White Collar, Securities, and Health Care

White Collar and Securities: Executive Pleads in Mortgage Fraud Case

2011-03-14T18:26:00.005-04:00

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

2011-03-08T19:37:00.003-05:00

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

2011-02-23T19:58:00.003-05:00

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

2011-02-08T15:50:00.004-05:00

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

2011-01-31T17:38:00.004-05:00

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

2011-01-25T10:46:00.006-05:00

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

2011-01-21T11:36:00.005-05:00

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.

White Collar and Securities: New York Federal Court Okays Wiretap Evidence in Insider Trading Prosecutions

2011-01-07T14:32:00.005-05:00

In a series of insider trading prosecutions in federal court in New York judges have ruled that wiretap evidence is admissible. The cases have arisen from a three year investigation of the Galleon hedge fund. The best known of the prosecutions is the case against Raj Rajaratnam, founder of Galleon. he is scheduled to go on trial on February 28, 2011, in the Southern District of New York.

In Rajaratnam's case, as well as the companion cases, the Justice Department has sought to introduce evidence of conversations intercepted pursuant to court authorized wiretaps. These cases appear to be the first time that wiretap evidence will be used by the government in an insider trading prosecution.

Wiretaps are authorized by the Omnibus Crime Control Act of 1968. They are an extraordinary investigative tool and are to be used only when the government demonstrates to the court that such wiretaps are necessary to further its investigation. Wiretaps are authorized when other less intrusive investigative techniques have proved insufficient. Courts refer to this as the "necessity" requirement. Affidavits in support of wiretap warrants must contain sufficient information to satisfy the court that other investigative means will not prove effective and that the wiretap requested is necessary to conduct the investigation. In many ways the law views a wiretap as essentially an investigative technique of last resort.

Historically, government has limited its use of wiretaps to investigations of crimes such as drug distribution and racketeering type offenses. Investigators have not used the technique in pursuit of white collar crime such as securities fraud. The probable explanation for this fact is that white collar type cases often have large numbers of documents that investigators can use to investigate economic relationships and the flow of monies. Moreover, business crime investigation typically affords the opportunity to interview witnesses who are not connected to the criminal scheme. Thus, document review, witness interviews, financial forensic analysis, and a grand jury may all be useful in concluding a successful investigation without the necessity of wiretaps. Additionally, wiretaps are most beneficial in the investigation of ongoing criminal activity. Most fraud investigations are retrospective. Thus, there is less likelihood of obtaining relevant evidence from a wiretap during a fraud investigation.

The fact that the government successfully persuaded courts to authorize the wiretaps and then admit the evidence from the taps in an insider trading prosecution suggests that in the future government investigators will seek to use wiretaps in fraud investigations where they believe that the criminal conduct is ongoing.

If you have any questions about this post, white collar enforcement, or securities litigation, please contact me at (954) 761-2902 or at richard.serafini@ruden.com.

Securities: New York AG Sues Ernst and Young over Lehman Failure

2010-12-29T17:26:00.004-05:00

The New York Attorney General last week filed suit against the international auditing firm Ernst and Young, alleging complicity in fraudulent accounting by Lehman Bros. prior to the collaps of that firm. The complaint alleges that the fraud allowed Lehman to hide its overly leverage balance sheet.

The case revolves around the accounting treatment of securities transactions known as "repo 105" transactions. The complaint alleges that the accounting treatment accorded the "repo 105" transactions allowed Lehman to park tens of billions of dollars in liquid fixed income securities with off shore banks. The State alleges that the sole purpose of the parking of these assets was to improve Lehman's balance sheet leverage when the company's financial reports were due.

A typical repo transaction is a financing arrangement that has no impact on a company's balance sheet leverage. However, the Financial Auditing Standards Board has determined, pursuant to FAS 140, that if a company gives up all control of a security and sells it at a discount ("haircut") of 5%, then the transaction may be booked as a sale rather than a financing arrangement. The theory of the rule is that the "haircut" will prevent the company from immediately buying the security back to create a wash transaction for the purpose if improving its financial statements. To book a final sale the company obtains a "true sale" legal opinion that the sale was a final transaction and not a cover for a financing arrangement. Such a final sale would improve the company's balance sheet leverage.

The Attorney General's complaint alleges that Lehman was unable to obtain a "true sale" legal opinion in the United States but did obtain one from a British law firm under local law for transactions in the United Kingdom.

In essence, the suit charges that E and Y entered a scheme with Lehman to help Lehman temporarily park securities to improve its balance sheet leverage. This concealed from third parties the precarious degree of leverage on Lehman's balance sheet. That leverage ultimately was a significant factor in the collapse of Lehman Bros.

Supreme Court Declares Sarbanes Oxley Removal Provisions for Accounting Board Unconstitutional

2010-07-06T16:10:00.006-04:00

In a case interpreting the provisions of the Sarbanes-Oxley Act setting up the Public Company Accounting Oversight Board the Supreme Court has held that the removal provisions for PCAOB members violates the separation of powers provisions of the United States Constitution. However, the Court upheld the remainder of Sarbanes Oxley and allowed the PCAOB to remain.

Sarbanes-Oxley created the PCAOB to oversee accounting firms that perform the audit and accounting duties for public companies. Pursuant to Sarbanes-Oxley, the commissioners of the Securities and Exchange Commission appoint the members of the PCAOB. The President appoints the members of the SEC with the advice and consent of the Senate. Both sets of commissioners can only be removed for cause.

The Supreme Court held that the double layer of for cause terminations created insulation from presidential oversight making the President's exercise of executive authority over the PCAOB too attenuated to comport with the requirements of the Constitution's separation of powers provisions. Instead, the Court held that the termination structure impermissibly allowed Congress to encroach on executive authority. Therefore, the Court struck down the Sarbanes-Oxley provisions for the removal of the members of the PCAOB.

The unconstitutional tenure provisions of the Sarbanes-Oxley Act for the PCAOB are severable from the rest of the Act. Thus, the Court left the remainder of the Sarbanes-Oxley regulatory scheme in tact. The PCAOB remains with oversight responsibility for accounting firms providing services for public companies. With the Court's voiding of the "for cause" removal provisions, the commissioners of the SEC may terminate the PCAOB members "at will."

The name of the case before the Supreme Court was Free Enterprise Fund v. Public Company Accounting Oversight Board. To read the opinion, please see http://www.supremecourt.gov/opinions/09pdf/08-861.pdf.

For more about the decision, please see The National Law Journal, "Sarbanes-Oxley Survives High Court Ruling on Accounting Board," http://www.law.com/jsp/article.jsp?id=1202463107175&SarbanesOxley_Survives_High_Court_Ruling_on_Accounting_Board.

Supreme Court Upholds Honest Services Fraud, but Vacates Skillings Conviction

2010-06-24T11:47:00.005-04:00

In a much anticipated decision, the United States Supreme Court upheld the constitutionality of the "honest services" theory of mail fraud and wire fraud prosecutions. However, in doing so, the Court vacated the conviction of former Enron executive Jeffrey Skillings. The Skillings case was remanded to a lower court for further proceedings.

The Justice Department had charged Skillings with conspiracy to commit wire and mail fraud for defrauding Enron investors of his honest services. The Government charged Skillings with conspiring to defraud Enron’s shareholders by breaching his duty of honest services in misrepresenting the company’s fiscal health, thereby artificially inflating its stock price. It was the Government’s theory at trial that Skillings profited from the fraudulent scheme by receiving of salary and bonuses. Additionally, the Government alleged that he realized $89 million from the sale of Enron stock.

Skillings's defense team had attacked the mail fraud and wire fraud honest services theory as unconstitutionally vague. Justice Ginsburg in her decision held that the historic core of the honest services theory of the fraud statutes was the subversion of honest services by bribery and kickback schemes. Thus, the Court held that the application of the honest services theory in these instances met constitutional scrutiny. In such cases it is immaterial whether any person or entity suffered an economic or other tangible loss. The harm comes from the victim not receiving the honest services of the violator.

In the case before the Supreme Court the Government had charged the following as the objects of its conspiracy count: 1) honest services wire fraud, 2) money or property wire fraud, and 3) securities fraud. A conviction of Skillings for conspiracy based on honest services wire fraud would be unconstitutional because the Government did not allege a bribe or kickback as a basis for the honest services fraud. Instead, it alleged a conflict of interest as the basis. However, the Justice Ginsburg rejected a conflict of interest basis for honest services fraud. Because the jury returned a general verdict of guilty to the conspiracy count, the Court was unable to determine whether it had used the constitutionally impermissible theory. Therefore, the Court vacated the conviction and remanded the case to the Fifth Circuit Court of Appeals for further proceedings.

The case is particularly significant because it will allow the federal government to continue the use of wire and mail fraud statutes to combat official corruption. The fraud statutes and the honest services theory of prosecution had become government favorites in the prosecution of local and state officials. Federal bribery statutes only apply to federal officials. So, to target corrupt state and local government officers, the Justice Department uses the honest services theory based on bribery or kickbacks. To a lesser extent, the Government also uses the theory against corrupt business people, although the money or property fraud theory is much more prevalent in the private sector context.

For more about the Supreme Court's decision, please see The New York Times, "Justices Limit Use of 'Honest Services' Law against Fraud," June 24, 2010, http://www.nytimes.com/2010/06/25/business/25bizcourt.html?hp.

U.S. and Switzerland Deal to Reveal Clients Suspected of Tax Evasion

2010-06-21T16:56:00.004-04:00

Swiss law makers approved a deal between Swiss and American authorities that will pave the way for Swiss banks to provide U.S. prosecutors with account information on thousands of suspected tax cheats.

The agreement grew out of a law suit by the United States against Swiss banking giant UBS to gain the identity of undisclosed private banking accounts. As a result, UBS will identify clients with such undisclosed accounts. UBS accounts at one point held more than $18 billion in assets held offshore by Americans. Moreover, the agreement opens up investigative avenues for American tax and law enforcement authorities into the accounts held by Americans at other Swiss financial institutions. Such other institutions likely to receive American inquiries are Credit Suisse and HSBC, one of the world's largest banks, which has operations in Switzerland. Swiss banking institutions hold approximately 1/3 of the world's $7 trillion in offshore wealth.

This may be only the first waive of inquiries. Reportedly, prosecutors are looking into banks in Hong Kong and Singapore, two increasingly popular locations for offshore banking. Leads from almost 15,000 Americans who disclosed their offshore account information in response to an IRS voluntary disclosure program has aided the investigative efforts immensely.

In 2009, UBS paid a $780 million fine to federal authorities as part of a deferred-prosecution agreement with the United States. Part of that settlement included the bank's disclosure to investigators of the names of several hundred clients.

Any American account holder who objects to the bank providing information may contest the disclosure in Swiss courts. However, anyone making such an objection must notify the Attorney General of the United States of the objection. This fact effectively will identify the objecting person to the IRS and accomplish the same result as the bank's disclosure.

There is a sliding criteria scale for determining disclosure. The bank will identify clients with undisclosed accounts of at least $988,000. That amount will also trigger disclosure of Americans whose funds are in the name of secret offshore sham companies. For accounts involving the submission of false documents to UBS or the IRS, the trigger amount is $247,000.

This is a far reaching agreement that fundamentally changes the nature of Switzerland's banking secrecy laws. Moreover, the United States appears ready to take the secrecy fight to other offshore banking havens. As the world's financial system has become more global, the United States has suffered significant tax evasion losses. The United States has the legal strength to address the hiding of assets and is making the attack a priority.

For more about the Swiss and American agreement, please see The New York Times, "Swiss Approve Deal for UBS to Reveal U.S. Clients Suspected of Tax Evasion," June 17, 2010, http://www.nytimes.com/2010/06/18/business/global/18ubs.html?scp=1&sq=swiss%20ubs&st=cse.

Securities: SEC Settles Administrative Action for Transactions Affecting the Price of Secondary and Follow On Offerings

2010-05-11T17:32:00.008-04:00

On May 11, 2010, the Securities and Exchange Commission agreed to administrative settlements with two traders who covered short sales with stocks purchased during follow on or secondary offerings. The settlement states that Peter Grabler and Leonard Adams affected the pricing mechanism of numerous offerings by engaging in riskless transactions matching short sales with purchases of follow on or secondary offerings during restricted periods. Grabler has agreed to a cease and desist order and the payment of $636,123 and interest. Adams has also agreed to an identical order and the payment of $331,387 and interest.

Rule 105 of Regulation M protects the independent pricing mechanism of the securities markets shortly before follow on and secondary offerings. During part of the period of time that the orders cover, Rule 105 prohibited, in connection with a registered offering, anyone from covering "a short sale with offered securities purchased from . . . [a] broker . . . participating in the offering, if such a short sale occurred during the . . . five business days before the pricing of the offered securities. . . ." On October 9, 2007, the SEC amended Rule 105 refining the computation of the restricted trading period while maintaining the intent of the Rule. In both iterations the design of Rule 105 is to prevent riskless trades that would influence the market price of securities shortly before securities offerings.

The settlement agreement states that Grabler and Adams repeatedly sold short securities in companies within five days of the pricing of secondary offerings and then covered those short positions by purchasing securities in the offering. The respondents had numerous securities accounts at various brokerage houses so that they could participate in the secondary and follow on offerings. In essence the agreement states that Grabler and Adams sold short at a higher price than the offering price. By covering the short sales with stock purchased in the offering, they were able to engage in riskless transactions and realize the spread between the short sale price and the offering purchase price. These riskless transactions affected the market pricing mechanisms for the securities.

There is no scienter requirement under Rule 105. Thus, the intent of the trader is not relevant in determining liability.

The SEC claims that these actions are the first use of Rule 105 against individual traders, not associated with an underwriter or broker/dealer involved in an offering that is the focus of the inquiry.

White Collar and Securities: U.S. Reportedly Opens Investigation of Goldman Sachs

2010-04-30T17:59:00.005-04:00

Various news organizations are reporting today that the U.S. Attorney for the Southern District of New York has begun an investigation of Wall Street banking giant Goldman Sachs. The reports state that the investigation resulted from a Securities and Exchange Commission referral of possible criminal activity by the bank. The SEC brought a civil enforcement action against Goldman earlier in the month alleging securities fraud.

The prosecutors will most likely begin their investigation on the basis of facts generated by the SEC investigation. The government will begin by looking to see whether Goldman and its executives defrauded customers who invested in Goldman's CDO offering, ABACUS 2007-AC1. (See prior post for a discussion of the SEC complaint.) There are a number of fraud statutes available to federal prosecutors should they seek indictments. Those most commonly used by federal prosecutors in securities fraud cases are wire fraud, mail fraud, securities fraud, conspiracy, and money laundering.

The criminal investigation will focus more on the potential culpability of individuals rather than the Goldman corporate entity. Typically, federal prosecutors will seek to hold individuals responsible for any criminal wrongdoing rather than settle for corporate liability. In many cases a corporation will enter into a corporate integrity agreement with the government. Such an agreement will require compliance and internal education programs and a period of time in which the company must report regularly to the government. In return for the agreement the government forgoes prosecution of the business entity.

The criminal authorities have more difficult task than the SEC in prevailing in a law suit. For a criminal prosecution to be successful the government must convince the jury beyond a reasonable doubt, a much greater burden than the preponderance of the evidence burden that the SEC must meet in its civil enforcement action.

A potentially important factor to bear in mind is that the SEC did not name John A. Paulson or his hedge fund in its complaint against Goldman. In the press conference announcing the SEC action, the Commission's Director of Enforcement seemed to deflect questions about the charging of the hedge fund. Additionally, when Goldman executives testified before the Permanent Senate Subcommittee on Investigations, there was an absence of questioning about the role of the Paulson hedge fund in creating the CDO offering. One possible explanation for the absence of discussion about Paulson is that persons involved in the hedge fund may be cooperating with the government investigations.

If there are persons involved in the the deal cooperating with investigators, that fact could greatly facilitate the government's investigation and proof of wrongdoing. "Flipping" an insider to a criminal conspiracy is one of the best means of investigating and bringing a successful case against a criminal conspiracy.

For more about the reported federal criminal investigation of Goldman, please see The New York Times, "Goldman's Share Plunge on Inquiries and Downgrades," April 30, 2010, http://www.nytimes.com/2010/05/01/business/01goldman.html?ref=business.

Financial Reform: Goldman Sachs Executives Testify before Congress

2010-04-29T11:44:00.005-04:00

On Tuesday of this week several Goldman Sachs executives testified before the Permanent Senate Subcommittee on Investigations. Among those spending the day testifying were CEO Lloyd Blankfein and Fabrice (The Fabulous Fab) Tourre, who was named along with Goldman by the SEC in its securities fraud suit. The hearing picked up where the SEC suit left off as the Committee's staff focused the senators' attention more on conflicts of interest in its conduct than the SEC's specific fraud allegations. While the coverage of the hearing focused on assertions from senators with corresponding denials from Goldman personnel concerning whether Goldman had conflicts of interest, a broad view of the hearing highlights the fact that the senators and executives were not even in agreement about underlying duties and definitions.

Black's Law Dictionary defines a "conflict of interest" as a "[t]erm used in connection with . . . fiduciaries and their relationship to matters of private interest or gain to them." Thus, the concept of a "fiduciary" or "fiduciary duty" provides the basis to analyze a conflict of interest. Black's defines "fiduciary duty" as "[a] duty to act for someone else's benefit, while subordinating one's personal interests to that of the other person. . . ."

It is clear that the subcommittee and its staff assumed that Goldman had a fiduciary duty to its clients and then violated that duty by developing and selling bad investment deals and then engaging in financial transactions involving these deals that were adverse to the interests of the clients. What is far less clear is whether Goldman's executives believe that they have a fiduciary duty to Goldman's customers. If they do believe such a duty exists, Goldman's definition of a "fiduciary duty" must be significantly different from the one offered by Black's and intuitively adopted by the subcommittee.

Ultimately, apart from the speeches and political posturing, which is a part of any high profile legislative hearing, Tuesday's hearing was probably very important for the public as Congress moves forward with financial reform. A fundamental question that the reform package will address is the duty that financial professionals owe to their clients. The resulting law will attempt to define the parameters of the duty by the limits that it imposes on the financial industry. The likelihood is that the legislation will state clearly that Wall Street has a clear duty of care owed to clients and customers that must prevail over the banking institutionss goals of realizing profits. The final rules could range from outright bans on certain activities to allowing the banking institutions to hold adverse positions, but with full disclosure to their clients.

Securities: Analysis of SEC Suit against Goldman Sachs

2010-04-28T11:51:00.009-04:00

Last week the U.S. Securities and Exchange Commission shocked Wall Street by bringing an enforcement action against Goldman Sachs, the world's premier investment banking firm. In the suit, brought in federal district court in Manhattan, the SEC charged the banking firm with securities fraud in connection with the marketing of a derivative, specifically a synthetic collateralized debt obligation ("CDO"). The complaint alleges a fraud of $1 billion.

The theory of the SEC's complaint is rather simple and straight forward. The Commission alleges that Goldman Sachs put together a CDO at the request of a hedge fund, Paulson & Co., Inc. ("Paulson"). Moreover, the SEC contends that Paulson picked the subprime residential mortgage-backed securities upon which the CDO was based. The complaint then alleges that Goldman Sachs was aware of the facts that Paulson had selected mortgage-backed securities for inclusion in the CDO that it believed would default and that Paulson had taken a short position or one adverse to the investors in the CDO. Finally, the complaint alleges that Goldman's failure to so advise its customers was a material omission resulting in liability for fraud.

