White Collar and Securities: Executive Pleads in Mortgage Fraud Case

Raymond Bowman, former president of Taylor, Bean & Whitaker Mortgage Corp., pleaded guilty to charges in federal court in the Eastern District of Virginia stemming from a mortgage fraud that prosecutors characterized as a $1.9 billion scam. Bowman pleaded guilty to a count of conspiracy to commit wire fraud, bank fraud, and securities fraud. He also pleaded guilty to a count of making false statements. The government alleged that the crime defrauded the Troubled Asset Relief Program and caused the failure of Colonial Bank, based in Montgomery, Alabama.

The government prosecutors said that Bowman and other Taylor Bean executives conspired with executives at Colonial Bank. As part of the conspiracy Taylor Bean and Colonial Bank personnel transferred more than $400 million between the two entities to hide Taylor Bean overdrafts. The conspirators sent mortgage information to Colonial Bank for fictitious loans or actual loans that Taylor Bean had already sold or committed to sell to other investors. As a result, Colonial Bank got no value for its tens of millions of dollars of purported Taylor Bean mortgage assets. The conspirators caused Colonial Bank and the Freddie Mac to believe that they had undivided ownership interests in thousands of the same loans worth hundreds of millions of dollars.

Moreover, conspirators knew that their fraud caused Colonial Bank to file false periodic reports with the SEC.

Finally, Bowman lied to the FBI when questioned. This served as the basis for the false statements charge.

Bowman is the third Taylor Bean executive to plead guilty. They are all cooperating in the prosecution of former chairman Lee Farkas. All hope to lessen their sentences through cooperating against Farkas who goes to trial on April 4, 2011.

White Collar: ATT Charged in Civil RICO Complaint

A customer of AT&T (ATT) has filed a class action suit in federal district court in San Francisco alleging a bank, wire and mail fraud based racketeering claim. The suit names AT&T and three of its subsidiaries as defendants. The complaint alleges that the defendants engaged in a practice known as "cramming," which is the unlawful practice of charging customers for third party products that the customers had neither requested nor authorized.

The complaint accuses the defendants of falsely representing in their bills that the amounts charged were authorized and owed by customers. The plaintiffs alleged two specific bills and the invoice dates to meet the requirement of a pattern of racketeering activity.

The complaint alleges that the racketeering enterprise consisted of AT&T, the three subsidiaries, billing aggregators, and third party providers billing through AT&T. The plaintiffs successfully argued that the entities forming the RICO enterprise all had a common purpose, thus meeting the burden necessary to establish an enterprise rather than an ad hoc group or conspiracy. The common purpose was the exploiting of AT&T's unlawful third party billing and collecting system.

The case has made it through the first hurdle of a motion to dismiss. Discovery will now begin before the next major obstacle for the plaintiffs, which is the certification of the class under Federal Rule of Civil Procedure 23.

White Collar: Are White Collar Wiretaps Too Easy

Last week I gave a presentation at the University of Miami Law School during a symposium conducted by the school's law review. The topic of the symposium was corporate crime. My panel discussed the Criminalization of Corporate Conduct.

I looked in particularly at the likely increased use of wiretap orders in the investigation of white collar crime. I used as a discussion point the wiretaps in the Galleon hedge fund cases, particularly focusing on the pleadings by the government and Defendant Raj Rajaratnam involving the motion to suppress the wiretap evidence.

Of particular interest is the issue of the necessity of the wiretaps. Rajaratnam argued that the taps were unnecessary for the government to accomplish its investigation. Moreover, the Defendant argued that the affidavit presented to the authorizing court was knowingly lacking in material details. The motion argued that the government failed to advise the court of the following: 1) the FBI had been conducting an investigation of Rajaratnam for over a year, 2) the SEC had been conducting an investigation for over four years, 3) as part of the its investigation, the SEC had obtained over 4 million documents, which it had reviewed, 4) the SEC shared the documents and important information from its investigation with the FBI, 5) the SEC had interviewed or taken investigative testimony from 20 Galleon employees, 6) the SEC had interviewed Rajaratnam twice, and 7) the government failed to advice the court that the SEC investigation was continuing while the wiretaps were underway.

