Peters’ argument that his “Prelude to Axanar” was fair use of the Star Trek material. The judge said Peters had mined the studios’ copyrighted works down to “excruciating detail.” “Axanar and Mr. Peters have agreed to make substantial changes to Axanar to resolve this litigation,” according to a joint statement. Peters has “also assured the copyright holders that any future Star Trek fan films produced by Axanar or Mr. Peters will be in accordance with the “Guidelines for Fan Films” distributed by CBS and Paramount in June 2016.” The case is a rare instance of movie and TV-rights owners throwing the book at one of their own fans. CBS and Paramount alleged Peters has ripped off the plot, characters, costumes and spaceship design from their 50-year-old science fiction franchise. Peters claimed his movie, crowd-funded with $100,000 raised on Kickstarter, was an original work of satire and parody. He has been raising money for a feature-length film budgeted at $1.3 million. U.S. District Judge R. Gary Klausner said in a Jan. 3 ruling it was difficult to see how the film qualifies for protection as a “criticism” of the Star Trek works. “This is not surprising since defendants set out to create films that stay faithful to the Star Trek canon and appeal to Star Trek fans,” Klausner said in the decision. Peters and his Axanar Productions Inc. got caught in the studios’ crosshairs after the YouTube success of his 2014 documentary-style short that recounts a confrontation between the Federation and the Klingon Empire. The short film has been viewed about 2.8 million times on YouTube.
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China extends Hollywood push with $1 billion Paramount investment
Viacom Inc’s Paramount Pictures will receive a $1 billion cash investment from two Chinese film companies, Shanghai Film Group (SFG) and Huahua Media, giving the U.S. studio much-needed cash and support as it attempts to grow. As part of the agreement, SFG and Huahua Media will finance a combined 25 percent of all of Paramount’s films for the next three years, with the option to extend to a fourth year, a source familiar with the situation said. The deal comes as parent company Viacom focuses on a turnaround plan under new Chief Executive Officer Bob Bakish. It also follows a spate of tie-ups between China and U.S. producers, with Chinese investors increasingly keen to lend their financial muscle to boost their stake in Hollywood. U.S. studios such as Warner Bros, Walt Disney Co, Dreamworks, Lionsgate and STX Entertainment have all made tie-ups with Chinese firms to fund productions or help boost their presence in China’s fast-growing film market. Last year, Chinese real estate conglomerate Dalian Wanda Group spent $3.5 billion to buy a controlling stake in U.S. film studio Legendary Entertainment, while Paramount worked with Alibaba Pictures Group Ltd in 2015 to promote “Mission: Impossible – Rogue Nation” in China. The studio could now use the latest partnership as an entry point into China, Paramount CEO Brad Grey told Reuters in an interview, adding that the studio would someday be interested in producing films in the country. “Certainly Paramount would love to produce films (in China) and we think that should be a win for us,” Grey said. The agreement marks the first major move by Grey since Viacom’s former CEO, Philippe Dauman, tried to sell a 49 percent stake in the movie studio to Dalian Wanda last year. “This will give Paramount the wherewithal to build the slate and produce, as a major studio should, 15–17 movies a year,” Grey said. Over the past few years, under Dauman, Paramount’s production fell as low as eight films in a given year. “You really can’t operate a major studio with that,” Grey said, referring to the lower figure. Shanghai Film Group and Huahua Media said in a joint statement with Paramount that they were keen to deepen their cooperation on film projects through the deal. Both firms declined to comment further when contacted by Reuters on Friday. Huahua has partnered with Paramount on several films, including “Transformers: the Age of Extinction” and “Star Trek Beyond”. State-linked Shanghai Film Group was an investor in “Jack Reacher: Never Go Back”. Viacom shares moved higher in Thursday afternoon trading but pared gains to close at $39.80.