The SEC succinctly sums its theory in paragraph three of the complaint: ". . . GS&Co [Goldman Sachs] arranged a transaction at Paulson's request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests, but failed to disclose to investors, as part of the description of the portfolio selection process contained in the marketing materials used to promote the transaction, Paulson's role in the portfolio selection process or its adverse economic interests."

In 2007 Goldman Sachs offered to its clients ABACUS 2007-AC1, the synthetic CDO. The performance of ABACUS 2007-AC1 was tied to an underlying group of subprime residential mortgage-backed securities. Paulson, the hedge fund, selected the underlying mortgage-backed securities upon which the CDO would rest. The complaint alleges that Paulson selected underlying mortgage-backed securities that would underperform, referring to the likelihood of those securities experiencing "credit events in the near future." In short, the SEC alleges that Paulson's selection process included nothing but bad investments. Then, Paulson engaged in credit default swaps involving the underlying securities, much like buying insurance against the failure of those underlying securities. The government contends that with knowledge of Paulson's actions, Goldman offered ABACUS 2007-AC1 to its clients without informing them that Paulson picked losers for inclusion and was taking a position adverse to those investing in the offering it had created.

The SEC claims that Goldman represented to its clients that ACA Management, LLC ("ACA"), a well respected, third-party entity with experience analyzing the risks of subprime mortgage-backed securities had selected the securities underlying the CDO. The government further argues that Goldman brought ACA into the deal to essentially hide Paulson's involvement. It alleges Paulson presented the underlying securities to ACA that Paulson wanted included without revealing to Paulson the reason for inclusion, specifically, the weakness of the securities and the fact that Paulson would make adverse investments. Moreover, the SEC alleges that Paulson objected to the inclusion of any strong underlying assets.

The complaint alleges that Paulson paid Goldman approximately $15 million for the structuring and marketing of ABACUS 2007-AC1. The deal closed on April 26, 2007. By October 24, 2007, credit rating agencies had downgraded 83% of the subprime mortgage-backed securities in the ABACUS 2007-AC1 portfolio and the remaining 17% were on negative watch. By January 29, 2008, these agencies had downgraded 99% of the portfolio. Finally, the SEC alleges that investors in ABACUS 2007-AC1 lost over $1 billion while Paulson's adverse positions result in its profit of approximately $1 billion.

The complaint accuses Goldman Sachs of violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission is seeking injunctive relief, disgorgement of profits, prejudgment interest, and civil penalties.

The case will probably revolve around two factual issues. First, did Goldman Sachs make adequate disclosure to investors in ABACUS 2007-AC1? If the court finds that disclosure was adequate, then by definition there was no omission of communication of material information to the investors. Second, if Goldman Sachs omitted to make disclosure of the Paulson facts, did the investors nevertheless have this information? If the investors were fully apprised from a different source, there could be a defense argument that the omission was not material.

White Collar and Securities: University of Miami Donor Charged with Fraud

2010-04-21T17:44:00.006-04:00

Federal prosecutors in New Jersey have charged a Miami Beach business man with operating a $900 million investment fraud. Prosecutors allege that Nevin Shapiro operated a Ponzi scheme that bilked his friends and acquaintances.

The complaint alleges that Shapiro obtained investments for his company, Capitol Investments, USA. Prosecutors contend that Shapiro told prospective investors that the investment monies would be used to fund a wholesale grocery business. He told them that returns on the investments could reach 26%. Moreover, Shapiro allegedly showed investors invoices and purchase orders for sales that never took place.

Because Shapiro's alleged victims were friends and acquaintances, the scheme is commonly known as an "affinity fraud." In such a scam the victims and perpetrator have some connection or "affinity."

As happens in all Ponzi schemes, Shapiro used a portion of new investment funds to pay interest and principal to earlier investors. Additionally, the government alleges that Shapiro used the proceeds of the fraud to make numerous philanthropic donations and spent over $35 million and $38 million of stolen fraud for personal purposes. The government estimates the total loss to investors at $80 million. The higher figure is a compilation based on purported reinvestment of investors' principal.

Prosecutors allege that Shapiro donated $150,000 to the University of Miami athletic programs. As a result, the University named a student athlete lounge after him. Additionally, the government claims that Shapiro spent $400,000 on courtside seats for Miami Heat basketball games.

The government has charged Shapiro with one count of securities fraud and one count of money laundering. The case cannot proceed to trial unless the government indicts Shapiro. However, Shapiro can plead to charges in the complaint if he waives indictment. That could result if he reaches a plea agreement with the government. The Securities and Exchange Commission has filed a companion civil enforcement action against Shapiro.

For more information about the charges against Shapiro, please see the Reuters article, "US Charges Miami Sports Donor with $900 Million Fraud," http://www.reuters.com/article/idUSTRE63K3IP20100421, and The Miami Herald, "UM Booster Accused of Food Ponzi," April 22, 2010, p. A1.

White Collar and Health Care: Former Professional Baseball Player Pleads Guilty to Medicare Fraud Charges

2010-04-13T16:39:00.004-04:00

Ihosvany Marquez, a former pitcher in the Baltimore Orioles and Boston Red Sox organizations, pleaded guilty on Monday, April 12, 2010, in federal court in Miami to health care fraud charges. The government charged that Marquez and his partners submitted more than $55 million in false claims to Medicare for HIV and cancer therapy and pain treatment. The government contends that the defendants received more than $22 million in payments from Medicare as a result of the fraud.

Marquez and his co-conspirators operated six fraudulent Miami-Dade clinics and one in Orlando. It was from these clinics that Marquez and others caused fictitious bills to be sent to Medicare. According to the government, Marquez and his group did not provide any services. To operate the scheme Marquez and his group stole the Medicare numbers of some persons covered by the government insurance program and the provider numbers of physicians who participate in Medicare. The co-conspirators then laundered the Medicare proceeds through shell companies that they created for the sole purpose of laundering the proceeds of the fraud. Marquez and others also paid Cuban immigrants to pose as the owners of the clinics. These nominee owners received large fees with the understanding that the straw owners would flee the country if an investigation began.

The government will execute seizure orders on Marquez's property and holdings as he spent the proceeds of the fraud lavishly. Prosecutors contend that Marquez bought a number of luxury automobiles including a Lamborghini for almost half a million dollars, a second Lamborghini, a Ferrari, two Bentleys, and at least eight Mercedes Benzes. The total amount spent on automobiles according the government was $2.7 million. Additionally, the prosecutors allege that Marquez spent over $500,000 on jewelry and approximately $1,000,000 on thoroughbred races horses.

For more about the Marquez plea, please see The Miami Herald, "Former Pitcher: I Made Millions Off Claims," April 13, 2010.

White Collar and Securities: Miami Man Indicted for Insider Trading

2010-04-13T16:08:00.003-04:00

A federal grand jury in the Southern District of New York has handed down an indictment charging Daniel Corbin with participating in an insider trading ring. The indictment alleges that Corbin netted $2.1 million from the scheme. The government claims that Corbin obtained tips about upcoming mergers and acquisition and then traded on this non-public information. The indictment follows a 2008 indictment of Corbin charging him with securities fraud and conspiracy to commit securities fraud. The new indictment also includes charges of securities fraud and a count of conspiracy to commit securities fraud.

The indictment alleges that Corbin was part of a scheme involving Jamil Bouchareb and Matthew Devlin. Devlin's wife worked for an international public relations firm. In her position Devlin's wife became aware of material information about mergers and acquisitions before the news became public. Mrs. Devlin discussed what she had learned at work with her husband who then passed the information to Corbin and Bouchareb. The tippees executed trades based on the material non-public information they had received from Devlin. Corbin and Bouchareb rewarded Devlin for the information that he provided to them.

Devlin and Bouchareb have both pleaded guilty to charges in connection with the scheme. Corbin has pleaded not guilty to all charges.

For more about the charges against Corbin, please see The Miami Herald, "More Insider-Trade Charges for Miami Beach Resident," April 13, 2010, http://www.miamiherald.com/2010/04/13/1576339/more-insider-trade-charges-for.html

Securities: First SEC Insider Trading of Default Swaps Case Goes to Trial

2010-04-07T17:12:00.006-04:00

For the first time the Securities and Exchange Commission is bringing to trial an insider trading case based on credit default swaps. The case is taking place in the United States District Court for the Southern District of New York in Manhattan. It will be a bellwether for the handling of these types of cases by the SEC.

A "credit default swap" is exactly what the name suggests. It is a bet that a credit instrument will go into default. Typically, a credit default swap references a bond or a loan. The buyer of the credit default swap pays a premium and receives proceeds of the contract from the seller if the bond or loan goes into default. The buyer may or may not also hold the underlying obligation. However, in most cases the buyer does not hold the bonds or loan.

The SEC alleges that Jon-Paul Rorech, a bond and credit default swap salesman for Deutsche Bank Securities, provided information about a bond sale to Renato Negrin, a former Millennium Partners portfolio manager. The complaint further alleges that based on the tip, Negrin executed credit default swap transactions, which referenced the bond being offered.

The case revolves around bond offerings by the Dutch media company, VNU Group BV. In July 2006 VNU announced a $1.67 billion bond offer by its subsidiaries. Investors in the offering became concerned that the bonds could not be used to settle credit default swaps referencing them. As a result, on July 24, 2006, Deutsche Bank, the underwriter for the bond offering, announced a restructuring of the bond offer. The restructured offer was to include a 200 million euro tranche from VNU to cover the credit default swaps.

The SEC alleges that Rorech tipped Negrin about the restructuring before the announcement. Negrin bought 20 million euros of VNU subsidiary swaps. Upon the announcement of the restructuring, the price of the swaps rose. Then, Negrin sold his holdings of the swaps to realize a profit. The SEC alleges that the trading realized a gain of $1.2 million of which Negrin's personal gain was $240,000.

The case is significant because derivatives such as credit default swaps are part of the "shadow banking" system which has been essentially unregulated. A threshold issue in the trial is whether the SEC has jurisdiction in the matter. The defendants contend that credit default swaps are private contracts rather than securities and are outside the purview of the SEC. Congress has given the Commission authority to prosecute credit default swap cases where material terms of the contract relate to the price, yield, value, or volatility of a security. The Commission is arguing that the price of the credit default swap involving the VNU bonds brings the matter within its jurisdiction.

How the district court and ultimately the Second Circuit Court of Appeals rules on this issue will dictate how active an approach the SEC will be able to take in its enforcement program concerning credit default swaps. The trial is underway and the initial answer to this question should be forthcoming.

For a further discussion of the pending trial, please see BussinessWeek, "Trial Begins in First SEC Insider Default-Swap Case," April 7, 2010, http://www.businessweek.com/news/2010-04-07/trial-begins-in-sec-s-first-insider-credit-default-swap-case.html.

Health Care: Pfizer Found Liable in Civil RICO Case

2010-03-26T13:35:00.004-04:00

Yesterday was quite newsworthy the U.S. District Court in Boston. (See blog entry below about the identity theft sentencing.) In a case before the court a jury found Pfizer, Inc., liable for the violation of federal racketeering law by improperly marketing its epilepsy drug Neurontin for off-label uses. The jury awarded the plaintiffs, Kaiser Foundation Hospitals and the Kaiser Foundation Health Plan, $47 million. Civil RICO (Racketeer Influenced and Corrupt Organizations) provides for the awarding of triple damages. Thus, the jury's award is increased to a judgment of $141 million.

Off-label uses of a drug are its prescription for medical purposes not approved by the Food and Drug Administration. Pfizer marketed Neurontin not only for the treatment of epilepsy, the FDA approved use, but the company also marketed Neurontin for the treatment of migraine headaches, pain, and bipolar disorders. While physicians are free to prescribe drugs for off-label uses, drug companies may only market their products for the uses approved by the FDA.

To succeed on a claimed RICO violation the plaintiffs must prove the existence of an enterprise, which engaged in racketeering activity two or more times in a ten year period, thus establishing a pattern of racketeering activity. In this case Pfizer itself, or at least its division marketing Neurontin, would be the enterprise. The racketeering activity would be the fraudulent marketing of the drug for off-label uses, in essence a mail fraud or wire fraud. Finally, the pattern of racketeering activity would be the repeated marketing of the drug for off-label uses.

Pfizer has stated its intention to appeal the verdict. Previously, in 2004 Pfizer had pleaded guilty to a criminal charge for its promotion of off-label uses for Neurontin and paid a fine of $430 million to the federal and state governments. Pfizer believes that the court erred in allowing evidence of the criminal conviction to come before the jury and has stated its intention to base the appeal on this alleged error.

For more about the Pfizer case please see Forexyard, "US Jury's Neurontin Ruling to Cost Pfizer $141 Mln," March 26, 2010, http://www.forexyard.com/en/news/jurys-Neurontin-ruling-to-cost-Pfizer-141-mln-2010-03-25T220425Z-US.

White Collar: Hacker Sentenced to 20 Years in Identity Theft Case

2010-03-26T11:11:00.004-04:00

A federal court judge in Boston sentenced Albert Gonzalez to 20 years in prison for causing thefts of more than $200 million. Gonzalez had stolen more than 40 million debit and credit card numbers. Then, he used those stolen numbers to cause the theft and losses.

Gonzalez had pleaded guilty to breaking into accounts held by the customers of Barnes & Noble, OfficeMax, BJ's Wholesale Club, and other well known retail stores. He had been arrested in 2008 and has been in custody since.

The Gonzalez case shows the potential for serious harm that can result from identity thefts. Gonzalez was able to use sophisticated means to steal the ID numbers of the retailers' customers. In that regard the Gonzalez case is typical of large scale identity theft crimes. In such cases those committing the crimes hack into computers that store identifying information such as credit card numbers, social security numbers, or drivers license numbers. Then, using the identities of the victims, the hackers transact business in the names of the victims. The schemes can be for less sophisticated too. For instance violators may obtain ID numbers from stealing mail or obtaining credit card receipts.

For more about the Gonzalez case please see InformationWeek, "Card Hacker Draws 20 Year Sentence," March 25, 2010, http://www.informationweek.com/news/security/attacks/showArticle.jhtml?articleID=224200438&subSection=All+Stories.

White Collar and Securities: Madoff Aide Indicted

2010-03-25T12:16:00.005-04:00

A federal grand jury in the Southern District of New York has indicted former Bernard Madoff aide, Daniel Bonventre, on charges related to the operation of Madoff's $65 billion Ponzi scheme fraud. The indictment alleges that Bonventre facilitated the operation of the investment fraud by using $750 million in investment funds to hide the existence of the scheme.

Bonventre was the director of operations of Bernard L. Madoff Investment Securities, LLC, from at least 1978 until its collapse in December 2008. The investment fund ended when its fraudulent nature came to light with the arrest of Madoff on securities and other fraud charges. Bonventre began his employment with Madoff in 1968.

For a Ponzi scheme to continue in its operation the earlier investors must receive payment attributed to their investments. In the Madoff scheme the government believes that Bonventre was responsible for diverting $750 million of new investor money to earlier investors to keep the scheme operating and to prevent its discovery. Moreover, the government believes that the defendant concealed the scope of the fraud.

The indictment alleges nine counts against Bonventre. The specific crimes alleged are the following: 1) one count of securities fraud, 2) two counts of falsifying records, 3) one count of making a false filing to the Securities and Exchange Commission, 4) four counts of filing false tax returns, and 5) one count of conspiracy.

Bonventre is the sixth person charged in the Madoff fraud. Madoff, former chief financial officer Frank DiPascuali, and former accountant David Friehling have all pleaded guilty. According to prosecutors, DiPascuali's cooperation has been instrumental in unraveling the fraud. Consequently, they have petitioned the court for extraordinary leniency in his sentencing. Jerome O'Hara and George Perez have been indicted for falsifying records.

The court joined the charges against O'Hara and Perez with those against Bonventre and the three await trial. Joinder of counts is appropriate when common issues of fact and law predominate in the charges brought. Joinder streamlines the trial process thus saving judicial time and resources without prejudicing the parties.

For more about the charges, please see Reuters, "Ex-Madoff Aide Indicted for Fraud, Conspiracy," March 24, 2010, http://www.reuters.com/article/idUSTRE62N6BW20100324.

White Collar: Wells Fargo Seeks Settlement in Wachovia Money Laundering Investigation

2010-03-17T16:31:00.004-04:00

Wells Fargo is in negotiations to resolve a money laundering investigation by the U.S. Attorney in Miami into Wachovia Bank. The investigation involves Wachovia's former ties to Mexican money exchanges and whether Wachovia violated U.S. federal money laundering statutes in its relationships with these exchanges.

The money exchanges are known as "casas de cambio." The exchanges facilitate the efforts of Mexican immigrants in the United States to send money earned in the U.S. back to Mexico. However, American authorities believe that drug traffickers also use the exchanges to launder drug proceeds and transfer cash back to Mexico.

The federal prosecutors believe that Wachovia failed to exercise sufficient care and oversight in processing transfers for the exchanges. Thus, the bank failed to ensure that it was not facilitating the transfer of proceeds of unlawful activity, in particular drug sales.

The investigation became public in April 2008 as part of a series of disclosures that forced Wachovia to oust its former CEO, Ken Thompson. Wells Fargo purchased Wachovia in the fall of 2008. By the time of the acquisition Wachovia had ceased doing business with the exchanges. All of the alleged illegal conduct took place before Wells Fargo acquired Wachovia.

Wells Fargo disclosed the negotiation to settle the matter in its annual report. If the parties reach a settlement, it is likely that the bank will enter into a deferred prosecution agreement. As par of the agreement, it will have to pay a penalty and institute a money laundering compliance program.

For more about the possible settlement, please see the Charlotteobserver.com, "Wells in Talks over Wachovia Money-Laundering Probe," March 14, 2010, http://www.charlotteobserver.com/2010/03/15/1316010/wells-in-talks-over-wachovia-money.html.

White Collar and Securities: Government Focuses on Personal Gain in Backdating Trial

2010-03-15T13:03:00.007-04:00

As the United States government prepares for the beginning on Tuesday, March 16, 2010, of the trial of Bruce Karatz, the former CEO of KB Home, on charges stemming from his backdating of stock option bonuses, it is focusing on proving his motive, namely personal gain. The government has alleged that Karatz fraudulently received millions from his receipt of backdated stock options. Interestingly, the federal prosecutors have not alleged the exact amount of his alleged fraudulent gains.

The government's trial of Karatz is its sixth one alleging securities fraud based on individuals receiving backdated stock options. In most of the prior cases, the government did not focus the proof and the juries' attentions on the personal gains received by the defendants as motive for the crimes charged. Of the five prior prosecutions two resulted in convictions. A third conviction was overturned on appeal due to prosecutorial misconduct. A fourth was thrown out at trial due to prosecutorial misconduct, and the fifth resulted in an acquittal.

Defendants in the past urged juries to accept the argument that the backdating of options was a common practice among many companies. More specifically, defendants have argued that all of the actors within their corporations aware of the backdating, including the corporations' accountants and attorneys. Moreover, the argument relies on the fact that the accounting rules are arcane, and defendants relied on their accounting and legal professionals who allowed the backdating to occur. By drawing attention to the motive of personal gain, the federal prosecutors are attempting to focus the jury's attention on the result of the alleged crime, the receipt of the money by the defendant Karatz.