The government argued that traditional investigative techniques would not work in the investigation. An undercover could not be introduced because of the insular nature of Galleon. Physical surveillance was not possible. And finally, interviewing witnesses or the execution of a search warrant would disclose the existence of the confidential investigation.

The court ruled that the government had failed to prove necessity due to its failure to make material disclosures to the authorizing court. However, the court did not suppress the evidence. Instead, it took into account the information adduced during a hearing on the motion. The court determine that the additional evidence supplemented that already in the affidavit. The court said that the SEC's investigation would not have proved the full extent of the criminal activity because the crime was largely conducted by telephone. Thus, the court denied the motion to suppress.

Title III, which provides for the authorization of wiretaps seems to make necessity condition precedent for the authorization of this extraordinary investigative technique. However, the court seemed to give the government two chances to establish probable cause. First, the government produced an insufficient affidavit. The the government had the opportunity to cure the deficiencies during the hearing.

If the government is allowed the opportunity to cure its intentional or reckless omissions, the protections against wanton use of wiretaps may be eviscerated.

White Collar: IRS Offers Second Amnesty Program

The Internal Revenue Service has created an amnesty program for offshore account holders for the second time in three years. The intent of the amnesty is to lure tax evaders to self report. The penalties to which such self reporting individuals are subject are considerably less than if the government had uncovered the evasion. Additionally, the IRS has announced that it will not refer to the Justice Department for prosecution any of those self reporting.

The amnesty program will last until August 31, 2011. An individual taking advantage of the amnesty will pay a penalty of 25% of the amount in the offshore bank account in the year with the highest aggregate account balance over the eight year period running from 2003 to 2010. This is a substantial saving over the normal penalty of 50% of the greatest amount in the account for each year over a six year period. Moreover, some taxpayers may be eligible for reduced penalties of 5% or 12.5%. Back taxes and interest for up to eight years must also be paid.

Persons with offshore accounts containing $75,000 or less in a year covered by the program will qualify for a lower penalty of 12.5%.

In 2009 the IRS instituted an amnesty program and found it to be very successful. That program resulted in approximately 15,000 tax payers notifying authorities of their tax evasion, accomplished through the use of offshore bank accounts. The penalties at the time of the first amnesty were lower than those announced for the second program. Under the prior program taxpayers paid a penalty of 5% or 20%.

For more about the amnesty, please see The New York Times, "IRS Offers New Amnesty Deal for Offshore Accounts," February 8, 2011, http://www.nytimes.com/2011/02/09/business/09tax.html?ref=business.

White Collar and Securities: New Investigation of Hedge Fund

Today, The New York Times is reporting that Samir Barai and his hedge fund Barai Capital Management is under investigation for insider trading (http://dealbook.nytimes.com/2011/01/31/another-hedge-fund-linked-to-insider-trading-inquiry/?ref=business). The report says that the Federal Bureau of Investigation executed a search warrant at Barai Capital last November.

The investigation is associated with a criminal complaint against Winifred Jiau. In December the government charged Jiau with leaking confidential information about technology companies to two money managers. One of those managers is reportedly Barai. The companies involved are Marvell Technology and Nvidia. The complaint against Jiau alleges that she provided the information to the money managers in 2008. It says that she provided specific financial information about the companies before the public release of that information.

Specifically, regarding Marvell, the complaint against Jiau alleges that she told the fund managers that Marvell's revenue for the upcoming quarter would be approximately $805 million and its gross margins would be 53%. In a follow up call she amended her figures to a more exact prediction of $804 million in revenue, gross margins of 51.6%, and earnings of $.11 per share. Those numbers turned out to be quite prescient. It is alleged that Barai's fund made in excess of $820,000 by trading Marvell securities between May and June 2008.