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Alibaba’s Million-Job Boast Reflects Slower China Outlook
Jack Ma talked the talk when he met Donald Trump this month, promising to create a million jobs in the U.S. by linking small businesses with Chinese online buyers. Now Michael Evans has to walk the walk. “We understand the power of connecting small businesses to consumers – in this case, new consumers for their products – and the leverage that gives the small business to hire more people,” Evans said. “For the next five years, it’s going to be a business priority and focus in the U.S.” Alibaba is trying to broaden its revenue sources as China’s economy grows at the slowest pace since 1990. Ma’s attention-grabbing pronouncement was portrayed as a new initiative, though the company has been talking up a U.S. expansion since Ma said he wanted more than half of sales to come from outside China by 2025. Last quarter, that portion was about 26 percent, according to data compiled by Bloomberg. Hangzhou-based Alibaba releases third-quarter earnings Tuesday. Sales are expected to increase 45 percent from a year earlier to 50.1 billion yuan ($7.3 billion), according to estimates compiled by Bloomberg. The period includes the blockbuster Singles’ Day promotion in November. That would mark a second-straight decline in growth for the e-commerce company, where explosive expansion was the norm before its initial public offering. Still, the company’s shares are outperforming the New York Stock Exchange this year. They rose 1.2 percent to $97.24 9:54 a.m. in New York Monday. Now Alibaba faces a cooling economy at home. China’s gross domestic product expanded 6.7 percent last year, and that’s expected to drop to 6.4 percent this year, Bloomberg economist surveys show. To diversify, Alibaba convinced mega-retailers such as Macy’s Inc. and Costco Wholesale Corp. to open online shops; led a $2.6 billion deal to privatize department store chain Intime Retail Group Co.; and ramped up its outreach to small – and medium-sized enterprises. Alibaba already has 650,000 U.S.-based companies registered on, a business-to-business platform primarily used for sourcing, and more than 7,000 brands across its platforms including Tmall Global, where businesses sell directly to consumers. Recruiters will fan out across America to lure more businesses, Evans said. Their pitch: China’s appetite for cross-border retail e-commerce is expected to reach 3.6 trillion yuan by 2020, according to AliResearch, a unit of Alibaba. “Today, these people are selling products in their local communities,” Evans said. “The key is to connect them to new sources of demand – consumer demand in China and Asia.” Ma said after his Jan. 9 meeting with Trump that U.S. expansion will especially target the Midwest region and items such as wine and fruit.
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Chinese firm withdraws from U.S. effort to fight college application fraud
A major Chinese education company that was subsidizing a project to verify transcripts of Chinese students applying to U.S. colleges has pulled out after Reuters reported that the firm itself stands accused of widespread application fraud. Shanghai-based Dipont Education Management Group “has withdrawn from the project,” Jerome Lucido, who heads a University of Southern California research center that has been working on it, said in a statement to Reuters. Jeff Zhu, Dipont’s vice president, said the project’s advisory board, which includes representatives of some of America’s top universities, had recommended that the company withdraw “to eliminate any possible question of who has control over the project.” The project’s future is now unclear. A committee of participating schools – including Stanford University, Columbia University, Massachusetts Institute of Technology and the University of California, Los Angeles – “is on hiatus and plans to reconsider how it approaches the project,” Lucido said. At least two schools – Swarthmore College and Pomona College – dropped out. The legitimacy of applications coming out of China has become a growing problem for many U.S. colleges, which have come to rely on Chinese students able to pay full tuition. Hundreds of Chinese companies have sprung up to help students get into American universities, and their services sometimes include falsifying documents, Reuters found. Dipont operates international programs in Chinese high schools and also offers college counseling services. Last year, 17 former Dipont employees told Reuters how the company had engaged in college application fraud, including writing essays for students and altering teacher recommendation letters. Brian Perkins, an American who taught at a Dipont school in Hangzhou from 2012 to 2014, said he was pressured by Chinese supervisors and other employees to give good grades to students who skipped class. He said he did it “under protest.” In a statement, Dipont disputed the accounts of academic fraud but said it would “promptly and thoroughly investigate any credible evidence of any situation in which the company’s legal and/or ethical standards may not have been upheld by any of its employees.” Meanwhile, the status of a $750,000 pledge by Dipont’s founder and chief executive, Benson Zhang, to the USC Rossier Center for Enrollment, Research Policy and Practice is now unclear. According to Zhu, the center, which helped launch the transcript-vetting project, can keep the $525,000 paid to date. But Zhu didn’t address whether Zhang planned to make good on the rest. USC declined to comment.