Previous trials had focused on Accounting Principles Board Opinion No. 25, which requires public companies to disclose in their public filings expenses incurred when granting "in the money options." "In the money" options are those below the current market value. Expenses incurred for options granted at the current market price did not have to be disclosed. Thus, there was an incentive to grant options at the lowest possible price and to reflect the date of the granting as the date when the market price was actually at that low level. By focusing on the personal gains of the defendants the prosecutors are trying to make the case less esoteric for the jury.

The indictment charges Karatz with seven counts of mail fraud, five counts of wire fraud, three counts of securities fraud, four counts of making false filings to the Securities and Exchange Commission, and one count of lying to the company's accountants.

The government will try to streamline its proof to show that Karatz knowingly and intentionally backdated his options to put money in his pocket at the expense of the company and its shareholders. The defense will argue that Karatz lacked the criminal intent to defraud the company and its shareholders, believing that the treatment of the options was lawful and appropriate. While the government would like to avoid a discussion of Opinion No. 25, it will probably be a centerpiece of the defense.

For more about the Karatz trial please see Law.com, "Prosecution in KB Home Backdating Case Takes a New Tack: Personal Gain," March 8, 2010, http://www.law.com/jsp/article.jsp?id=1202445793620&rss=newswire.

White Collar Crime and Securities: Former McKessonHBOC Chairman Sent to Prison

2010-03-11T17:00:00.003-05:00

Last week a federal judge in San Francisco sentenced Charles McCall, the former chairman of McKessonHBOC to 10 years in prison for securities fraud. McCall had been found guilty after a jury trial on November 19, 2009. The jury had found him guilty of an accounting fraud that inflated the reported revenues of HBOC and McKessonHBOC. The court denied McCall bail pending appeal and remanded him to the custody of the U.S. Marshal to begin his sentence.

The fraud began in 1997 when McCall was the CEO of HBOC. It continued after McKesson's acquisition of HBOC in early 1999. At the time of the acquisition, the name of the new entity became McKessonHBOC, and McCall became chairman of the board of directors of the new company.

The fraud came to light on April 28, 1999, when McKessonHBOC announced that it would restate its financial information for the quarter that ended March 31, 1999. The announcement caused the price of the the company's stock to collapse, dropping approximately 47% in one day in trading on the New York Stock Exchange. The fall wiped out about $8 billion of shareholder value in that one day. As a result, the government alleged loses of $8.6 billion resulting from McCall's fraud.

McCall participated in a scheme that artificially inflated software revenues of HBOC and McKessonHBOC by $100 million. The companies reported revenues that were based on contingent sales agreements. The recognition of the revenues should have been deferred until the contingencies no longer existed. Instead the companies reported the contingent revenues while acknowledging the contingent nature of the sales in secret side letters. The side letters were concealed from the companies' independent auditors.

This was the second attempt of the government to convict McCall of the crimes charged in the indictment. A 2006 trial resulted in a mistrial after the jury could not reach a verdict.

For more about the case please see Web Newswire, "Former McKessonHBOC Chairman Sentenced to 10 Years in Prison," March 10, 2010, http://www.webnewswire.com/node/513147.

Healthcare: Detroit Area Physician Convicted of Healthcare Fraud and Jailed

2010-03-11T16:16:00.004-05:00

A jury in U.S. District Court in Detroit has returned verdicts of guilty in the prosecution of a physician charged in an $18 million healthcare fraud. Jose Castro-Ramirez, M.D., was convicted of 13 counts of Medicare fraud and money laundering. The court remanded Ramirez into custody pending his sentencing.

Ramirez and others took part in a scheme to defraud Medicare of millions of dollars. The scheme billed the national health insurance program for physical therapy and rehabilitation services that were never provided. Ramirez's role in the fraud was to sign phony physical therapy prescriptions. The prescriptions served as the basis for the fraudulent billing of Medicare. In addition, Ramirez wrote prescriptions for painkillers that the schemers gave to Medicare beneficiaries as inducements to allow the use of their Medicare numbers in the operation of the scheme.

While Ramirez had been free during the trial, the court refused to continue his release after conviction. Instead, he was remanded into custody pending his sentencing. The court found that Ramirez had issues with his credibility and that factor served as the basis for his incarceration.

In February Ramirez had been taken from the court in an ambulance. After the incident, Ramirez had filed a motion seeking to delay the trial due to his ill health. The court ordered a physical examination by Ramirez's own physician who found the defendant fit for trial. Additionally, toward the end of the trial, Ramirez began to appear in court with an oxygen tank. The FBI conducted a surveillance of Ramirez and found that he did not use the oxygen from the time he left his home until he arrived at court. Only at court did he employ the oxygen tank, apparently for its effect on the jury. These were the primary credibility issues leading the court to imprison Ramirez.

Ramirez will be sentenced in June.

For more about the conviction, please see The Detroit News, "Farmington Doctor Guilty in $1.8M Medicare Fraud Case," March 11, 2010, http://www.detnews.com/article/20100311/METRO/3110472/Farmington-doctor-guilty-in-$18M-Medicare-fraud-case.

Health Care: DOJ Seeks Funding to Expand Strike Forces

2010-03-05T17:20:00.002-05:00

Officials from the U.S. Department of Justice are asking Congress to significantly enhance funding for health care investigation and prosecution in the fiscal 2011 budget. Acting Deputy Attorney General Gary Grindler and acting Deputy Assistant Attorney General for the Criminal Division Greg Andres appeared before a House Appropriations subcommittee. The officials are seeking an increase of $60 million in 2011, from $30 million to $90 million, to finance strike forces to combat health care fraud.

The Department of Justice estimates that for every dollar spent on enforcement since 1996, the Medicare trust fund has realized a return of $4.00. If that ratio were to hold in effect for the proposed increase, the $60 "investment" in enforcement would realize almost a quarter of a billion dollars returned to the trust fund. Moreover, the Justice Department estimates that the country suffers annual loses of billions of dollars due to health care fraud.

There are currently health care strike forces in seven U.S. cities. The Department wants to establish as many as 13 more such strike forces. Investigators and agents assigned to the strike forces come from Department of Justice components, the Department of Health and Human Services, and state and local law enforcement. The attorneys assigned to the strike forces come from the Criminal Division of the Department of Justice and U.S. Attorneys' offices.

The first of the strike forces began in Miami in 2007. That strike force first targeted fraud in the billing for durable medical equipment. In the Miami strike force's first year, submission of durable medical equipment claims fell by $1.74 billion.

For more about the Justice Department's request to expand the strike forces, please see Main Justice, "Justice Officials Push for Expansion of Health Care Strike Forces," March 4, 2010, http://www.mainjustice.com/2010/03/04/justice-officials-push-for-expansion-of-health-care-strike-forces/.

White Collar: Government to Use Full Arsenal to Combat White Collar Crime

2010-02-26T16:53:00.003-05:00

Traditional investigation of white collar offenses has involved reactive strategies focusing on document review and witness interviews. Increasingly the Department of Justice is using more proactive investigative strategies. For instance, the Galleon hedge fund insider trading prosecution is using extensive wire tap evidence. Additionally, the Department has recently brought a prosecution against 22 individuals for violations of the Foreign Corrupt Practices Act ("FCPA") based on the use of undercover agents. The FCPA outlaws the paying of bribes to foreign officials for business purposes.

Traditionally, white collar offenses came to the attention of law enforcement from complainants, whistle blowers, and self reporting. The new aggressive stance by the Justice Department could make prosecution of wrongdoing far more likely. Use of undercovers and electronic surveillance will facilitate the investigation and prosecution of these crimes.

In addition to the Galleon and FCPA prosecutions the Justice Department has seen significant success in its efforts to combat healthcare fraud. The Department has set up Medicare Strike Forces throughout the country. The first of these strike forces began operating in Miami and Los Angeles in 2007. The program has now expanded to include Detroit, Houston, Brooklyn, Tampa, and Baton Rouge. Since its inception the program has charged more than 300 defendants in more than 200 cases totaling allegations of more than $860 million in fraud. Prosecutors have convicted 230 defendants with almost 200 being sentenced to prison.

Assistant Attorney General Lanny Breuer has said that DOJ will continue its focus on white collar criminal prosecution. He told an audience at an American Bar Association event that the Department was developing "threat-based and intelligence-driven" strategies to pursue those committing mortgage fraud. Moreover, the AAG said that the Department was reorganizing sections to improve its approach in certain significant areas of prosecution.

For more about Assistant Attorney General Breuer's comments, please see Reuters, "US Top Cop Says Justice Department Using New Tools," February 25, 2010, http://www.reuters.com/article/idUSN2519413420100225.

Healthcare: RACs Unlikely to Report Fraud

2010-02-25T17:34:00.004-05:00

Recovery audit contractors or "RACs" are private companies that Medicare hires to identify improper payments. When a RAC identifies an improper payment to a physician or medical facility, the RAC receives a "bounty" of between 9% and 12% of the monies recovered for the government. In a three year pilot program in six states, the RACs were able to recover in excess of $1 billion for Medicare. Most of the recoveries came from hospitals.

The types of payments comprising the term "improper payments" includes honest billing errors, payments resulting from poor documentation, and other such ministerial issues. Such payments are to be understood as distinct from fraud. The RACs are required to notify criminal investigators in instances where there is suspected fraud. However, there is no incentive for the RACs to actually make such referrals. To the contrary, there is actually a disincentive to make fraud reports because Medicare requires RACs to discontinue reviewing billing records of those suspected of fraud. Thus, the RACs would forgo the possibility of the percentage reward by alleging that a payment resulted from fraud rather than a more benign explanation. In fact, during the three year pilot program RACs only referred two cases of suspected fraud.

Medicare plans to formally train the RAC auditors on detecting fraud and the process for the referral of suspected cases of fraudulent billing. The hope is that by highlighting the need to identify and report suspected instances of fraud Medicare will persuade the RACs to be more aggressive in fraud detection and reporting. It remains to be seen whether the active encouragement of Medicare can overcome the economic incentive for the RACs to treat fraud as less severe types of payment problems.

For an article about RACs and fraud detection, please see BNET, "Medicare's Bounty Hunters Turn Their Sights to Fraud," February 22, 2010, http://industry.bnet.com/healthcare/10001791/medicare-encourages-private-bounty-hunters-to-investigate-fraud/.

Securities: Court Reluctantly Accepts Settlement in SEC Suit against Bank of America

2010-02-24T11:24:00.003-05:00

Judge Jed Rakoff of the U.S. District Court for the Southern District of New York has reluctantly accepted a proposed global settlement of two Securities and Exchange Commission cases against the Bank of America. The settlement requires BofA to pay $150 million in penalties. The two matters revolved around BofA's acquisition of Merrill Lynch & Co. in late 2008. The first matter addressed the failure of BofA to disclose to shareholders the Bank's agreement to allow Merrill to pay $5.8 million in bonuses at a time when the brokerage house was suffering huge losses. The second case involved the failure of the bank to disclose to shareholders the fact that Merrill suffered a fourth quarter 2008 loss of $15.3 billion and had accelerated bonus payments of $3.6 billion to certain executives. The court had previously rejected a proposed settlement of the undisclosed bonus case as "neither fair, reasonable, adequate nor in the public interest. . . ."

There are two aspects to the current settlement. The first and less controversial is the requirement of remedial action by BofA to ensure that the same disclosure failures do not reoccur. The second aspect, and much more controversial one, is the payment of the penalty by the bank.

The remedial measures included the following: 1) an independent auditor to access BofA's accounting controls and procedures for the next three years, 2) an independent disclosure counsel to report to BofA's audit committee on the adequacy of public disclosures for the next three years, 3) an outside compensation expert to advise an independent board of directors compensation committee as to the terms of executive compensation for the next three years, and 4) the submission of executive compensation recommendations to shareholders for a nonbinding approval vote. The $150 million in penalties is to be paid by BofA to an SEC "fair funds" account for disbursement to BofA shareholders at the time of the Merrill acquisition.

As a threshold matter the court had to decide whether the proposed settlement had a reasonable basis in fact for concluding that the nondisclosures of the bank and its officers were the result of negligence rather than being intentional or reckless. The court reviewed a 35 page statement of facts and a supplemental 13 page statement of facts. Additionally, Judge Rakoff obtained from the New York State Attorney General deposition testimony that office used in bringing a fraud action under New York state law against the bank and two top officials. Without opining about whether the evidence gave greater support to the SEC's negligence theory or the AG's fraud theory, the court ruled that the SEC's negligence conclusion had evidentiary support and was not therefore irrational.

After determining that the factual basis was not irrational, the court had to decide whether the proposed settlement is "fair, reasonable, adequate, and in the public interest." Referring to the remedial measures, Judge Rakoff called them "helpful, as far as they go." Moreover, he pointed out that the BofA decision makers and lawyers employed a working assumption of not disclosing information "if a rationale could be found for not doing so." The remedial measures should help produce disclosure in the future when there is a question about whether or not to disclose information.

Judge Rakoff had the greatest difficulty with the penalty provision of the settlement. While the $150 million penalty is significantly greater than the $33 million proposed settlement that the court rejected earlier for the undisclosed bonuses case, Judge Rakoff considered the $150 million amount to still be modest since it included both cases. More importantly, the court said that assessing the fine against BofA rather than those responsible for the nondisclosures penalizes the shareholders who were the actual victims of the failures to disclose. While the decision that the monies will go to a "fair fund" account for payment to the victims of the nondisclosures is helpful, the court points out that it will only amount to pennies per share. Moreover, by not accessing fines against the persons responsible, a significant deterrent effect of the penalties is lost.

The court calls the proposed settlement "far from ideal." "While better than nothing, it is half-baked at best." Judge Rakoff writes that, if he were deciding the case "de novo," he would "reject the settlement as inadequate and misguided." However, the parties apparently pressed upon the court the fact that the law requires courts to give substantial deference to regulatory bodies, such as the SEC, in the areas of their primary responsibility. This factor coupled with the much more important consideration of the court's exercise of judicial restraint led Judge Rakoff grant the SEC's motion to approve the settlement, albeit with certain revised provisions.

The ultimate settlement of the case and the court's obvious concerns with the parties' settlement agreement raises a valid question of whether the SEC acted in the best interest of the BofA shareholders, the investing public in general, and the markets. It will be interesting to monitor the success of the New York Attorney General's fraud suit against the bank and two of its officers. If the AG is successful, that fact should raise question about the SEC's lack of aggressive law enforcement action against those responsible for BofA's disclosure failures.

White Collar and Securities: Investigations of Toyota Begin

2010-02-23T15:46:00.004-05:00

Reports are beginning to surface that Toyota has received a grand jury subpoena from a federal grand jury considering possible criminal charges and a document request from the Securities and Exchange Commission. The investigations apparently revolve around safety issues, including sudden acceleration, leading to the company's recall of more than 8 million vehicles. Among the issues addressed in the recall is the sudden acceleration and problems with the braking systems. The company is also the subject of congressional investigations.

The Wall Street Journal is reporting that the grand jury subpoena was issued from the United States Attorney's Office in Manhattan. The securities fraud unit of that office is active in cases involving public companies. The paper is also reporting that the request for documents from the SEC was a voluntary request that came from the Commission's Los Angeles office

Toyota Motor Corporation is the world's largest automaker. It is a publicly traded company, and its stock is traded on the Tokyo, London, and New York stock exchanges.

It is likely that the United States Attorney and the SEC are both considering similar possible charges. The question under investigation is whether Toyota officials were aware of mechanical deficiencies in the company's products and failed to disclose these deficiencies to the investing public and in its periodic filings to the SEC. If 1) such deficiencies existed, 2) corporate personnel were aware of the deficiencies, and 3) the information about the deficiencies rises to the level of material information, the company had a duty to disclose the information. Under securities laws material information is that which a reasonable investor would need to make an informed decision of whether or not to execute a securities transaction. In short, if there were significant problems with sudden acceleration, brakes, and other systems about which Toyota management knew and withheld disclosure, Toyota and its knowledgeable officials could be legally liable both criminally and civilly.

The existence of the potential factual situation above could serve as the basis for criminal charges of wire fraud, mail fraud, and securities fraud among others. Also, the facts could support a civil Section 10(b), Rule 10b-5 Securities Exchange Act and rules charge by the SEC. It will be interesting to see if and how these investigations develop.

For more about the investigations please see The Wall Street Journal, "Subpoenas Hit Toyota on the Eve of Hearing," February 23, 2010, http://online.wsj.com/article/SB20001424052748704454304575081363213478420.html?mod=WSJ-hpp-LEFTWhatsNewsCollection.

White Collar and Healthcare: Big Tobacco Seeks Supreme Court Review of RICO Finding

2010-02-22T17:34:00.005-05:00

Three of the nations largest companies are seeking Supreme Court review of the determination that they had engaged in racketeering acts in violation of the federal RICO statute. The appeal is of the decision of a three judge panel of the United States Court of Appeals for the District of Columbia. That court upheld the decision of the United States District Court finding the companies liable for racketeering violations based on fraud.

Philip Morris, Lorillard, and R.J. Reynolds Tobacco are asking the Supreme Court to review the circuit court's decision to uphold the trial court. The U.S Department of Justice brought a civil action against the tobacco companies in 1999, alleging that the companies violated RICO by making deceptive claims as part of their advertising. Among the deceptions were claims of low tar and "light" cigarettes. At trial the district court judge found that the companies had conspired to hide the dangers of cigarette smoking through these fraudulent claims.

To succeed in the RICO allegatiion the government had to prove that the companies constituted racketeering enterprises and that they engaged in a pattern of racketeering activity. The government satisfied the trial court that the companies met the definition of an enterprise and that they had conspired to engage in the pattern of racketeering activity, which was the pattern of false claims designed to increase sales and profits.

The companies appear to be asking the Supreme Court to hear the case on the basis of a First Amendment challenge. The companies contend that the government's use of RICO in the context of the suit against big tobacco is a violation of protected speech and will chill public debate on scientific matters.

It may seem like quite a stretch to move from advertising light cigarettes to a defense of scientific speech. However, the thinking of the company attorneys probably is that recently the Supreme Court reversed years of precedent by treating corporate expenditures for political advertising as the equivalent of individual speech in the political context. Using the same logic, they will argue that product advertising is immune from control. After its ruling on compaign funding by corporations, it will be interesting to see if the Court is willing to go further down this activist revolutionary path. My guess is that the Court will put on the brakes and decline to hear the case.

White Collar: New York Attorney Indicted for Mortgage Fraud and Money Laundering

2010-02-20T12:21:00.002-05:00

A federal grand jury in the Southern District of New York has returned an indictment against Louis Cherico, an attorney practicing in New York City and its suburbs. The indictment charges Cherico with operating a scheme to obtain control of luxury properties by filing false information with banks in obtaining mortgages. Specifically, the indictment alleges that in filings to lenders Cherico valued the properties in excess of 100% of their true market value.

According to the indictment, between July and December 2002, Cherico and his co-conspirators allegedly accomplished the fraud by filing false and misleading information with the lenders. Among the false documents allegedly filed were the following: loan applications, contracts for sale, deeds, and title reports. The false and misleading information in these and other documents included the following: income, assets, debts and credit worthiness of the purported lender; the chain of title; price; and the purported borrower's intent to reside in the premises. Through the scheme the co-conspirators were able to gain control of millions of dollars worth of property that they would otherwise have been unable to afford.