On the scale of complexity insider trading cases are easier for prosecutors to establish that frauds allegedly based on products and statements that led to the economic crisis but significantly more difficult than penny stock "pump and dump" schemes.

Health Care and White Collar: Fraud Recoveries Come from Pharmaceutical Giants

In 2009, the Department of Health and Human Services and Department of Justice jointly created the Health Care Fraud Prevention & Enforcement Action Team ("HEAT"). The goal of the venture was and remains the prevention of waste, fraud, and abuse in programs such as Medicare and Medicaid. The program utilized task forces throughout the country dedicated to the prosecution and hopefully the eradication of health care fraud.

An HHS report claims that the HEAT program obtained 140 indictments in the last fiscal year against 284 defendants. Prosecutors obtained 726 convictions. (The reasons for a larger number of convictions than indicted defendants probably arises from cases already in the prosecutorial pipeline and those that resulted in negotiated pleas without indictments.) The average prison sentence was in excess of three years.

Most remarkable is the report's claim that the program obtained recovery of $4 billion of monies taken by fraud. An analysis of this amount reveals that the largest category of recovery is payment obtained fraudulent by large pharmaceutical companies that marketed drugs for uses not approved by the Food and Drug Administration.

Botox marker Allergan, Inc., agreed to pay the government $600 million to resolve criminal and civil charges stemming from its marketing of Botox as a treatment for headaches. The drug manufacturer Novartis agreed to pay $422.5 billion to resolve criminal and civil issues arising from its illegal marketing of pharmaceutical products for off label uses. Also, AstraZeneca paid $520 million to settle allegations that the company marketed its anti psychotic drug Seroquel for off label uses and also paid kickbacks to physicians for prescribing the drug.

In total, of the $4 billion collected, approximately half came from settlements with large drug manufacturers. In the future the HEAT task forces will no doubt continue to pursue the individual practitions of fraudulent medicine with the goal of financial recovery and prison time. However, it will be interesting to see if the approach taken against the pharmaceutical companies will dissuade future fraudulent conduct. If not, look for the next round of cases against big pharma to include indictments of management with the potential for significant prison terms.

For more about the report please see "Health Care Fraud Crackdown Nets $4 Billion," on CNNMoney.com, http://money.cnn.com/2011/01/24/news/economy/health_care_fraud/.

Securities: Class Action Claims Up

A study prepared by Stanford Law School in conjunction with Cornerstone Research reports that class action filings in federal court rose 4.8% between 2009 and 2010. Interestingly, the report says that the greatest growth in filings are cases alleging disclosure violations in merger and acquisition transactions. These violations replaced traditional fraud cases, which experienced a sharp decline in filings, as the most prominent types of cases.

The growth in merger and acquisition filings resulted primarily from a large increase in the number of cases filed naming Chinese issuers. Cases against Chinese firms amounted to almost 43% of the cases filed against all foreign issuers.

The reason for the larger numbers of cases involving Chinese issuers is not readily apparent. One explanation is that Chinese companies are new to the American market. As a result, the people operating these companies are not yet very familiar with Securities and Exchange Commission disclosure rules. In a sense this theory views the issue as a acculturation process. As the Chinese business community becomes more comfortable with U.S. regulations, problems with disclosure violations should cease. A less benign explanation for the number of cases is the possibility of outright fraud. The geographic distance could lead confidence artists to conclude that the likelihood of capture for fraud is remote, thus encouraging the risk of unlawful behavior.

The study also appears to show that effects of the credit crisis are wearing off, at least in the context of federal class action filings. Plaintiffs filed only 13 such cases in 2010, a 76.4% decrease from 2009.

It will be interesting to see if 2011 shows that merger and acquisition cases remain strong or whether the spurt in activity resulted from corporate economic contraction resulting from the recent financial crisis. If that is the case, we should see traditional fraud cases returning to the forefront of federal class action securities filings.

For more about report please see http://www.housingwire.com/2011/01/20/class-action-federal-securities-fraud-cases-on-the-rise.