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J&J plans more price transparency; eyes U.S. tax, healthcare changes
Johnson & Johnson’s chief executive officer said on Tuesday that responsible drug pricing is a priority and discussed changes he would like to see on the U.S. tax code and healthcare policy, one day after meeting with President Donald Trump. The diversified healthcare group got off to a rocky start to the year, forecasting 2017 sales and profit below Wall Street estimates and reporting 2016 fourth-quarter sales short of expectations. J&J shares fell 2.1 percent to $111.52. It also said it was reviewing strategic options, including the possible sale, for some diabetes care businesses. High prices for prescription medicines have come under extreme criticism from health insurers and politicians, and J&J was the first major healthcare company to report results since Trump’s scathing remarks on the subject. J&J said it has generally limited annual product price increases to the single digits in percentage terms, something other companies have begun to pledge to do. “It’s important to price responsibly. We believe that has been our practice,” CEO Alex Gorsky said on a conference call. The company is planning to release what it is calling a pharmaceutical transparency report. It will include expanded disclosures on U.S. pricing, research and development expenses, and compassionate care programs, Gorsky said. Lack of transparency in how companies price medicines has been a major sore point among industry critics. Gorsky was among business leaders who met with Trump on Monday in Washington, and on Tuesday outlined his priorities, including lower taxes to help U.S. companies better compete with overseas rivals and being allowed to bring back cash held abroad at a lower tax rate. With Congress and Trump determined to repeal and replace the Affordable Care Act (ACA), Gorsky said he hoped any new plan would retain health coverage for people with pre-existing conditions. He would also like to see a continued move toward value-based care and a focus on wellness and preventive care. J&J said it did not see a significant business uptick as a result of former President Barack Obama’s health care law, commonly referred to as Obamacare, and does not expect changes to have a negative effect.
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U.S. blocks health insurer Aetna’s $34 billion Humana acquisition
A U.S. judge blocked on Monday health insurer Aetna Inc’s proposed $34 billion acquisition of smaller peer Humana Inc, raising the stakes for rival Anthem Inc as it battles to close a $54 billion deal to buy Cigna Corp. The ruling is another victory for the U.S. Justice Department, whose antitrust enforcement became much more aggressive during former U.S. President Barack Obama’s eight years in office, which ended last week. Obama’s successor, Donald Trump, and a Republican-controlled legislature are seeking to undo much of the Affordable Care Act, better known as Obamacare. The law reshaped the U.S. healthcare industry by mandating health insurance and creating online exchanges where consumers can shop for individual policies and get subsidies. Aetna, Humana, Anthem and Cigna had cited Obamacare as one of the main reasons their industry needed to consolidate to cope with the costs of expanding coverage. Their shares ended trading on Monday at levels that suggested that investors continued to see little chance that the two mergers would happen. The U.S. Justice Department filed a lawsuit last July to block Aetna’s acquisition of Humana and Anthem’s acquisition of Cigna, arguing that the two deals would lead to higher prices. Anthem and Cigna are still waiting for a judge to rule on whether their merger can proceed. Investors have long been skeptical that this deal can be approved, and Leerink Research analyst Ana Gupte reiterated on Monday that she expected to also see this deal blocked. In his ruling, Judge John Bates of the U.S. District Court for the District of Columbia said the proposed deal would “substantially lessen competition” in the sale of Medicare Advantage plans in 364 counties in 21 states that the Justice Department had identified in its complaint, and on the Obamacare exchange in three Florida counties. “We’re reviewing the opinion now and giving serious consideration to an appeal after putting forward a compelling case,” Aetna spokesman T.J. Crawford said. Humana did not respond to a request for comment.
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Baxter to pay $18 million over mold at North Carolina plant
Baxter International has agreed to pay $18 million to resolve its criminal and civil liability over claims its unit ignored mold in air filters at a plant where sterile intravenous solutions were made, the U.S. Justice Department said on Thursday. The resolution includes a deferred prosecution agreement and penalties and forfeiture totaling $16 million and a civil settlement under the False Claims Act with the federal government totaling approximately $2.158 million, the Justice Department said in a statement. The government charged that managers at Baxter Healthcare Corp’s North Cove plant in Marion, North Carolina, ignored an employee’s warning that mold was found in air filters in the ceiling of the room where sterile intravenous solutions were manufactured, the statement said. There was no evidence, however, that the mold affected the quality of the IV solutions, which were manufactured from July 2011 to November 2012, the department said. A Baxter spokeswoman said the handling of the mold concerns “was not consistent with Baxter’s standards” and the company had made some changes as a result. “We took a number of actions to address these issues, including terminating several members of the facility’s management team and enhancing the training and compliance processes for employees throughout the facility,” Baxter spokeswoman Deborah Spak said in a statement. Problems with mold in Baxter’s air filters were revealed several years ago, after FDA inspectors issued the company a warning letter about the problem. “We are especially concerned that you have not identified the root cause that allowed the mold to proliferate” to a level that was too numerous to count, the FDA said in its May 2013 letter. The letter also said the mold problem represented a “repeat violation” from a 2012 inspection. The civil portion of Thursday’s settlement came about after Christopher Wall, a Baxter employee, blew the whistle and filed a False Claims Act lawsuit. He will recover a little more than $431,500 from the case. While the quality of the IV solutions were not affected by the mold in this case, the company has had a number of recall product recalls over the last few years in connection with quality problems.