The indictment also charges Cherico with money laundering and obstruction of justice. These charges revolve around Cherico's relationship with Dominick DeVito. The government alleges that Cherico deposited the proceeds of the fraud into a bank account that he controlled and then transferred funds to an account controlled by DeVito, a co-conspirator. The government contends that the purpose of the transfer to DeVito's account was to conceal the fraudulent source of the funds. The obstruction charge stems from DeVito's 2003 conviction for racketeering and mortgage fraud. It is alleged that Cherico helped DeVito hide profits from a similar mortgage fraud and filed a false affidavit with the U.S Probation Office on DeVito's behalf.

For more about the case please see American Chronicle, "New York Lawyer Indicted on Mortgage Fraud, Money Laundering, Other Charges," February 19, 2010, www.americanchronicle.com/articles/view/142436.

White Collar: Former Owner of Food Company Charge with Fraud and Racketeering

2010-02-19T16:51:00.003-05:00

A federal grand jury in Sacramento, California, has indicted the former owner of SK Foods on charges of conspiracy, racketeering, wire fraud, and obstruction of justice. The indictment stems from a decade long scheme to bribe company employees of tomato sellers and artificially inflate the prices of tomato products.

The indictment alleges that Frederick Scott Salyer, a former owner and chief executive of SK Foods led a 10 year conspiracy to pay more than $330,000 in bribes to sell his company's products and to subvert the sales efforts of SK's competitors. The scheme involved deals to sell SK's tomato paste, peppers, and other foods. Some of the companies involved in purchasing these SK products were Kraft Foods, Frito-Lay North America, Gerber Products, and Safeway.

In addition to the bribes the indictment alleges that Salyer and others at SK tricked customers into buying lower quality tomato paste at inflated prices. The government claims that SK mislabeled its products to make them appear to be of higher quality. Ultimately, SK was able to sell its tomato paste at a markup of at least 30%. SK Foods and three other California firms process almost 95% of all tomatoes grown in the United States.

The indictment charges Salyer with obstruction of justice for altering the minutes of the board of directors to hide a connection between the company and a director who had pleaded guilty to racketeering and money laundering charges in connection with the investigation.

The government first broke the case in late 2008. Since December of that year, 10 people have pleaded guilty. Six worked for SK and four worked for customers of the company. After the case broke, SK's financial situation declined, and it went into bankruptcy. Last year a Singapore company purchased SK out of bankruptcy.

Salyer's family is one of the largest land owners in California's history. His grandfather built an agricultural empire of more than 65,000 acres.

Salyer will be arraigned in federal court in Sacramento next week.

For more about the charges please see The Los Angeles Times, "Ex-Owner of SK Foods Indicted in Tomato Scandal," February 19, 2010, http://www.latimes.com/business/la-fi-tomato-scandal19-2010feb19,0,3396464.story.

White Collar: DOJ Charges West Palm Beach Man with Telephone "Cramming"

2010-02-18T16:56:00.004-05:00

A federal grand jury in Florida has voted an indictment against Willoughby Farr of West Palm Beach charging him in a telephone cramming scheme. "Cramming" occurs when a telephone customer is billed for services that he did not order or use. According to Department of Justice officials, it is a type of consumer fraud that steals hundreds of thousands of dollars from consumers annually.

The indictment alleges that Farr, using three of his companies, billed customers for collect calls that they had not made. It is alleged that the fraud took place between April 2003 and December 2005. The government claims that the charges appeared on the last page of the customers' telephone bills and that many customers paid the phony charges.

The indictment further alleges that, as part of the scheme, Farr hid his ownership of the three companies. This was because other telephone companies submitting bills to their customers had refused to allow Farr to bill for services on their accounts after state regulators had sued him for improper billing.

The charges against Farr include mail fraud and wire fraud. For more about the indictment, please see PCWorld, February 17, 2010, http://www.pcworld.com/printable/article/id,189590/printable.html

White Collar and Securities: Daimler Reportedly Agrees to Global Settlement with U.S. over FCPA Violations

2010-02-13T14:31:00.003-05:00

BusinessWeek magazine is reporting that Daimler AG has reached a global settlement with the U.S. over allegations that the company, during its incarnation as DaimlerChrysler, violated provisions of the Foreign Corrupt Practices Act ("FCPA"). The reported settlement will involve the payment of $200 million in civil penalties and criminal pleas by two Daimler subsidiaries.

The FCPA prohibits the bribery of foreign officials by American corporations. There are both criminal and civil enforcement tools in the FCPA. The Department of Justice has exclusive criminal jurisdiction. The Securities and Exchange Commission has jurisdiction to act civil in the area of civil enforcement.

The magazine reports that the matter revolves around bribery payments to foreign officials by Daimler subsidiaries. The SEC began its investigation in 2004 based on allegations by a then auditor at DaimlerChrysler that he was fired for objecting to supervisors about bribe payments. The whistleblower alleged in a lawsuit that DaimlerChrysler business units maintained secret bank accounts to use for bribe payments. Moreover, he claimed that practice of paying local officials was common. It was alleged that 40 secret accounts existed and were a necessary cost of doing business.

In a July 2005 filing to the SEC the company disclosed that it was conducting an internal investigation and would share its results with the Department of Justice and the SEC. In the annual report for 2005 the company reported that improper payments were made in a number of places, but primarily in Africa, Asia, and Eastern Europe.

In addition to disclosure to American authorities, at the time of the internal investigation DaimlerChrysler self reported potential tax liabilities to several jurisdictions. The tax liabilities stemmed from the mischaracterization of the bribe or gratuity payments for tax purposes.

In 2007 Daimler sold Chrysler LLC to Cerberus Capital Management, LP. Chrysler filed for U.S. bankruptcy protection in 2009. Chrysler sold most of its assets to Fiat SpA, a United Auto Workers union benefit trust and the U.S. and Canadian governments in June 2009.

A spokesman for Daimler confirmed to BusinessWeek that the company was in discussions with DOJ and the SEC about resolving the investigations. Both DOJ and the SEC refused to confirm the settlement agreement.

For the full article reporting the agreement, please see BusinessWeek, "Daimler Said to Agree to Pay $200 Million Over Probe of Bribes," February 13, 2010, www.businessweek.com/news/2010-02-13/daimler-said-to-agree-t0-pay-200-million-over-probe-of-bribes.html.

White Collar and Healthcare: Feds Indict Two Doctors for Medicare Fraud

2010-02-12T16:13:00.003-05:00

The United States Attorney in Seattle has obtained grand jury indictments of two Seattle area physicians on charges of defrauding the Medicare program. While the indictments do not allege a relationship between the defendants, the two schemes were allegedly identical.

The grand jury charged Dr. Garnik Karapetyan with bilking Medicare of $1.9 million and attempting to receive as much as $3.2 million from the federal health insurance program. The indictment alleges that Karapetyan set up a dummy company called Federal Way Medical Equipments, Inc. Then, using the stolen identities of real Medicare patients, Karapetyan billed Medicare through his shell company for services never rendered.

In a separate indictment the grand jury charged Dr. Iacob Razumnii with stealing $753,000 from Medicare. The indictment alleges that Razumnii created a front company called American Standard Medical Supply. Additionally, he used stolen Medicare identification numbers to submit claims to Medicare for services never provided. The grand jury alleges that Razumnii attempted to defraud Medicare of $2 million.

While the grand jury alleged unrelated schemes against the two defendants, it is noteworthy that the alleged schemes were identical. Most interesting is that both defendants were allegedly able to make large numbers of Medicare claims using valid Medicare identification numbers. This modus operandi has become an indicator of organized crime involvement in Medicare fraud.

The defendants are each charged with six counts of wire fraud, three counts of health care fraud, and four counts of aggravated identity theft.

For more about the charges, please see the Seattle Post-Intelligencer, February 11, 2010, http://www.seattlepi.com/local/415317_Medicare11.html.

White Collar: Western Union Settles Money Laundering Charges with Arizona

2010-02-12T15:05:00.006-05:00

Western Union Financial Services has settled civil money laundering actions brought by the state of Arizona. The settlement in state court in Arizona calls for Western Union to make total payments of $94 million to settle a series of lawsuits. The actions claimed that Western Union was allowing Mexican drug cartels and human smugglers to use its money transferring facilities to launder criminal proceeds. The state alleged that Western Union's money transferring services had become the favored means of payment for networks smuggling humans across the border.

Under the terms of the agreement Western Union will pay Arizona $21 million to reimburse the state for its legal and law enforcement expenditures between 2003 and 2007. The company will also contribute $50 million to a law enforcement grant program jointly operated by the four states bordering Mexico (California, Arizona, New Mexico, and Texas). Additionally, Western Union will spend $23 million to upgrade its anti money laundering efforts. An independent entity will monitor the upgrading efforts. Finally, as part of the agreement, each of the four states bordering Mexico has committed to making $7,000,000 available as grants to border security agencies. These states combine on the U.S. side to form a 2000 border with Mexico.

In the past state border enforcement has found itself outgunned and technologically behind the criminals in combating crime at the Mexican border. Arizona officials hope that aggressive enforcement of money laundering provisions will provide a significant boost in the fight against the illegal cartels.

For more about the settlement, please see The Washington Post, February 11, 2010, http://www.washingtonpost.com/wp-dyn/content/article/2010/02/11/AR2010021103272.html?hpid=moreheadlines.

White Collar and Securities: New York AG Sues Bank of America for Fraud

2010-02-11T16:30:00.006-05:00

The New York Attorney General sued Bank of America last week as the bank had reached a settlement with the Securities and Exchange Commission involving two other enforcement actions. The AG's suit, filed in New York state court, alleges that BofA and two of its former officers committed securities fraud in connection with the bank's acquisition of Merrill Lynch. The two officers named in the complaint are Kenneth D. Lewis, former chief executive officer, and Joe L. Price, former chief financial officer.

The complaint alleges that the bank and its officers misled BofA shareholders and lied to the federal government in connection with the bank's December 2008 acquisition of the brokerage giant. First, the AG alleges that BofA failed to disclose to its shareholders at the time of the acquisition the full extent of Merrill Lynch's losses, which totaled more than $16 billion. The significance of this failure is that BofA failed to disclose a material fact (ML's loss information) to BofA shareholders who voted to authorize the merger. Second the complaint alleges that, while keeping BofA shareholders ignorant of the Merrill loses, BofA told federal bank officials that the magnitude of the losses had caused BofA to consider backing out of the acquisition unless the government provided a second bank bailout. The AG contends that BofA's threat to the government to withdraw from the acquisition was a gross overstatement of the facts. If proved, these allegations would constitute securities fraud under New York's Martin Act.

At the same time that the Attorney General announced the filing of the lawsuit, BofA and the SEC announced a settlement of two SEC actions against the bank. One of the SEC suits addressed billions in bonuses that BofA allowed Merrill to pay shortly before the merger. The second suit involved the $16 billion in losses sustained by Merrill. The parties reached a $150 million settlement to end both suits.

Federal District Judge Jed Rakoff must approve the bank's settlement with the SEC. Judge Rakoff had earlier rejected a $33 million settlement of the SEC's first lawsuit. In rejecting that proposed settlement the judge had objected to the size of the settlement amount and the fact that the SEC had not charged any BofA officials. The current proposed settlement between BofA and the SEC, while much larger, covers two actions and still does not charge any individuals.

The bank responded to the New York charges by pointing to the fact that the SEC had investigated the matter and did not see fit to charge any individuals. In view of Judge Rakoff's earlier questioning of the SEC's failure to charge individuals and the necessity for the judge to approve the proposed settlement with the SEC, the bank's comments seem ill considered at this stage of the the litigations.

For more information about the government lawsuits against Bank of America, please The New York Times, "Cuomo Sues Bank of America as It Settles With S.E.C.", February 6, 2010, http://www.nytimes.com/2010/02/05/business/05cuomo.html?scp=2&sq=cuomo&st=cse

Health Care: US Settles Qui Tam Suit

2010-02-02T16:38:00.003-05:00

The federal government has settled a qui tam or whistle blower action against a medical device manufacturer. Atricure, Inc., a Ohio based company, will pay $3,760,000 to settle the lawsuit. The action alleged that Atricure engaged in prohibited conduct in the marketing of its surgical ablation devices. Such devices use focused energy to create scar tissue on a patient's organs during surgery.

The suit alleged that Atricure engaged in the following wrongful activities: 1) marketed its devices to treat atrial fibrillation (abnormal heartbeat) knowing that the Food and Drug Administration had not approved the ablation device for such use, 2) promoted numerous heart surgeries using its devices while knowing that less invasive procedures were appropriate, 3) advised hospitals to up-code billings to Medicare that used the devices thus inflating the Medicare costs, and 4) paid kickbacks to health care professionals who used the company's devices. The complaint alleged that Atricure violated the Food, Drug, and Cosmetic Act and caused the submission of false claims to Medicare in violation of the federal False Claims Act.

The False Claims Act allows a private citizen to file a qui tam or whistle blower action on behalf of the United States to recover federal payments made as a result of fraud. The person filing the suit is called a "relator." If the federal government intervenes and brings the suit to a positive conclusion, the relator will receive a portion of the recovery. In the Altricure case the relator received $625,000.

The relator filed suit in the Southern District of Texas, which is the district court where the settlement took place.

For more about the case, please see PR Newswire, February 2, 2010, http://www.prnewswire.com/news-releases/atricure-to-pay-us-376-million-to-resolve-medicare-fraud-allegations-83371027.html.

Health Care: Pennsylvania Physician Pleads Guilty to Fraud Charges

2010-02-02T15:56:00.006-05:00

A Lancaster County physician, Saroj K. Parida, has pleaded guilty in the U.S. District Court for the Middle District of Pennsylvania, located in Harrisburg, to bilking public and private health insurers out of $8 million. Parida pleaded guilty to health care fraud and mail fraud charges. He is awaiting sentencing.

Parida and the federal prosecutors entered into a plea agreement. The terms of the agreement call for the recommendation of a sentence of eight years incarceration. The plea agreement is not binding on the court. As a general rule, if the probation department agrees with the sentencing rationale of the plea agreement, the court will impose the agreed upon plea.

Parida also agreed to the payment of $7.1 million in restitution to several insurers. The insurers included Medicaid and private insurance companies. Thus far, Parida has turned over $959,000. Additionally, the plea agreement called for Parida to forfeit $5.7 million that the government seized from Parida's bank and investment accounts. The forfeiture will count towards the restitution order.

The government alleged that Parida was submitting bills to the insurance companies for work that he was not performing. The government claims that the locations of Parida's fraud scheme were Cumberland and Lancaster counties in Pennsylvania and in the state of South Carolina.

For more information about the case, please see The Reading Eagle, February 2, 2010, http://readingeagle.com/article.aspx?id=192174.

White Collar: Ponzi Schemers Usually Target Closest

2010-01-14T17:34:00.003-05:00

Many if not most of the Ponzi schemes that have recently come to light appear to have targeted individuals or groups close to the scheme perpetrators. Even Bernard Madoff targeted wealthy individuals and philanthropists with whom he was well acquainted. In particular, smaller Ponzi schemes most often target individuals whom the schemer knows or who are part of an intimate group to which the schemer also belongs. The targets of the fraud are often friends, family, neighbors, members of the same church, students at the same school, and/or persons of the same ethnic background. Such frauds are also known as "affinity" frauds since the schemer has some affinity to or with his/her victims.

A recent New Jersey case illustrates the point. Marcia Sladich is a mother of four whose husband is a teacher. Sladich was a ticket collector at professional sports arenas in the Meadowlands in New Jersey, including Giants Stadium. In her spare time she operated a Ponzi scheme between 2004 and 2007. In that time, Sladich raised more than $15 million from neighbors and members of her church. She promised to invest the funds in risk free real estate investments and to double the investments within a year. Instead, she pocketed most of the money and paid the early investors with monies obtained from later investors, a classic Ponzi scheme. Sladich used the ill gotten gains to make real estate investments, but not the kind anticipated by her investors. She use monies to buy property in Florida and Brazil in her name and the names of family members. Sladich also used the stolen funds for numerous personal expenditures. A New Jersey federal court judge has sentenced Sladich to 70 months in prison for her scheme.

What is most striking about Sladich's fraud is how amateurish it was. Some of the clauses in the investment contract were incomprehensible gibberish. Yet, those close to her willingly invested their money. The important point is probably that the victims trusted her because of this close association. They were her neighbors and fellow church members. In fact, some of the victims from her church urged the sentencing court to show leniency to Sladich.

The lesson to be learned from this and other such affinity schemes is that vigilance and due diligence are necessary before making any investment. It just as important if not more so to investigate an investment proposed by a close associate as opposed to one offered at arms length.

For more information about the Sladich case, please see The New York Times, January 14, 2010, http://www.nytimes.com/2010/01/14/nyregion/14towns.html.

Health Care: Miami Man Held in Massive Medicare Fraud

2010-01-08T18:09:00.005-05:00

The owner of seven Medicare clinics in Miami and Orlando was arraigned on January 4th on charges of submitting $55 million in false claims to Medicare for reimbursement. Ihosvany Marquez was arraigned in federal court in Miami on the charges. The government further alleges that Marquez and his co-conspirators collected approximately $22 million from Medicare between 2005 and 2007 based on the phony billings.

The alleged fraudulent billings were for purported HIV and cancer services. The government alleges that the treatments for which the clinics billed Medicare were neither prescribed by physicians nor administered to patients. The schemers used straw men to collect the funds who then passed the money to Marquez and others. The straw men, who could be readily identified by Medicare, were to flee the country to avoid arrest.

The government alleges that Marquez purchased $2.7 worth of luxury automobiles including two Lamborghinis, two Bentleys, at least eight Mercedes Benzes, and a Ferrari. In addition, he is alleged to have acquired more than $500,000 worth of jewelry and watches. Finally, the government alleges that Marquez spent more than $1 million to purchase thoroughbred horses.

A co-defendant of Marquez has already pleaded guilty and is awaiting sentencing. A second co-defendant fled last summer after post bond of $500,000. As a result, Marquez is being held without bail.

For more information, please see The Miami Herald, January 4, 2010, http://www.miamiherald.com/news/breaking-news/story/1408952.html.

White Collar: Federal Authorities Foil Boston Area Affinity Scheme

2010-01-07T17:33:00.004-05:00

Agents of the Federal Bureau of Investigation arrested Richard Elkinson at a casino in Mississippi yesterday. He is charged with operating a Ponzi scheme that defrauded more than 130 investors out of more than $29 million. Federal prosecutors in Boston filed the charges, which include mail fraud.

The government alleges that Elkinson gave investors promissory notes paying up to 13% return on the investments. The funds were supposedly to be used to supply uniforms to governments and large private organizations. Apparently, no such business existed, and Elkinson kept the scheme going by making interest payments to early investors by using the monies of later investors. This Ponzi scheme was the type known as an "affinity scheme" because it targeted victims who were close to Elkinson. Many of those victimized belonged to the Belmont Country Club in Belmont, Massachusetts.

The scheme came to light when Elkinson failed to make regularly scheduled interest payments last year. Investors made complaints to the Massachusetts Secretary of State who referred the matter to federal law enforcement authorities for investigation. The secretary of state has proceeded with civil enforcement in the matter by filing civil charges against a Boston area financial advisory firm for referring clients to Elkinson. To prevail in the civil suit the secretary will have to prove knowledge on the part of the advisers.

Federal authorities said that they had tracked Elkinson to Las Vegas before capturing him in Mississippi. They allege that Elkinson had conducted $3.7 million in reportable currency transactions of more than $10,000 since 1998. These transactions included placing and collecting wagers.

For more information, please see The Boston Globe, January 7, 2010, http://www.boston.com/business/articles/2010/01/07/ponzi_suspect_had_prior_woes/.