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Mars to buy pet healthcare provider VCA for $7.7 billion
Candy and pet food conglomerate Mars Inc is buying veterinary hospital operator VCA Inc (WOOF.O) for $7.7 billion in a deal that will give the maker of Pedigree pet food an even bigger share of the $4 billion global pet healthcare market. The deal will help family-owned Mars, better known for candies such as M&Ms and Snickers, add about 800 pet hospitals to its network of more than 900 clinics, which includes the 61-year-old Banfield pet hospital chain. McLean, Virginia-based Mars is already the biggest pet food company in the world – it held a quarter of the $71.77 billion global pet food market as of 2015 – followed by Nestle SA (NESN.S), the maker of the Purina cat and dog food brand. Mars and Nestle also hold the mantle of being the No.1 and No.3 confectionary makers in the world, respectively, according to Euromonitor data. Candy makers have been diversifying their business as calorie-conscious consumers increasingly shun sugary sweets, a trend that has weighed on the $183 billion global confectionery market. Rival Hershey Co (HSY.N) is also expanding beyond chocolates – it bought Krave, a beef jerky maker, in 2015, while Mondelez International Inc (MDLZ.O) recently introduced Good Thins, its first snack brand in more than a decade. “While most of Mars Pet is focused on food, the firm had long dabbled in pet healthcare services,” Morningstar analyst Debbie Wang wrote in a note. “Considering that growth in pet healthcare has averaged 7–8 percent over the long term, the addition of VCA would help Mars tap into this appealing market.” Mars said it would offer $93 per share, a premium of 31.4 percent to VCA’s Friday closing price. Including debt, the deal is valued at $9.1 billion.
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SEC Charges Government Contractor With Inadequate Controls and Books and Records Violations
The Securities and Exchange Commission today announced that an oil-and-gas company has agreed to settle charges that it used illegal separation agreements and retaliated against a whistleblower who expressed concerns internally about how its reserves were being calculated. The SEC’s order finds that Oklahoma City-based SandRidge Energy Inc. conducted multiple reviews of its separation agreements after a new whistleblower protection rule became effective in August 2011, yet continued to regularly use restrictive language that prohibited outgoing employees from participating in any government investigation or disclosing information potentially harmful or embarrassing to the company. The SEC’s order further finds that SandRidge fired an internal whistleblower who kept raising concerns about the process used by SandRidge to calculate its publicly reported oil-and-gas reserves. The employee had been offered a promotion, which was turned down. Just months later, senior management concluded the employee was disruptive and could be replaced with someone “who could do the work without creating all the internal strife.” The company had conducted no substantial investigation of the whistleblower’s concerns and only initiated an internal audit that was never completed. The employee’s separation agreement also contained the company’s prohibitive language that violated the whistleblower protection rule. “Ignoring a rule that protects communications between outgoing employees and the SEC, SandRidge flatly prohibited such contact in their separation agreements and at the same time retaliated against an employee who raised concerns about the company to its management,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office. Jane Norberg, Chief of the SEC’s Office of the Whistleblower, added, “Whistleblowers who step forward and raise concerns internally to their companies about potential securities law violations should be protected from retaliation regardless of whether they have filed a complaint with the SEC. This is the first time a company is being charged for retaliating against an internal whistleblower, and the second enforcement action this week against a company for impeding employees from communicating with the SEC.” Without admitting or denying the SEC’s findings, SandRidge agreed to pay a penalty of $1.4 million, subject to the company’s bankruptcy plan. The SEC’s investigation was conducted by Tamara F. McCreary, Timothy L. Evans, and David R. King and supervised by Jonathan P. Scott and David L. Peavler of the Fort Worth office.
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Biomet Charged With Repeating FCPA Violations
The Securities and Exchange Commission today announced that a Warsaw, Ind.-based medical device manufacturer has agreed to pay more than $30 million to resolve parallel SEC and Department of Justice investigations into the company’s repeat violations of the Foreign Corrupt Practices Act (FCPA). Biomet first faced FCPA charges from the SEC and entered into a deferred prosecution agreement with the Department of Justice in March 2012, agreeing to pay more than $22 million to settle both cases. As part of the SEC settlement, Biomet agreed to retain an independent compliance consultant to review its FCPA compliance program. After the settlement as Biomet was implementing recommendations from the independent monitor, the company learned about potential anti-bribery violations in Brazil and Mexico and notified the monitor and the SEC in 2013. The SEC’s order finds that Biomet continued to interact and improperly record transactions with a known prohibited distributor in Brazil, and used a third-party customs broker to pay bribes to Mexican customs officials to facilitate the importation and smuggling of unregistered and mislabeled dental products. “Biomet didn’t entirely learn its lesson the first time around as it continued to use a prohibited agent in Brazil and engaged in a new bribery scheme in Mexico,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit. Biomet, which has since been acquired by Zimmer Holdings and renamed Zimmer Biomet, agreed to pay more than $5.82 million in disgorgement plus $702,705 in interest and a $6.5 million penalty for a total of more than $13 million. Zimmer Biomet also agreed to retain an independent compliance monitor for a three-year period to review its FCPA policies. As part of the deferred prosecution agreement with the Department of Justice, Zimmer Biomet agreed to pay a fine of more than $17.46 million. The SEC’s investigation was conducted by Michelle L. Ramos, Robert Dodge, and Shahriar Masud. The case was supervised by Tracy L. Price. The SEC appreciates the assistance of the Department of Justice Criminal Division’s Fraud Section and the Federal Bureau of Investigation.
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Shipping Conglomerate and Former CFO Charged With Failure to Recognize Hundreds of Millions in Tax Liabilities
The Securities and Exchange Commission today charged shipping conglomerate Overseas Shipholding Group (OSG) and its former chief financial officer Myles R. Itkin with failing to recognize hundreds of millions in tax liabilities in its financial statements that had accumulated over nearly 12 years resulting from its controlled foreign subsidiary guaranteeing OSG’s debt that had been borrowed under various credit financing agreements. As a result of the misconduct, OSG materially understated its income tax liabilities by approximately $512 million (17 percent) of its total liabilities. In November 2012, following the discovery of the tax liabilities, OSG filed for bankruptcy protection. “Where public companies derive economic benefits from their offshore earnings, it is critical that those responsible for the company’s accounting and financial reporting understand the federal income tax consequences triggered from these benefits,” said Gerald Hodgkins, Associate Director of the SEC’s Enforcement Division. According to the SEC’s order instituting settled cease-and-desist proceedings, OSG’s credit agreements from 2000 to the second quarter of 2012 contained a provision making OSG’s controlled foreign subsidiary Overseas International Group Inc. (OIN) and another subsidiary Overseas Bulk Ships (OBS) “jointly and severally” liable for OSG’s debt. The provision triggered current income tax liability under Section 956 of the Internal Revenue Service Code, which addresses “investments in United States property,” for amounts that OSG borrowed, and deferred tax liabilities for amounts not borrowed but available under the credit agreements. During this period, OSG and Itkin, who participated in the negotiation of the credit agreements and signed them, failed to recognize OSG’s tax liability despite significant indicia that the structure of its credit agreements in effect made OIN a guarantor under the agreements and could trigger tax consequences, including tax memos from outside counsel and communications with the banks during the negotiation phase of the credit agreements. Without admitting or denying the charges, OSG and Itkin each consented to the order finding they violated or caused the violation of, among other provisions, the negligence-based antifraud provisions as well as reporting, books-and-records, and internal controls provisions of the federal securities laws. OSG agreed to pay a $5 million penalty subject to bankruptcy court approval, and Itkin agreed to pay a $75,000 penalty. The SEC’s investigation was conducted by Cory C. Kirchert, Nancy E. McGinley, and Brian Palechek with assistance from Kevin Lombardi. The investigation was supervised by Anita B. Bandy.
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