White Collar: Property Owners Sue Credit Suisse for Fraud

2010-01-04T12:03:00.003-05:00

Owners of property at four luxury ski and/or golf resorts have sued Credit Suisse for $24 billion. The class action civil suit alleges that Credit Suisse engaged in conspiracy, wire and mail fraud, racketeering, and money laundering. The complaint alleges that Credit Suisse engaged in a predatory loan scheme designed to load the developments with so much debt that it could foreclose on the assets.

The lawsuit involves property at the following four resorts: Ginn Sur Mer in the Bahamas, Lake Las Vegas in Nevada, Tamarack Resort in Idaho, and Yellowstone Club in Montana. The complaint alleges that Credit Suisse concocted a scheme to artificially inflate the resorts' values to make large loans and charge exorbitant loan fees. Moreover, the plaintiffs allege that the bank knew that the resorts would not be able to perform under the loans. Thus, the complaint alleges that the entire plan amounted to nothing more than an elaborate scheme to bleed money from buyers through loans and then foreclose on those buyers when they became unable to keep up with the loan payments.

The civil case may have developed from the bankruptcy proceeding of the Yellowstone resort. In that case U.S. Bankruptcy Judge Ralph Kirscher said that Credit Suisse had devised a "predatory" loan scheme.

Credit Suisse in the last several years has become very active in financing upscale resorts, which have fallen into bankruptcy. The only property named in the class action suit not in bankruptcy is Ginn Sur Mer.

The plaintiffs filed the action in the United States District Court for the District of Idaho.

For more information about the suit, please see The Wall Street Journal, January 4, 2010, http://online.wsj.com/article/SB10001424052748703580904574638052691063912.html.

White Collar: Credit Suisse Settles with Government

2009-12-17T17:20:00.005-05:00

International banking giant, Credit Suisse, has reached an agreement with the Department of Justice and the New York County District Attorney. The government has agreed to defer prosecution of the Swiss bank in return for payment of $536 million. If the company does not commit any further violations, it will not be prosecuted. The monitoring of the bank's behavior will be undertaken by Swiss authorities and the Federal Reserve Bank of New York.

The government said that for a 10 year period Credit Suisse had helped clients in Iran and other foreign countries, against which there were economic sanctions, to secretly conduct financial transactions in US dollars. In addition to clients in Iran, Credit Suisse helped other clients in Libya, Sudan, Burma, and Cuba. Credit Suisse was one of several banks involved in the two year investigation. However, it is the largest of the banks involved. So far, the case has resulted in fines assessed against banks of more than $1 billion.

The investigation revealed that Credit Suisse had moved or processed more than $700 million for clients under sanction between 1995 and 2006. Additionally, the government said that the bank had manipulated and processed $1.1 billion in payments to hide their Iranian origins. Also, using code names to hide the true identities of the banks involved, a division of the bank located in London had illegally invested $150 million for banned banks in Libya and the Sudan.

Credit Suisse accepted responsibility and cooperated in the investigation. These factors were instrumental in the bank obtaining the deferred prosecution agreement. Credit Suisse said that in 2005 it had ended the business giving rise to the illegalities. Moreover, it claimed to have performed its own internal investigation and cooperated with American authorities. Additionally, the bank said that it had closed its Tehran office in 2006 and had ended all business with sanctioned countries in 2007.

It appears that the United States is attempting to exert pressure on Iran to end its nuclear program through aggressive financial sanctions. While direct sanctions on the country may have limited effect, it seems that the goal is to increase the pressure by removing the country's access to international bankers. Moreover, it seems likely that the United States in conjunction with the New York County District Attorney, whose jurisdiction is Manhattan, are using the same aggressive tactics against other rogue states.

For more information, please see The Wall Street Journal, "Credit Suisse's Secret Deals," December 17, 2009, page A3, and The New York Times, http://www.nytimes.com/2009/12/16/business/16bank.html?_r=1&scp=2&sq=credit%20suisse&st=cse.

Securities: SEC Charges Lawyer in Insider Trading Ring Action

2009-12-11T15:34:00.004-05:00

Yesterday, the Securities and Exchange Commission brought insider trading charges against Brien P. Santarlas, formerly an attorney at the international law firm Ropes & Gray, LLP. Santarlas was the tenth person charged in the investigation. Last month, the SEC brought charges Arthur J. Cutillo, a former Santerlas colleague at Ropes & Gray, and eight others.

The complaint alleges that Santarlas misappropriated confidential information about mergers from his law firm and provided the information to others who traded in the securities of the companies involved in the mergers. Santarlas received a kickback for providing the inside information. The SEC alleges that the scheme took in more than $20 million in illicit profits.

The essence of the case is that Santarlas and Cutillo breached their duties to Ropes & Gray by misappropriating confidential information about the mergers. Thus, they had duties to either refrain from trading or to disclose the confidential information. When the attorneys passed the information on to other members of the insider trading scheme, the duty to refrain or disclosed passed with the information. This is because those receiving such information allegedly knew that it was misappropriated nonpublic information.

This is a further example of the SEC's tougher stance on allegations of insider trading.

The cases were brought in federal district court in the Southern District of New York. While Ropes & Gray is headquartered in Boston, the two attorneys worked at its New York office.

For an article about the Santarlas case please see The Boston Globe website, http://www.boston.com/business/ticker/2009/12/ex_ropes_gray_a.html.

Securities: SEC Sues Brokerage House and Founder

2009-12-10T17:39:00.004-05:00

The Securities and Exchange Commission has filed suit in federal court in California against Brookstreet Securities Corp. and its founder, Stanley C. Brooks, alleging that Brookstreet systematically sold high-risk mortgage securities to customers who were financially unable to handle such risky investments.

The complaint alleges that Brookstreet and Brooks sold mortgage backed investments to more than 1000 retirees and others for whom such investments were unsuitable. The SEC contends that these Brookstreet investors poured over $300 million into collateralized mortgage obligations ("CMO's") between 2004 and early 2007. The CMO's were bonds backed by payments on pools of mortgages. The complaint alleges that investors lost more than $36 million and that some lost their entire net worths. Moreover, some investors ended up owing money because they had borrowed funds to make the investment.

Earlier this year the SEC sued 10 Brookstreet brokers in federal court in Florida, alleging that the brokers had realized millions in profits from high risk investments by retirees. That complaint alleges that these retirees invested based on misrepresentations of the brokers who claimed that the complex and illiquid mortgage investments were safe and suitable for conservative investors.

Brooks through his attorney said that the company had instructed its brokers to provide potential investors with written warnings that the investments were appropriate only for those capable of handling high risk investments.

In the aftermath of its Madoff failures, it appears that the SEC is becoming aggressive in its efforts to fight investment fraud. For more about the SEC's complaint, please see The Los Angeles Times, December 9, 2009, http://www.latimes.com/business/la-fi-brookstreet9-2009dec09,0,7565475.story.

Health Care: Fraud Goes Viral throughout Country; Miami Is Epicenter

2009-12-07T17:22:00.003-05:00

Medicare fraud has gone viral in cities throughout the United States. Investigators have found that criminals from particular ethnic groups have become extremely active in Medicare fraud scams. In various cities criminals from different ethnic groups are active in the fraud schemes. Investigators believe that viral patterns of crime occur in close knit ethnic communities because of the larger number of participants needed to carry out the scams.

Scams that have gone viral include false billing for wheelchairs and scooters, home health care, and infusion therapy (an older method of treating AIDS/HIV that has largely been supplanted by more successful drug "cocktail" therapies). A key to a successful Medicare fraud is the recruiting of Medicare recipients to take part in the scams. Elderly people often receive some remuneration for the illegal use of their Medicare numbers. In some instances, scammers have paid Medicare recipients a cash sum for the use of their Medicare numbers. In others the scammers have provided services such as housekeeping, which was billed as home health care. In still others Medicare recipients have received expensive electronic equipment such as large screen plasma televisions.

The problem of Medicare fraud in Miami is particularly acute. In 2008 Miami received approximately $500 million in Medicare home health care payments meant for the sickest patients receiving Medicare benefits. This sum was more than the rest of the country received combined. Miami received more than 50% of the benefits even though only about 2% of the country's Medicare home health care recipients reside in the city.

Many of the claims involve patients purportedly suffering with diabetes. In many cases scammers made claims for nurses to administer day and night insulin injections to patients who claimed to be blind because of the disease. Investigations have proved that in many cases the patients were not only not blind but did not even have diabetes.

Analysis of payments to Miami recipients showed that Medicare outlier payments for home health care related to diabetes in that city was eight times the national average. "Outlier payments" are those reserved for the extremely ill. They are for services such as occupational therapy and mental health services. Outlier payments can result in approximately double the amount of Medicare payments. Moreover, CMS does not limit the amount that it will pay a home health care agency for these services. While approximately 7% of all Medicare home health care payments are for outlier services, in Miami the percentage of outlier payments for home health care is 60%.

HHS and the Department of Justice have formed task forces throughout the country to combat the rampant growth of health care fraud. If the United States is to gain control of health care spending, it will have to make a major impact on the amounts lost to fraud.

For more information about the viral growth of Medicare fraud please see the Houston Chronicle website, December 6, 2009, http://www.chron.com/disp/story.mpl/metropolitan/6756271.html, and The Miami Herald, December 7, 2009, http://www.miamiherald.com/news/florida/AP/story/1369349.html.

White Collar: Another Huge Ponzi Scheme, Another Conviction

2009-12-03T10:09:00.003-05:00

In the aftermath of Bernard Madoff's $50 or $60 billion Ponzi scheme, mere thefts of one or a few billion dollars lose the ability to shock. Nevertheless, there seems to be no end to gigantic Ponzi scheme thefts. The most recent news comes from Minneapolis, Minnesota, where federal prosecutors yesterday won conviction on all 20 counts of an indictment charging Tom Petters, a Minnesota business man, with operating a $3.65 billion Ponzi scheme for at least a decade. After deliberating for five days, the jury returned guilty verdicts for wire fraud, mail fraud, money laundering, and conspiracy.

The indictment charged Petters with promising investors significant returns for lending his company, Petters Co., funds to buy surplus merchandise to resell to large retailers such as Costco and Wal-mart. In reality, there were no such transactions, Petters simply pocketed the invested funds and used them to finance his lavish lifestyle. Prosecutors showed that the investments of Petters's victims went to his purchase of expensive homes throughout the country, luxury automobiles, and expensive boats. Moreover, Petters used the stolen funds as seed money to purchase several legitimate businesses such as Polaroid Corp.

Several co-conspirators pleaded guilty to lesser crimes and cooperated in the investigation and prosecution of Petters. The scheme began to collapse in September 2008 when one of the co-conspirators approached the United States Attorney's Office in Minneapolis and disclosed the existence of the fraud. This co-conspirator began cooperating in the investigation, including the wearing of a recording device to meetings with Petters. The tapes gained through this cooperator's efforts to record conversations were the key evidence in the prosecution of Petters. In one tape, Petters was heard saying that the business was "one big . . . fraud."

Sentencing will take place in approximately two months. Petters was in jail since his 2008 arrest and will remain in custody awaiting further proceedings. The receiver in the case has stated that thus far less than $200 million has been recovered. Appeals are standard, although rarely successful, in most criminal convictions after trial. Petters's attorney said that his client will appeal the conviction.

For more about the Petters conviction please see The Wall Street Journal, December 3, 2009, http://online.wsj.com/article/SB10001424052748704107104574572402358172042.html.

White Collar: South Florida Attorney Charged in Massive Ponzi Scheme

2009-12-02T16:44:00.003-05:00

The United States Attorney for the Southern District of Florida has charged Scott Rothstein, a Fort Lauderdale attorney, with operating a $1.2 billion fraud. The criminal information alleges that Rothstein and others committed racketeering violations, money laundering, and wire and mail fraud violations.

The government alleges that Rothstein used his now defunct law firm, Rothstein, Rosenfeldt and Adler as the basis of his fraud. The allegations are that Rothstein and co-conspirators sold purported settlements in sexual harrassment and whistle-blower suits to investors. According to the complaint, Rothstein sold these purported settlements at discounted rates. Allegedly, he told the investors that the plaintiffs would receive the investment money and relinquish the right to the settlement proceeds to the investors who would receive a longer term pay out. Rothstein allegedly told the investors that the plaintiffs wished to sell the settlements to avoid publicity and embarrassment. Moreover, he told the purported victims that there were no public court records because his law firm had settled the cases before filing the actions by threatening suits, explaining the that defendants could thereby avoid negative publicity.

One of the charges against Rothstein alleges a RICO conspiracy. RICO is an acronym for Racketeer Influenced and Corrupt Organizations. It is a statute that was orginally enacted to combat organized crime. However, it is frequently charged in cases of business crimes and fraud. The centerpiece of a RICO charge is the existence of an enterprise that is instrumental in the conduct of a pattern of racketeering. In the Rothstein case the government has charged the law firm as the RICO enterprise with wire fraud, mail fraud, and money laundering comprising the pattern of racketeering facilitated by the law firm.

At arraignment the government asked the court to remand Rothstein to custody pending further action, which will be either a plea to the information or a grand jury proceeding. (In the federal system, the government can only proceed based on a grand jury indictment unless the defendant voluntarily waives indictment.) It is likely that Rothstein will cooperate against his co-conspirators in attempt to reduce his ultimate sentence.

Finally, the government has also filed a count of forfeiture in the information. The count seeks, upon conviction, the forfeiture of currency and property in the amount of $1.2 billion.

For further information, please see The Miami Herald, http://www.miamiherald.com/467/story/1360988.html, The South Florida Sun-Sentinel, http://www.sun-sentinel.com/news/broward/fort-lauderdale/fl-rothstein-next-20091201,0,3597653.story, and The New York Times, http://www.nytimes.com/2009/12/02/us/02lawyer.html?scp=1&sq=rothstein&st=cse.

Health Care: Federal Government Targets Medicare Fraud

2009-12-01T15:53:00.002-05:00

Beginning in 2007 federal, state, and local law enforcement officials came together in South Florida to form the nation's first Medicare fraud strike force. The goal of the strike force was to track down and prosecute those defrauding the nation's multibillion dollar Medicare system. From that beginning in South Florida the government formed a second strike force in the Los Angeles area. Now, the investigation and prosecution of Medicare fraud has become a top priority of the Departments of Justice and Health and Human Services as well as state and local law enforcement agencies. The enforcement program has expanded nationwide. To date the initiative has resulted in the indictment of more than 300 health care providers and ended schemes responsible for more than $700 million in false Medicare claims. Most of the cases brought by the government task forces charge kickbacks and false-billing schemes.

Kickbacks are schemes that operate essentially as bribery arrangements where one party provides a payment or some value to a second party for the referral of patients or services covered by Medicare. False-billing schemes are self explanatory and involve claims to Medicare for services that are unnecessary and/or never rendered to the patient.

Before the Senate in May of this year Assistant Attorney General for the Criminal Division Lanny Breuer testified that federal and state spending on Medicare and Medicaid has reached $800 billion annually. Of this amount, various estimates put the loss to waste, fraud, and abuse between three and ten percent.

The 2010 federal budget invests $311 million to bolster the integrity of the Medicare and Medicaid programs. This investment is a 50% increase over the 2009 budget. Estimates suggest that the investment could save $2.7 billion over five years. Moreover, statistics indicate that the number of cases being brought by prosecutors is growing rapidly. Since the program's inception, the strike forces have filed more than 130 cases, charged 300 people, and convicted dozens in the cases that have thus far been adjudicated.

It is clear that the federal government will continue its emphasis on health care enforcement. In the future the numbers of cases should continue to rise. As a result, it is vitally important that all health care providers ensure compliance with all statutes and regulations. Moreover, it is necessary to contact experienced counsel at the first indication of a government inquiry.

For more information concerning the government health care strike forces, please see The Washington Times, December 1, 2009, http://www.washingtontimes.com/news/2009/dec/01/strike-forces-target-multimillion-dollar-medicare-/

Securities: SEC Charges San Diego Area Man with Affinity Fraud

2009-11-24T17:17:00.003-05:00

The Securities and Exchange Commission has brought fraud charges in federal court against a Somali run financial services firm accusing it of targeting local Somalis in a securities fraud scheme. The Commission charged Mohamud Abdi Ahmed and his company, Shidaal Express, Inc., with defrauding investors of over $3,000,000.

The SEC complaint alleges that Ahmed marketed his scheme to Somali investors, promising them returns of 5% monthly with an annual return of 60%. Among the victims of the alleged fraud was a Southern California mosque, which the complaint alleged Ahmed defrauded out of $200,000. As part of the scheme, Ahmed bragged to potential investors that he was an experienced stock trader who had never lost any money.

Allegedly, Ahmed began the scheme in 2006. He apparently operated it as a Ponzi scheme, making payments to investors requesting money until the beginning of last year. The payments presumably came from the monies invested by later victims. When the payments ceased, investors began to complain.

The federal court has frozen the assets of Shidaal and Ahmed. Additionally, the court has appointed a receiver to temporarily administer the firm.

An "affinity" fraud occurs when a confidence artist targets a religious or ethnic group with which he has an affinity. The fraudster has a built in trust with the targeted group and can more easily effect his fraud. The "affinity" fraud may be accomplished by any type of fraud scheme. Most prevalent are Ponzi and pump and dump schemes.

For more about the fraud charges against Ahmed, please see the article from The San Diego Union-Tribune, November 24, 2009, http://www.signonsandiego.com/news/2009/nov/24/sec-accuses-financial-firm-preying-local-somalis/.

White Collar Crime and Securities: Federal Authorities Seek Top Russian Mobster on Fraud Charges

2009-10-22T16:03:00.003-04:00

Federal investigators are seeking reputed Russian crime boss Semion Mogilevich on a 45 count indictment charging Mogilevich and others with racketeering (RICO), securities fraud, wire fraud, mail fraud, and money laundering.

The charges allege that Mogilevich owned a company called YBM, which purportedly manufactured magnets. YBM was a public company traded on the Ontario, Canada, exchange. Its headquarters was in suburban Philadelphia. Allegedly, the company did not produce magnets or anything else. Instead, it is alleged that the defendants moved large amounts of money through European banks including banks in Budapest, Hungary. According the the U.S., the movements of money were reported as the manufacture and sale of magnets. This made the company appear active and profitable, thus driving up its stock price. Those owning the stock, in short the defendants, were able to realize millions from the fraudulently valued stock. It is alleged that Mogilevich defraud American and Canadian investors out of $150 million.

Mogilevich is currently in Russia where authorities arrested him last year on fraud and tax charges. He is out of custody on bail in the Russian cases. American authorities have not been able to bring Mogilevich under U.S. jurisdiction because this country has neither an extradition treaty nor extradition relations with Russia. Authorities are hoping that Mogilevich travels to a jurisdiction that has either a treaty or extradition relations with the U.S.

This case is an example of organized crime elements becoming more sophisticated in their activities and becoming an international law enforcement group. Combating such crime will increasingly require international law enforcement cooperation.

For more information please see CNN.com, http://www.cnn.com/2009/CRIME/10/21/mogilevich.fbi.most.wanted/

White Collar and Securities: California Sues State Street Bank for Fraud

2009-10-21T17:06:00.005-04:00

The California attorney general has filed a suit against the State Street Corporation alleging that State Street Bank cheated California's two largest pension funds out of almost $57 million. The state alleges that the bank committed the fraud by overcharging the pension funds for foreign exchange trades. Specifically, the complaint alleges that State Street Bank overcharged Calpers and Calstrs for managing their accounts and concealed the overcharges. Including interest and penalties, the suit seeks recovery of $200 million.

The attorney general alleges that State Street Bank executed currency trades of more than $35 billion for the pension funds since 2001. The suit claims that State Street entered false exchange rates into the databases for electronic trading and reported false prices in the account statements that it provided to the pension funds. The effect of the false prices was allegedly to convince the state's fund managers that costs were higher than they were in reality, thus diminishing the amounts in the funds. The amounts by which the scheme diminished the accounts was pocketed by the bank. Moreover, the complaint alleges that the bank failed to include time stamp information in its reports, thus making impossible the pension funds' verification of the actual cost of trades. In essence, the failure to include the time stamps would frustrate attempts by the pension funds to create audit trails.

Calpers is the California Public Employees' Retirement System and Calstrs is the California State Teachers' Retirement System.

The case grew out of the actions of whistle-blowers who brought the allegations of fraud to the attention of California investigators. If California prevails, the whistle-blowers will share in the recovery.

For more about the California law suit please see The New York Times, "State Street Bank Accused of Fraud by California," October 21, 2009, http://www.nytimes.com/2009/10/21/business/21street.html?_r=1&ref=business

White Collar Crime and Securities: Wire Taps Lead to Insider Trading Charges

2009-10-19T15:18:00.003-04:00

A federal grand jury in the Southern District of New York brought insider trading charges against six individuals, including a billionaire hedge fund operator and executives of major corporations. The indictment alleges that Raj Rajaratnam, a billionaire who operates the $7 billion Galleon Group hedge fund, Rajiv Goel, manging director of strategic investments at Intel Corp., Anil Kumar, a director at McKinsey & Co., Robert Moffat, a senior vice president for IBM, and two former Bear Stearns executives engaged in an insider trading scheme. The indictment charges conspiracy and securities fraud, alleging that the scheme produced more than $20 million in illicit profits. The case appears to be the largest fraud involving a hedge fund ever brought. The Securities and Exchange Commission announced the bring of a civil enforcement action simultaneously.

The government has alleged that Google, Advanced Micro Devices and Hilton Hotels were among the stocks traded upon inside information. Intel has instituted an internal investigation to determine whether its stock was the subject of any insider trading.

Insider trading is the unlawful trading of securities while in possession of material non-public information. For the government to sustain a charge of fraud based on insider trading it must establish that the defendant breached a duty to someone or some entity by acting on the insider information or acted on the information while aware of an other's breach in communicating such information. In many insider trading cases there is difficulty in establishing knowledge of the inside information by those trading. Traditionally, either circumstances or the testimony of a scheme insider provides the proof.

In this instance the government built the indictment, in part, on court ordered wire taps. The recorded statements of the defendants themselves purportedly provide the evidence of the breach of duty and knowledge (referred to as "scienter" by securities litigators). This appears to be the first instance in which the investigation of alleged insider trading employed wire taps.

Court ordered wire taps require investigators to undertake the process of "minimization." This requires agents to monitor the intercepts to determine whether the conversations intercepted involve discussions or evidence of crime. If not, the agents must "minimize" the intercept to avoid capturing innocent conversations. Thus, the use of wire taps is an expensive and laborious undertaking. The fact that the government employed wire taps indicates the importance that federal authorities placed on this investigation.

For more information about the case please see the following articles: Los Angeles Times, "6 Accused of Insider Trading after Wiretapping Investigation," http://www.latimes.com/business/la-fi-hedge-fund17-2009oct17,0,4843899.story, and The New York Times, "Hedge Fund Chief Is Charged with Fraud," http://www.nytimes.com/2009/10/17/business/17insider.html?_r=1&scp=5&sq=rajaratnam&st=cse

White Collar Crime and Securities: 3 Indicted in Securities Scheme

2009-10-19T14:35:00.003-04:00

A federal grand jury in the Southern District of Florida indicted three men for operating a Ponzi scheme targeting Haitian Americans. The indictment charges that the three defrauded the scheme's victims of $14.3 million. Most of the proceeds of the fraud went to those charged with a minimal amount actually being invested.

The government alleges that Brian Taglieri, Ronnie Bass, and Abner Alabre operated an entity called Homepals Investments from April 2008 to March 2009. The investment scam allegedly promised investors that they would double their investments in 20 days. In reality, according to the government, only approximately $1.2 million of the more than $14 million taken was actually invested. The remaining $13 plus million allegedly went to pay early investors to keep the scheme operational and to the personal use of the defendants. When federal authorities closed the business, only $7300 remained in its accounts. The indictment charges conspiracy, securities fraud, wire fraud, and conspiracy to commit money laundering.

Along with the federal indictment, the Securities and Exchange Commission filed a corresponding civil enforcement action based on the alleged fraud.

For more information, please see the following article from South Florida Sun-Sentinel.com, "Three Men Accused of Fraud," October 19, 2009, http://www.sun-sentinel.com/services/newspaper/printedition/local/sfl-ponzi-scheme-p101909pnoct19,0,7086730,print.story

White Collar: Supreme Court to Hear "Honest Services" Fraud Appeal

2009-10-13T16:34:00.003-04:00

Convicted former Enron CEO Jeffrey Skillings has successfully petitioned the United States Supreme Court to hear the appeal of his conviction. A primary focus of his appeal will be an attack on those counts of conviction that arose from "honest services" fraud. His lawyers will undoubtedly argue that the language of the "honest services" statute is so vague that it does not adequately advise people of what amounts to criminal conduct.

Federal prosecutors do not have a federal criminal statute addressing bribery involving state and local officials. To reach such crimes, traditionally, federal prosecutors invoked mail and wire fraud statutes to obtain criminal jurisdiction. These statutes make illegal participation in schemes to defraud that use either the U.S. Postal Service or interstate couriers for mail fraud or interstate wire transmissions for wire fraud. To combat local corruption federal prosecutors charged these crimes under the theory that the corrupt conduct was a scheme to defraud the citizens of the honest services of their public officials. This theory of prosecution was particularly popular in the 1970's and 1980's.

In the case of McNally v. United States, 483 U.S. 350 (1987), the U.S. Supreme Court held that the wire and mail fraud statutes did not apply to the theory of honest services fraud. The Congress addressed the McNally decision expeditiously, enacting the "McNally fix," 18 U.S.C. Section 1346, in 1988. Section 1346 simply states that a "scheme or artifice to defraud another of the intangible right of honest services" satisfies the requirements of the "scheme or artifice to defraud" language in the mail fraud chapter (mail fraud, wire fraud, bank fraud, health care fraud, and securities fraud). The law does not provide a definition of the "intangible right to honest services." The failure of a definition in the law is the basis of the concern with the statute.

Over the ensuing years, federal courts have interpreted "honest services" provisions in the public employee context to provide a rather clear understanding of what the law holds to be unlawful conduct. Generally, bribery or an undisclosed conflict of interest will cross the line into illegal conduct on the the public employee side.

Unfortunately, as the "honest services" provision has bee applied to those involved in private transactions, the standards of conduct are far less clear. Different courts have provided varying guidance on the level of breach of duty necessary to warrant a criminal charge of a scheme to defraud someone of honest services. The Supreme Court may rule that the statute is too vague as applied or may provide guidance on the use of the theory. The Court's decision could have a profound influence on federal law enforcement in the white collar arena and bears watching.

For more information about the Skillings appeal, please see the following article in the New York Times, "Justices Will Hear Appeal of Former Enron Chief," http://www.nytimes.com/2009/10/14/business/14enron.html?hp

White Collar and Securities: JPMorgan Closely Monitoring Cioffi and Tannin Trial

2009-10-09T13:58:00.003-04:00

Months before Lehman Brothers collapsed, Bank of America acquired Merrill Lynch, and the securities markets came to the precipice of disintegration, JPMorgan Chase acquired Bear Stearns. The acquisition took place in March 2008 for $10 per share. As is common in acquisitions through stock purchases, JPMorgan also acquired Bear Stearns's potential liabilities including those arising from ongoing Bear litigation.

In 2007 two Bear Stearns hedge funds failed, resulting in a market meltdown that presaged the 2008 market panic. As a result of the failure of the Bear hedge funds, federal prosecutors sought and obtained the indictment of the heads of the two Bear funds, Ralph Cioffi and Matthew Tannin. The indictment charges Cioffi and Tannin with conspiracy, securities fraud, and wire fraud. Cioffi is also charged with insider trading.

The indictment alleges that Cioffi and Tannin were aware of the precarious financial condition of the Bear hedge funds and the grave risk of their collapse, but nevertheless, they failed to inform the funds' investors and the public of the true facts. Instead, the indictment alleges that they made false statements to lull investors into not withdrawing funds. The government alleges that investors lost more than $1 billion upon liquidation of the funds in July 2007 as a result of the fraud.

While JPMorgan is free from exposure in the criminal case, the evidence adduced at trial could have significant impact on civil suits against the firm. There are currently two significant cases that plaintiffs have filed against JPMorgan. In one suit investor Bruce Sherman has filed a claim against Bear (JPMorgan) alleging that Bear fraudulently overstated the value of the hedge funds' assets. This suits seeks unspecified damages, but success could result in plaintiffs recovering billions of dollars. The second suit, filed by Bank of America, seeks damages of $2 billion and alleges that the Bear hedge funds' managers deceived Bank of America about the financial condition of the hedge funds to sell the bank $4 billion of mortgage backed securities and to obtain from BofA a further $1 billion line of credit.

If evidence at the criminal trial of Cioffi and Tannin proves that executives above the hedge fund managers were aware of the true financial status of the funds, the likelihood of success in the civil suits will increase. Moreover, the more such evidence comes to light, the more likely that other plaintiffs will come forward and sue Bear (JPMorgan). In short, JPMorgan has a very keen interest in the evidence adduced in the trial.

For a further discussion of the issues confronting JPMorgan Chase in the Cioffi and Tannin trial, please see the following article in cnnmoney.com, http://money.cnn.com/2009/10/08/news/companies/bear_stearns_trial_jpmorgan.fortune/?postversion=2009100908

White Collar: Local Law Enforcement Lack High Tech Investigative Capabilities

2009-10-08T16:09:00.004-04:00

As crimes and the means of committing them have become more technologically advanced, so too have the skills necessary for investigation. While federal agencies such as the FBI have cutting edge computer technology skills, the same is not true for many local law enforcement agencies. Only those in the nation's largest cities and some states have the cyber skills necessary to facilitate criminal investigation of cyber crimes and other crimes in which cyber investigation would be helpful.

Increasingly, high tech investigation and evidence can be helpful in the investigation of almost any type of crime. However, most localities are not equipped to bring such resources into the investigation of local crimes. Considering that 90% of all the nation's felony crimes are local matters, the lack of technological skill and resources creates a yawning gap in effective crime fighting. Quite simply, most local law enforcement offices lack the budget to support the very expensive equipment and training necessary to employ high tech investigative measures.

Localities that do have such capability have used cyber investigation techniques in crimes such as identity theft, child pornography, and extortion. Much as traditional white collar investigation often involves following an audit or money trail to unlock the mystery of the crime, high tech investigation often involves following a cyber trail to the computer used by the high tech criminal. Once investigators are able to identify the computer used in the crime and seize it, they are able to extract significant evidence from the computer.

One of the potential means of extending cyber investigative capability to localities that would not otherwise have access to such resources is for state law enforcement agencies to function as cyber investigation resource centers. This would be a role similar to that played by these agencies in areas such as forensic laboratory or document analysis.

For more information please see the following Wall Street Journal, article discussing cyber investigation and providing anecdotal discussion of various successful cyber investigations, http://online.wsj.com/article/SB125487044221969127.html

White Collar and Health Care: Medicare Fraud Increasing in Popularity

2009-10-06T17:11:00.004-04:00

Federal investigators are finding that Medicare fraud schemes are flourishing throughout the country. The schemers range from small ad hac groups to elaborate networks operated by organized crime groups, including traditional La Cosa Nostra families and Russian mobsters. As more professional crime groups become involved, the stakes rise as do the probabilities of violence to silence witnesses or collect debts.

The typical scheme involves the billing of Medicare for medical equipment and/or drugs that patients never needed and never received. In essence, the scam is the fraudulent billing of Medicare for services. The scams require access to valid Medicare or social security numbers for the purported patients. There are three main methods of obtaining such numbers depending on the sophistication of the scammers. First is the simple extortion of the numbers from elderly people by force or threats. Second is paying homeless people for the use of their Medicare or social security numbers. Third, and most sophisticated, is the theft of numbers. The thefts are accomplished by either breaking into medical facilities to obtain the numbers or by hacking into the computers of such facilities to steal their patients' numbers. Not surprisingly, the organized crime groups are most likely to use the most sophisticated means to steal the identities.

Medicare fraud is growing at such a rate simply because it is so lucrative. The crime pays much better than crimes such as street level drugs sales or car theft. In addition, it is generally much less dangerous than those other types of crimes. Federal authorities estimate that some scams net the criminals tens or hundreds of millions of dollars in fraudulently obtained monies.

While generally safer than traditional street crime, the increased profits and attention paid by law enforcement is probably responsible for an uptick in violence within some schemes. The violence that does occur takes place within the criminal group and rarely touches the general public.

The federal government is focusing law enforcement efforts on Medicare fraud. In his health care address to Congress last month, the President promised hundreds of billions of dollars in health care cost savings from combating fraud and waste. Medicare fraud appears to be one fertile area for such savings.

For more on the subject, please see the following Associated Press article, http://www.google.com/hostednews/ap/article/ALeqM5gkMiV-gKQhCN626RwnoxQKm8eM7AD9B5OKO01

White Collar and Securities: Financial Advisor Charged with Operating a Ponzi Scheme

2009-10-02T14:43:00.004-04:00

Federal prosecutors in Boston filed fraud charges against a former financial advisor, who also hosted a financial information radio program. The 13 fraud counts allege that Gregg Rennie diverted to personal use at least $3.2 million that he had persuaded clients to invest.

Allegedly, Rennie convinced clients to purchase financial instruments that he called "federal housing certificates" and guaranteed the investors a return of eight to 12 percent interest. Moreover, he told prospective investors that the investments were tax free. To entice investors Rennie provided phony prospectuses. Additionally, to prevent detection of the fraud, he provided investors with fictitious account statements and on some occasions funneled funds from new investors to those already invested intending for the payments to look like interest return on the investments.

The Securities and Exchange Commission had previously won a $4.2 million default judgment in a case against Rennie based on this scam.

For more information, please see the Boston Herald, "Ex-Radio Host, Adviser Facing Fraud Charges," October 2, 2009, http://news.bostonherald.com/jobfind/news/media/view/20091002ex-radio_host_adviser_facing_fraud_charges/srvc=home&position=also.

White Collar: Florida Political Fundraiser Indicted

2009-10-01T17:14:00.002-04:00

A Broward County ophthalmologist was indicted by a federal grand jury in the Southern District of Florida for diverting funds intended for lobbying and campaign contributions to his personal use. The indictment accuses Alan Mendelsohn, M.D., with diverting to his personal use hundreds of thousands of dollars from political action committees he had set up. The specific charges are 27 counts of wire fraud or mail fraud and five counts of making false statements to federal officials.

It is unlawful to divert political contributions to personal use. Actions to do so are chargeable as either mail or wire frauds.

The indictment alleges that during the course of the decade, Dr. Mendelsohn had created three political action committees. The ostensible purpose of these PACs was to raise money to contribute to politicians and to influence state legislation concerning the viatical industry, which was a market involving the sale of life insurance policies of those with terminal illnesses, mostly AIDS.

According to the indictment Mendelsohn received more than $1.5 million in contributions to his PACs from Mutual Benefits, a Fort Lauderdale insurance company. All total, the indictment alleges that Mendelsohn collected more than $2 million for his PACs. Of that amount, the indictment alleges that Mendelsohn diverted more than $600,000 to himself and his associates.

Among the amounts that the indictment alleges Mendelsohn diverted are the following: 1) $60,000 monthly payments to his mistress from April 2003 to February 2005, 2) $240,000 for the purchase and repair of residence for Mendelsohn and his mistress and an automobile for the mistress, 3) $87,000 to an unnamed public official from November 2003 to November 2006, and 4) hundreds of thousands of dollars to pay for his children's tuition at a private Florida prep school, college, and medical school.

Finally, the indictment alleges that Mendelsohn claimed falsely to have used his influence with investigators to close both state and federal investigations.

It is unclear why the grand jury did not also charge money laundering in the indictment. If the movements of money alleged by the indictment are accurate, the facts appear to make out a case for monetary transactions designed to conceal illegal conduct. The government may be considering a superseding indictment charging additional people and crimes.

For further information please see the following article in The Miami Herald, http://www.miamiherald.com/1374/story/1259300.html?storylink=mirelated.

Health Care: Medicare Fraudster Sentenced

2009-09-30T16:31:00.003-04:00

A convicted Medicare fraud schemer received a sentence of more than 12 years in federal prison. Daniel Martinez had pleaded guilty in federal court in Miami to charges of health care fraud and money laundering.

Martinez was the leader of a conspiracy that cheated Medicare out of more than $20 million. The defendant had operated a Hialeah, Florida, company named Med-Pro of Miami. The company claimed to be a provider of durable medical equipment to patients in Florida. However, the scheme involved the billing of Medicare for services without actually providing those services. Med-Pro would bill Medicare for providing equipment that was not provided to patients nor even prescribed by physicians. After receiving the Medicare payments, the schemers laundered the checks through individuals whose role was to cash the checks for a portion of the proceeds and return the remaining cash to the schemers.

Martinez received a sentence of 150 months in prison, followed by 18 months of house arrest. For federal crimes the United States employs determinate sentencing without parole. Thus, Martinez must serve at least 85% of his sentence or more than 10 years in prison. In addition, the court ordered the forfeiture of property derived from the crime.

For an article about the sentencing, please see the following article from the South Florida Sun-Sentinel, http://www.sun-sentinel.com/news/local/breakingnews/sfl-medicare-fraud-b092909,0,4607301.story

White Collar: U.S. Arrests Three Broward County Officials on Corruption Charges

2009-09-24T15:58:00.002-04:00

Federal agents arrested three current or former Broward County officials on charges related to official corruption or money laundering. The three complaints are unrelated, but all resulted from undercover FBI operations. The three individuals charged are the following: 1) Beverly Gallagher, a member of the Broward County school board, 2) Fitzroy Salesman, a former Miramar, Florida, city commissioner, and 3) Josephus Eggelletion, a Broward County commissioner.

The complaint against Gallagher charges her with fraud and extortion. It alleges that she directed a $71 million contract for the construction of Hollywood Hills High School to a general contractor who, in turn, would hire as a sub contractor a purported company operated by FBI undercovers. The complaint further alleges that Gallagher served as consultant to the undercover agents. Moreover, the complaint alleges that Gallagher arranged a meeting between the FBI agents and a high ranking school official to help the agents' company qualify for board of education construction work. The government alleges that Gallagher received $12,500 for her help.

The complaint against Salesman charges him with fraud, extortion, and bribery. It alleges that Salesman contacted a high ranking Miramar official to inquire whether there were any no-bid contracts available for the construction company that the FBI agents purportedly operated. Moreover, the complaint alleges that Salesman interceded for the agents with Miramar officials to arrange meetings and to attempt to obtain construction work for the agents' company. The complaint accuses Salesman of receiving $5840 for his efforts.

The complaint against Eggelletion charges him with money laundering. It alleges that Eggelletion helped the undercover agents launder $900,000 purportedly from an investment fraud scheme. The laundering allegedly took place by routing the purported proceeds of the fraud from a Miami financial institution through the Bahamas to an account in St. Croix. As a crux of the charge, the government is alleging that the movement of the monies took place to conceal the purported fraudulent conduct. The complaint alleges that Eggelletion received $23,300 for his part in the money laundering scheme.

The three defendants were arrested based on criminal complaints obtained by the United States Attorney for the Southern District of Florida, headquartered in Miami. The criminal complaints allowed federal authorities to take the three defendants into custody. They were arraigned separately in federal court and released on bail.

The government cannot proceed against the defendants based on the criminal complaints. Instead, pursuant to the Fifth Amendment to the U.S. Constitution, the government must obtain Grand Jury indictments to proceed. Such indictments may charge the same crimes that are in the criminal complaints or different ones. The arrests and arrangements based on the criminal complaints has begun the running of the speedy trial clock. The Sixth Amendment to the U.S. Constitution guarantees the right of a defendant to a speedy trial. The government has a little over two months to bring the cases to trial. However, this time period usually expands as the time required for certain pre-trial activities is excluded from the speedy trial calculations.

Until the government obtains indictments and begins making its evidentiary disclosures, it is difficult to suggest what avenues of defense my be open to the defendants.

Please see the following article in The Miami Herald, http://www.miamiherald.com/news/front-page/story/1248795.html

White Collar: UBS to Notify Customers of IRS Interest

2009-09-23T17:53:00.002-04:00

Swiss banking giant UBS will notify customers if their accounts are of interest to the IRS in its investigation of tax evasion through the use of UBS accounts. Based upon a previous agreement between the bank and the U.S. Department of Justice, UBS had agreed to supply banking information for 4500 of its American account holders who are suspected of tax evasion by the IRS.

The decision to notify the American account holders comes as a result of a decision by a Swiss court. The court in Lugano, Switzerland, ruled that the bank had to disclose to two American account holders whether their banking information was among that forwarded to the IRS. In assessing the impact of the court's order, UBS has decided that it must provide the information to all 4500 of those whose accounts are at issue.

This ruling and subsequent decision by UBS will have a significant effect on both the bank's account holders and the IRS. There is an obvious benefit to the account holders in knowing whether they are within the focus of the IRS investigation. The United States had hoped to keep the identities of the individuals on the list secret for a longer period. This is because the IRS is offering an amnesty program for Americans with undisclosed assets abroad. The amnesty allows individuals with such undisclosed assets to come forward and pay taxes without fear of criminal prosecution. Additionally, those taking part in the amnesty will face a reduced monetary penalty. The response to the program by those with hidden assets abroad has been so great that the IRS has decided to extend the program.

For an article concerning the UBS decision, please see The Miami Herald, "UBS: We'll Say Who Is on IRS List," September 23, 2009, p. C1, http://www.miamiherald.com/business/nation/story/1247038.html

Securities: Federal Court Rejects Proposed Settlement between SEC and Bank of America

2009-09-23T16:01:00.005-04:00

A federal district court in Manhattan has refused to accept a proposed consent judgment between the Securities and Exchange Commission and the Bank of America. The matter arose from BofA'a $50 billion acquisition of Merrill Lynch last year. The SEC alleged that before the closing of the acquisition BofA in an effort to seek authorization for the acquisition sent a proxy statement to is shareholders containing materially false information. The complaint alleged that the proxy statement advised BofA shareholder falsely that ML had agreed not to pay year-end performance bonuses to its executives before the closing without first obtaining BofA's consent. The SEC alleged that at the time of the proxy statement, BofA had already agreed to ML paying up to $5.8 billion (or more than 10% of the acquisition price) in bonuses. Simultaneously, with the filing of the complaint, the parties filed a proposed settlement in which Bank of America would pay $33 million to the SEC without admitting or denying the allegations. It was this proposed consent judgment that the court rejected.

District Judge Jed Rakoff issued a sharply worded order denying the parties' request to enter the consent judgment. In essence, the court suggested that the consent was a sham agreement between the parties that would allow the SEC "to claim that it is exposing wrongdoing on the part of [BofA] in a high-profile merger" and would allow BofA's management "to claim that they have been coerced into an onerous settlement by overzealous regulators." Moreover, the court said that "all this is done at the expense, not only of the shareholders, but also of the truth."

The court characterized the proposed consent settlement as unfair, unreasonable, and inadequate. It pointed to the preposterous result that the settlement would produce. The settlement proposed that management of BofA, after hiding from shareholders that as much as $5.8 billion of the shareholders' money would be given out as bonuses to ML executives, "who had run the company nearly into bankruptcy," would settle the legal ramifications "of their lying by paying the SEC $33 million more of their shareholders' money.

The SEC had argued to the court that it could not charge BofA managers because lawyers retained by BofA and ML had made the relevant disclosure decisions. The court responded to the argument by asking rhetorically why the SEC had not charged these lawyers. Moreover, the court also asked why the culpability of outside counsel would "justify imposing penalties on the victims of the lie, the [BofA] shareholders[.]"

For its part BofA had argued that, upon a very close reading, the proxy statement was neither false nor misleading. The court pointed out that this argument rests on a schedule that did not appear in or with the proxy statement. Moreover, the order takes the bank to task for its failure to provide the court with the facts concerning how the proxy statement was prepared and who made the decisions concerning its content about the bonuses. The court had requested this information earlier in the litigation. The court also addressed the bank's claim that it was innocent of lying in the proxy statement. The order asked why the bank was prepared to pay $33 million to settle the case if it was innocent of wrongful conduct.

The bank had suggested in a footnote to one of its filings that its decision to settle was simply a business decision between litigating or settling case. The court responded with skepticism that litigating a straight forward proxy statement case "would cost anything like $33 million." Moreover, the court pointed out that the bank's decision to settle was made by the same managers who were accused of having lied in the first place.

The court has set a trial date of February 1, 2010. For its part the SEC can appeal, dismiss the complaint, or prepare for trial. At this stage it appears most likely that the case will go to trial at which time the facts about how and who prepared the proxy statements will finally become public.

For a further discussion of the court's order and how the decision impacts public policy, please see The New York Times, "Judge Rejects Settlement Over Merrill Bonuses," September 15, 2009, http://www.nytimes.com/2009/09/15/business/15bank.html.

Securities: IG Finds Incompetence Not Corruption in SEC's Madoff Failure

2009-09-21T15:14:00.002-04:00

The Inspector General of the Securities and Exchange Commission has released his report of the investigation of the SEC's failure to uncover Bernard Madoff's Ponzi scheme. The IG did not find evidence that any SEC personnel benefited financially or in any other inappropriate capacity from a connection with Madoff that influenced the examinations and investigations. Additionally, there was no evidence that the romantic relationship between an SEC assistant director and Madoff's niece influenced the conduct of the SEC investigations and examinations. Finally, the IG's investigation did not uncover evidence that senior management of the SEC attempted to influence or interfere with the Commissions investigations and examinations of Madoff.

The report did find that, despite "more than ample information" in the form of detailed complaints, three examinations, and two investigations, the Commission utterly failed to perform "a thorough and competent investigation or examination" of Madoff and Bernard L. Madoff Investment Securities. The SEC received six substantive complaints that raised significant questions about Madoff's operation. Moreover, the Commission was aware of two articles in 2001 questioning Madoff's unusually consistent returns and secretive operations. One article was published by MARHedge and the other by Barron's.

Among the evidence ignored by the SEC were a series of emails uncovered in an investigation of a hedge fund, Avellino & Bienes, that invested solely with Madoff. The emails stated that Madoff had to be misrepresenting his options trading because 1) the volume on the options exchanges was insufficient to support the massive amount of trading Madoff purported to be undertaking and 2) the trading could not be over-the-counter because Madoff's purported volume was so large that no contra-party could be found for such large volumes of trades.

Although significant evidence came to the SEC's attention that Madoff may have been operating a Ponzi scheme, the SEC never conducted a Ponzi scheme investigation nor even verified Madoff's claimed trading by looking at third party records. The report concludes the following about the examination of Madoff: 1) the examinations of Madoff's operation by the SEC were handled by inexperienced examiners, 2) these examinations were too narrow in focus, and 3) they did not proceed with a sense of urgency considering the information known to the SEC from complaints that it had received. Investigation of questions raised went no further than inquiring of Madoff and accepting his responses at face value.

The enforcement staff of the SEC was no more diligent than its examiners. The enforcement investigators also accepted Madoff's evasive or contradictory statements as plausible explanations. The enforcement staff did try to obtain evidence from third parties in some instances. However, for example, when the NASD sent a report indicating that Madoff had no options positions on a certain date that he had claimed having positions, the SEC investigators failed to follow up on this crucial evidence. In other instances the enforcement investigators completely failed to obtain evidence from third party sources. Such evidence would have readily disclosed Madoff's Ponzi scheme.

In sum, the Inspector General's report paints a very disturbing picture of an agency with a mission to enforce securities fraud laws, essentially, acquiescing in the continuation of the largest fraud known to history. A combination of inexperienced investigators reporting to timid supervisors resulted in numerous missed opportunities for the SEC to uncover the Madoff Ponzi scheme and save countless investors from financial ruin. We are left to ponder the stupendous negligence and incompetence of the nation's securities regulators and wonder whether the SEC focuses its attention on small miscreants while ignoring the horrific harm caused by those con artists of higher professional reputation. Hopefully, the IG report will be a first step in the reform of the SEC to insure that it performs its mission to combat securities fraud in a more professional and competent manner.

Securities: Federal Court Analyzes SEC - BofA Settlement

2009-08-25T13:27:00.002-04:00

Earlier this month the Securities and Exchange Commission and Bank of America reached a settlement in the SEC's investigation of the bank relating to the propriety of disclosures it made last year during its $50 billion acquisition of Merrill Lynch. The SEC alleged that BofA had mislead its shareholders about $5 billion in bonuses that Merrill paid to employees last year.

The bank's knowledge and acquiescence in the bonuses has been the focus of both congressional and SEC inquiries. The merger of the banking and brokerage giants took place at the instigation of federal reserve and treasury officials. Merrill paid the bonuses although catastrophic losses at the brokerage house had taken place and would help to force Bank of America to seek $45 billion in federal bail out monies to keep solvent.

Bank of America and the SEC reached a consent agreement requiring the bank to pay $33 million to settle its SEC charges without admitting or denying the allegations.

The focus of the SEC's action involves disclosures BofA made in its proxy statement concerning the acquisition of Merrill. The statements advised BofA investors that Merrill had agreed to forgo year-end bonus payments before closing the deal unless Bank of America consented. The SEC contends that the proxy statement failed to include the material fact that at the time of the proxy Bank of America already knew and had agreed to Merrill paying almost $6 million in year-end bonuses.

Two weeks ago the federal district court judge presiding over the case in New York demanded that the parties provide greater detail to the court about the bank's failure to disclose the bonuses. Federal District Court Judge Jed Rakoff said that the proposed $33 million settlement seemed "strangely askew." He requested information identifying the names of the individuals within BofA who knew of the bonuses and were responsible for authorizing their payment. The judge questioned the fact that the SEC had only brought an action against the corporate entity but no individuals at the bank. Moreover, the judge pointed out that the bonuses appear to have been paid using taxpayer money.

In its response the bank did not identify the names of any bank personnel involved in the decision not to include the information in the proxy materials. Instead, it identified two law firms as advisers to it and Merrill Lynch during the merger. The bank maintained that there was no false or misleading information in the proxy disclosures. It pointed to Merrill Lynch financial statements (not part of the proxy) showing that funds similar to the amount in the prior year had been set aside for bonuses, thus constructively providing shareholders with notice.

The SEC claimed that its settlement with the bank was an appropriate arms-length negotiation. Moreover, the Commission sought to emphasize that the central violation by the bank was inadequate disclosure about the bonuses and not misuse of government funds. It also agreed that the bank executives were not to blame. Instead, the SEC blamed the law firms retained by BofA and Merrill.

Now each party will have two weeks to respond to the filing of the other party. If the court refuses to approve the settlement, the parties will either attempt to negotiate a new agreement or appeal the matter to the U.S. Court of Appeals for the Second Circuit.

For further details please see The New York Times, "Bank Case on Bonuses Shifts Focus to Lawyers," August 25, 2009, http://www.nytimes.com/2009/08/25/business/25bank.html?_r=1&ref=business.

White Collar: UBS Agrees to Provide DOJ with Account Holder Names

2009-08-19T15:35:00.002-04:00

The world's largest private bank, UBS of Switzerland, has agreed to a settlement in a Justice Department civil suit that sought the names and account information for American account holders seeking tax shelters with the Swiss giant. DOJ and the Internal Revenue Service have agreed with UBS for the bank to disclose the names and account information of 4450 wealthy American account holders whom the government suspects of having committed income tax fraud.

In the original suit the US had sought the names and account information of 52,000 UBS American account holders. UBS had defended against that action by claiming that such disclosure would violate Swiss banking secrecy laws. After months of negotiation that involved the US government, UBS, and Swiss authorities, the parties arrived at the settlement, requiring UBS to examine the accounts within 370 days.

UBS intends to notify the account holders whose names it will disclose to US authorities. This will allow the individuals to self report to the IRS. The government has a voluntary disclosure program in effect until September 23, 2009. Those who self report before that date will most likely avoid criminal prosecution. Additionally, they will probably avoid larger penalties and fines that would result if caught without self reporting. Numerous persons have already self reported and the addition of the 4450 new names will bring the total number of UBS related account holders disclosed to the IRS to more than 5000. US authorities claim that at the height, UBS held more than $18 billion in accounts for wealthy Americans.

The settlement appears to be a major step forward by the US in its efforts to combat tax evasion. The agreement with the Swiss banking authorities is a significant achievement in the US's efforts to pierce Swiss banking secrecy laws. Importantly, Swiss government officials will also intervene with other Swiss banks to disclose to American authorities the names of more Americans hiding money in the other banks.

In February UBS settled criminal charges in the US of conspiracy to help American clients evade taxes on approximately $20 billion in assets held in Switzerland. The criminal settlement reacquired UBS to pay $780 million and disclose the names of 250 American account holders. Currently, approximately 150 Americans are under investigation for tax evasion related to the scheme. After UBS provides the information on the 4450 clients, the number under investigation is certain to rise.

For more on the settlement, please see the article in the New York Times, "Under Agreement, UBS to Give Up Over 4,000 Names," August 19, 2009, http://www.nytimes.com/2009/08/20/business/global/20ubs.html?_r=1&hp.

White Collar: Indictment in Largest Identity Theft Scheme

2009-08-18T16:15:00.002-04:00

Federal prosecutors in New Jersey on Monday announced an indictment in the largest identity theft scheme ever uncovered in the United States. Charged in the indictment were Albert Gonzalez and two others who remain fugitives.

The indictment alleges that Gonzalez and the others targeted large corporations for theft of credit and debit card numbers. The group allegedly placed "sniffer" programs on the corporate networks of targeted businesses. These programs relayed the credit card information to computers controlled by the defendants as the actual transactions were occurring.

Gonzalez and his cohorts allegedly infiltrated the computer systems of Hannaford Brothers, a supermarket chain, 7-Eleven, Inc., Heartland Payment Systems, a payment processor, and two other retailers who were unnamed by the indictment. Some of the credit and debit card information was sold online. Other credit card numbers were used to make unauthorized purchases or withdrawals from banks.

Federal officials contend that the schemers stole the information for more than 130 million credit or debit cards.

Gonzalez was arrested while in prison for other identity theft schemes. He has been in custody since May 2008, when he was placed under arrest for data theft from the restaurant chain, Dave & Buster's. Additionally, Gonzalez was indicted for theft of other credit card information including 2005 thefts from the T.J. Maxx retail stores.

If Gonzalez goes to trial in the New Jersey case, it will probably have to await disposition of the two earlier prosecutions. More likely is a global resolution in which Gonzalez pleads guilty in all three indictments and the cases are consolidated for sentencing in one court, probably New Jersey since the case there appears to be the most serious of the criminal violations.

Gonzalez's co-defendants remain at large, and the government believes that they are in Russia. Also, interestingly, Gonzalez had previously been arrested in New Jersey on a fraud charge in 2003 and had cooperated with the Secret Service and federal prosecutors in identifying online fraudsters. Prosecutors believe that, even as he was cooperating with federal law enforcement, Gonzalez was engaging in cyber fraud using fictitious names.

Gonzalez is currently in jail and will undoubtedly remain there pending sentencing at which time he will move to a federal prison facility.

For in depth articles on the indictment of Gonzalez, please see the New York Times, "3 Indicted in Theft of 130 Million Card Numbers," August 18, 2009 http://www.nytimes.com/2009/08/18/technology/18card.html?_r=1&ref=business and the Wall Street Journal, "Arrest in Epic Cyber Crime," August 18, 2009 http://online.wsj.com/article/SB125053669921337753.html.

Securities: SEC Charges Six with Insider Trading in Miami Acquisition

2009-07-16T15:52:00.003-04:00

The Securities and Exchange Commission has filed a complaint in federal court in Miami alleging insider trading by six individuals. The trades involved the stock of the Neff Corporation. In early 2005 Neff agreed to the acquisition offer of Odyssey Investment Partners, LLC. Several individuals with knowledge of the upcoming merger purchased Neff stock prior to the public announcement of the merger and then sold their holdings after the announcement for substantial profits.

Interestingly, the SEC's complaint does not allege an overarching scheme to profit from insider trading. Instead, the complaint sets forth four independent insider trading acts. Moreover, the complaint does not allege specific instances of the passing of material nonpublic information. Rather, it describes the relationships of individuals to corporate insiders, emphasizing the timing of the defendants' contacts with the insiders and the timing of the subsequent purchases of Neff stock. It seems from the complaint that the SEC is proceeding on largely circumstantial evidence to draw a compelling conclusion that the defendants traded on the basis of material nonpublic information.

The most direct evidence appears to exist against Kevan Accord, Esq., and Philip Growney, an accountant who, as outside tax consultants for Neff, provided information to Odyssey during the course of the acquisition's due diligence.

A second scheme allegedly involved the brothers Alberto and Jose Perez. The complaint alleges that these brothers were close real estate and business advisers of Neff's CEO and his brother. Alberto maintained an office on Neff's executive floor where the deal's due diligence was taking place. The complaint alleges that through his proximity to the people working on the acquisition Albert was able to misappropriate the material nonpublic information about the deal.

The third scenario charges the father-in-law of Neff's CEO with insider trading. Sebastian De La Maza's daughter is married to Neff's CEO. The complaint alleges that the families are very close and that De La Maza obtained nonpublic information through conversations with his daughter. Then, he profited by trading on that information.

The last scheme is one involving a longtime friend, Thomas Borell, of a Neff director, who is also the brother of Neff's CEO. During a period of the most sensitive negotiations Borell and his family and the Neff director and his family vacationed together. Then, Borell began buying Neff stock, allegedly in anticipation of the acquisition announcement.

Most SEC enforcement actions settle before trial by consent without findings of fact or law. It will be interesting to see if this suit follows the same pattern or becomes one of the few that go to trial.

For an article about the case please go to the Miami Herald website at www.miamiherald.com/business/story/1143552.html.

White Collar and Health Care: Medicare Fraud Ring Charged in Miami

2009-06-29T17:49:00.002-04:00

A federal grand jury in Miami has indicted eight persons in connection with a Medicare fraud ring. The indictment charges that Michel De Jesus Huarte is at the center of the scheme. It alleges that Huarte organized two conspiracies to defraud Medicare.

Both schemes involved the billing of Medicare and private insurers operating programs for Medicare through the Medicare Advantage plans. The defendants billed the government for HIV infusion therapy that had not taken places. Infusion therapy is an obsolete treatment for HIV patients, having been replaced more than a decade ago, by antiretroviral drugs. In the schemes Huarte and others obtained the cooperation of others to pose as the owners of the medical treatment facilities. These "straw men" owners were to leave the country to avoid detection and arrest. Using these fronts, Huarte and others would bill the government for infusion therapy that was neither prescribed or administered.

The schemes were alleged to have covered five southern states: Florida, Georgia, Louisiana, South Carolina, and North Carolina. The government alleges that the defendants were able to bilk Medicare of tens of millions of dollars through the schemes' operations. Huarte and a co-defendant deposited Medicare checks at two Miami check cashing stores. Once the checks cleared, the check cashing establishments would make multiple weekly cash payments of between $30,000 and $80,000.

The prosecution grew out of a joint HHS and DOJ task force. The Miami task force is one of four throughout the country. The others are in Los Angeles, Houston, and Detroit.

For an in depth discussion of the scam, please see The Miami Herald, "Feds: Fraud Ring Spanned 5 States," June 24, 2009, p.1A.

White Collar: First Conviction from UBS Case

2009-06-26T11:21:00.002-04:00

In February of this year Swiss banking giant UBS avoided federal prosecution by admitting that it helped U.S. taxpayers avoid income taxes by hiding funds in Swiss accounts. As part of the scheme, the Swiss bankers helped wealthy taxpayers to set up sham companies in off shore tax havens. The bank admitted doing this from 2000 to 2007. UBS was able to hide the funds by creating false documents indicating that the companies rather than the taxpayers were the owners of the monies. As part of its agreement with the United States, UBS turned over the names of hundreds of account holders to federal authorities. Additionally, the US has sued UBS to obtain the names of thousands of other account holders.

The first conviction of an American taxpayer for evading income taxes, based on evidence provided by UBS, has taken place in Miami, Florida. Steven Rubinstein, an accountant in Boca Raton, Florida, has pleaded guilty to filing a false tax return for tax year 2004. Rubinstein also admitted to failing to disclose to the IRS UBS accounts, which he held from 2001 to 2007.

With the help of UBS Rubinstein set up Hybridge International in the British Virgin Islands. Using this company, UBS bankers helped Rubinstein to buy and sell over $4 million in securities. Rubinstein also laundered $3 million through a UBS Monaco account to build a home in Boca Raton. Finally, Rubinstein used UBS accounts to sell more than $2 million in South African currency.

In addition to his prison sentence, Rubinstein must pay back taxes, interest, and penalties. He is cooperating with the government in its continuing investigation.

White Collar and Health Care: DOJ Subpoenas Health Giant

2009-06-24T17:39:00.004-04:00

Medtronic, the world's largest health care technology company received a subpoena from the U.S. Department of Justice. The subpoena required the production of documents about the company's ties to Timothy R. Kuklo, M.D. Among the documents sought are those providing information about the company's financial ties to the physician. Dr. Kuklo is a former Army orthopedic surgeon at Walter Reed Army Hospital. He had published an article favorable to the Medtronic about its product Infuse, which helps in bone growth.

Previously, the company disclosed that it had paid over $800,000 in consulting fees to Dr. Kuklo. Medtronic paid most of this money to Dr. Kuklo in the last three years. This was the same time frame in which Dr. Kuklo submitted his paper touting the effectiveness of Infuse in bone grafts that were employed in treating serious leg wounds of American combat casualties.

An army investigation of Dr. Kuklo accused him of forging the names of other physicians on his article and falsifying patient data for it. Moreover, the journal that published the article has since retracted it.

The government is probably focusing on Medtronic because it continued to pay Dr. Kuklo fees and to have him speak to physicians about Infuse after it became aware of the issues involving his article. The company only ceased payments when press and congressional investigations began requesting information about its financial ties to Dr. Kuklo.

For an in depth article on the Medtronic subpoena, please see The New York Times, "Medtronic Gets Subpoena Regarding Disputed Study," June 24, 2009, p. B2.

Securities: Scrushy Ordered to Pay $2.8 Billion

2009-06-18T16:46:00.002-04:00

The former chief executive officer of HealthSouth Corporation lost a civil verdict in an Alabama state court action and was ordered to pay defrauded investors $2.8 billion. The bench trial dealt with allegations that Scrushy, while CEO of HealthSouth, had defrauded the company's shareholders by engaging in accounting fraud.

The federal government had previously brought criminal charges against Scrushy for the same conduct. In June 2005 a federal jury in Birmingham, Alabama, acquitted him of all federal criminal charges relating to HealthSouth. That verdict surprised many observes as 16 other company executives either pleaded guilty or were convicted of federal charges in connection with the HealthSouth financial scandal.

The finding of liability in the civil action and the acquittal in the criminal case may seem somewhat incongruous, but the seemingly contradictory verdicts may be explained by the differing rules between civil and criminal trials. Of primary importance is the burden of proof. Criminal prosecutors must prove their cases "beyond a reasonable doubt" for a conviction while civil plaintiffs' attorneys need only reach the lower threshhold of a "preponderance of the evidence." Additionally, the Fifth Amendment to the Constitution protects a criminal defendant from being compelled to testify at trial. No such protection exists in the civil context. While a civil defendant maintains his Fifth Amendment right, that defendant may still be called to testify by the plaintiff.

While Scrushy was acquitted of the criminal securities fraud charges, he was convicted in federal court in Montgomery, Alabama, in June 2006 of bribing a former governor of Alabama. He is currently serving a seven year sentence based on that conviction. In March of this year the U.S. Court of Appeals for the 11th Circuit denied the appeal of Scrushy's conviction.

Securities: Bank Sued by Madoff Investors

2009-06-16T17:09:00.003-04:00

Individuals defrauded by Bernie Madoff have brought a class action suit in Miami federal court against a bank for bilking customers out of fees charged to manage investments in a Madoff fund. The suit alleges that the bank, Standard Chartered, headquartered in London charged fees to invest in a Madoff feeder fund, Fairfield Sentry.

The plaintiffs claim that the bank failed to adequately manage the investments. As a result, it failed to realize that Madoff's valuations of his funds' assets were fraudulent. The suit alleges that Standard Charter invested about $300 million in Fairfield Sentry and received more than $5 million in management fees.

This is one of several suits against third party "deep pockets" that plaintiffs have brought throughout the country. Since Madoff and his funds appear to have dissipated virtually all of the monies invested, the defrauded investors have turned to third parties, such as Standard Chartered, who operated investment vehicles, which put the investors' monies into the Madoff funds. The third party suits typically allege breaches of contract, fiduciary duty, and fraud.

Please see The Miami Herald, "Investors: Return Madoff Fees," June 16, 2009, page C1, for an article about the Miami suit.

White Collar: DOJ Turns to FCPA

2009-05-26T15:55:00.002-04:00

The Department of Justice is turning to a Watergate era statute to battle international business corruption. In 1977 the Foreign Corrupt Practices Act became law. The law responded to the fact that many companies maintained off shore funds about which they kept inadequate informaion. Investigations at the time revealed that companies used such slush funds to funnel money to former President Richard Nixon's 1972 re-election campaign. Additionally, companies used these funds to influence business decisions made by foreign officials, in other words for bribery.

The Congress responded to the problems by enacting the Foreign Corrupt Practices Act. The FCPA makes unlawful the paying of value to foreign officials or business executives in foreign state owned businesses to obtain a business advantage. Additionally, the act requires a company to maintain adequate books and records to fairly disclose the financial activities of that company.

DOJ has recently begun to actively use the FCPA to combat foreign bribery by American businesses. Currently, a number of large companies are under investigation by the Department and the Federal Bureau of Investigation for possible FCPA violations. Additionally, companies are engaging consultants to ensure that their practices do not run afoul of the FCPA.

In my experience at the Department of Justice and the SEC, developing FCPA cases consumes significant resources. Nevertheless, once a commitment to the investigation occurs the cases can be successfully brought by employeeing investigative audit procedures.

For an in depth look at the Justice Department's recent efforts, please see The Wall Street Journal, "U.S. Cracks Down on Corporate Bribes," May 26, 2009, page A1.

White Collar Securities: Investigators Probing Some of Madoff's Purported Victims

2009-05-18T18:06:00.003-04:00

The trustee in bankruptcy in the Madoff case has filed suit against some who have called themselves victims of the Madoff fraud. Irving Picard, the court appointed trustee for Bernard L. Madoff Investment Securities, LLC, has filed suit against two associates of Madoff. The suits allege that Jeffry Picower and Stanley Chais sought and received better returns than those purportedly made by other Madoff investors. Picard alleges that the returns received by these individuals reached as much as 300% or 950% annually. He has further alleged that the two defendants withdrew more than $6 billion in purported profits.

Criminal investigators from the United States Department of Justice are also beginning to look at the possibility of bring criminal charges against Picower, Chais, and several other investors. The investigation may be looking at the question of whether certain investors told Madoff how much in returns they wanted on their investments and received these amounts into their accounts.

A criminal case by the government would probably rest at least in part on the theory that these sophisticated investors either had direct knowledge of the fraud or knew that Madoff could not legally produce tremendous profits that matched the amount requested by these investors.

For more in depth discussions of the civil suit and criminal investigation, please see The Miami Herald, "Madoff Trustee Sues 2 Funds," May 14, 2009, page C1, and The Wall Street Journal, "Madoff Victims Investigated," May 18, 2009, page A1.

Health Care: Florida Takes Steps to Combat Illegal Pain Clinic Prescriptions

2009-04-27T17:09:00.003-04:00

Law enforcement has been unable to combat the illegal dispensing of pain medication at pain clinics throughout the South Florida area. In the past year the number of pain clinics in the area has risen from 60 to 150. The U.S Drug Enforcement Administration has said that in a six month span of 2008 50 South Florida physicians have dispensed almost nine million pills of the controlled painkiller, oxycodone. The problem is that Florida has lagged in its regulation of clinics that provide pain medication.

The leading health enforcement agency in Florida is the Agency for Health Care Administration. While AHCA has broad authority to insure compliance with health care standards, its jurisdiction exists only over clinics that accept insurance. To avoid regulation most pain clinics do not accept insurance, operating cash businesses instead.

Law enforcement officials believe that addicts and pill dealers from states that regulate and monitor the dispensing of pain medication come to South Florida to obtain the drugs and then take them out of state for sale or use. Thirty-eight states have programs to monitor the sales of these drugs. Florida may soon join them.

The Florida legislature is working on a proposal that will create a database to track narcotics prescriptions filled by the state's physicians and pharmacists. This will identify those professionals writing and filling excessive numbers of prescriptions for pain medication and will also identify individuals who are attempting to obtain pills from several doctors. The proposal will require pain clinics to register with the state and submit to annual Department of Health Inspections.

The proposed legislation is similar to that enacted my many of the states that regulate pain clinics. While it has some possible deficiencies, such as not requiring criminal background checks on pain clinic employees, the database will be a very important enforcement tool.

For an in depth discussion of the issue, please see The Miami Herald, "Law May Lack Teeth to Rein in Pill Mills," April, 27, 2009, p. A1.

White Collar: U.S. Court Suppresses Evidence Based on Attorney Misconduct

2009-04-14T15:29:00.002-04:00

A U.S district court in Los Angeles suppressed incriminating statements made by a defendant in a prosecution alleging impropriety in a company's granting of stock options. In the case of U.S. v. Ruehle, et al., the court found that the attorneys representing Broadcom Corporation and its CFO William Ruehle had violated the attorney client privilege. As a result, the court suppressed statements of Ruehle that the government wished to offer in evidence.

The court found that in May 2006, particular attorneys at the law firm Irell & Manella had undertaken three linked representations of Broadcom and its CFO. These representations included two shareholder suits alleging impropriety in the granting of stock options. The representation in these two suits included the personal representation of Ruehle. The third representation was in internal corporate investigation into the granting of such stock options, undertaken for the corporate entity, Broadcom. The court pointed out that the subject matter of the three representations, the granting of stock options, inexorably linked the three investigations.

As part of its internal investigation, Irell attorneys interviewed Ruehle. The attorneys claim that they provided an Upjohn warning before this interview. An Upjohn warning advises a member of an organization that the attorney represents the organization and not the member. Most importantly, the warning informs the organization member that the attorney client privilege applies to the organization and not to the member. Therefore, the organization may disclose the member's statements to third parties without obtaining consent.

The court held that an Upjohn warning was insufficient under the facts of the case. Because Irell represented Ruehle in a matter in which his interests were adverse to the Broadcom investigation representation, the court determined that Irell had to obtain written consent from Ruehle for disclosures to third parties. Because the attorneys failed to obtain such consent, the court ruled that disclosure to third parties, including the government, was a breach of the attorney client privilege. Therefore, the court suppressed Ruehle's statements at trial.

The court pointed out that Irell was defending Irell from the allegations made against him in the civil suit. At the same time, the attorneys knew that evidence uncovered in its internal investigation from an interview of Ruehle might prove adverse to him. If the attorneys wanted to turn over incriminating evidence against one of its clients, they had to obtain a written conflict of interest waiver. The attorneys failed to do so. As a result, the court suppressed the statements and referred the matter to the California State Bar for possible disciplinary action against the attorneys.

Perhaps the most interesting aspect of this case is that, at least initially, the most significant blow is being suffered by the government. The court's opinion makes no mention of any possible wrongful actions by the government attorneys or investigators. Nevertheless, the government suffers suppression of its important evidence based on the purportedly improper conduct of attorneys representing the target corporations and individual.

The government is appealing the order to the Ninth Circuit Court of Appeals. However, a few lessens may be drawn from this matter. First, the government is likely to look far more closely at the process of internal investigations to ensure against suppression of evidence generated by such investigations. Second, internal investigations are best handled by independent law firms that do not have ongoing business relationships with the entity under investigation. And three, internal investigations should only be undertaken by those with experience conducting criminal investigations. It is not an area for the novice.

Finally, I will keep watch to see how the appellate court handles this case.

White Collar and Securities: Madoff Trustee Begins "Clawback" Suits

2009-04-10T12:04:00.003-04:00

Irving Picard, the court appointed trustee who is liquidating the assets of convicted con artist Bernard Madoff has filed his first law suits seeking the return of funds withdrawn by Madoff investors. Picard has sued Viscaya Partners, Ltd., a British Virgin Islands investor and its bank Safra, Ltd. The suit asks for $150 million. The suit alleges that Viscaya transferred the $150 million from Madoff's Bernard L. Madoff Investment Securities, LLC, to Safra on October 31, 2008.

The "clawback" provision of bankruptcy law allows the trustee to seek recovery of funds paid out by the bankrupt estate within six years of the bankruptcy. In this instance the trustee is seeking the return of monies paid that were fictitious profits. In other words, trustee is claiming that the $150 million paid to Viscaya was not profits derived from its investment with Madoff. Instead, that sum is really money defrauded from more recent Madoff investors - the essence of a Ponzi scheme.

Generally, in situations involving such a scheme, the trustee/receiver will seek to exercise "clawback" rights to recover fictitious profits paid. Less certain is whether the trustee will seek the return of principal invested from those whose withdrawal have involved the return of at least some principal. Legally, no set of victims is more entitled to recovery than the rest of the victims. However, in practice trustees sometimes to not seek to exercise "clawback" rights against those who have withdrawn principal. In the Madoff matter the trustee has not yet disclosed how he will proceed in these instances.

White Collar: Judge in Stevens Case Appoints Special Prosecutor

2009-04-09T11:58:00.004-04:00

After excoriating Department of Justice prosecutors for their conduct in the prosecution of former Alaska senator Ted Stevens, the presiding judge, District Court Judge Emmet Sullivan, appointed a special prosecutor to investigate the alleged misconduct of the prosecutors. Earlier this week Attorney General Eric Holder had announced the dismissal charges against Stevens due to the prosecution team's failure to turn over evidence to the Stevens defense attorneys.

The court appointed Henry Schuelke III of Washington, DC, to investigate. Courts have legal authority to appoint counsel to investigate and prosecute cases of criminal contempt. It is unlikely that Schuelke could bring charges other than criminal contempt against the DOJ attorneys.

The Department's Office of Professional Responsibility is conducting an investigation also. If that investigation were to find wrongdoing by the prosecutors, a variety of other potential actions, both administrative and judicial could come into play. It is likely that both the court's investigation and that of DOJ will take some time to complete.

For further information please see The Miami Herald, "Stevens Prosecutors Blasted," April 8, 2009, p. 3A.

White Collar and Securities: New York AG Sues Feeder to Madoff Fraud

2009-04-07T17:28:00.004-04:00

The New York state attorney general has filed a civil suit in state court charging money manager and philanthropist J. Ezra Merkin with fraud and breach of fiduciary duty based on New York State law. The complaint alleges that Merkin fraudulently invested approximately $2.4 billion with convicted fraudster Bernard Madoff and fraudulently derived management fees of $470 million from the investment.

The complaint alleges that Merkin fed monies from his family of Ascot funds and his Gabriel and Ariel funds to Madoff's Ponzi scheme. Three separate funds comprise the Ascot funds, which Merkin began in 1992. The complaint alleges that Merkin represented to his clients that he served as the money manager for the Ascot funds. However, in reality, the complaint charges that Merkin merely passed the monies to Madoff and that Merkin failed to exercise management control, ceding all such control to Madoff. The Gabriel and Ariel funds purportedly invested in distressed assets. However, the complaint alleges that beginning in 2000, Merkin turned 1/3 of the monies in these funds over to Madoff for investment. Notwithstanding the fact that Madoff's investment "strategy" was a Ponzi scheme, Madoff's publicly stated strategy was never to invest in distressed property.

According to the complaint, charities and non-profit organizations suffered particular harm at the hands of Merkin. He allegedly used his position on boards of such organizations to influence the investment of monies in the funds that he purportedly managed.

The theory of the state's action is that Merkin committed fraud and breached his fiduciary duty to investors by failing to advise such investors that Madoff was the real manager of the Ascot funds and a significant portion of the monies invested in the Gabriel and Ariel funds.

Merkin does not face possible incarceration based on this action because it is a civil rather than criminal suit. He faces the possibility of an injunction and significant monetary penalties.

White Collar: DOJ Dismiss Charges Against Former Senator

2009-04-06T17:29:00.003-04:00

Attorney General Eric Holder has announced that the government would seek to dismiss its indictment of former Senator Ted Stevens of Alaska. Stevens had been convicted in the fall for making false statements on his Senate disclosure form about items of value that he had received while in the Senate.

The Attorney General announced that a Justice Department review had disclosed that Stevens had been denied a fair trial by the government's failure to provide key evidence to the defense.

The possibility of prosecutorial misconduct had long hung over the Stevens trial. During the course of the trial, U.S. District Court Judge Emmet Sullivan had criticized the government attorneys for knowingly presenting false evidence and for attempting to conceal evidence favorable to the defendant.

Although Stevens survived a primary fight while the charges were pending, he lost his re-election bid by a narrow margin. The jury returned the verdict just days before the election.

The conduct of the prosecutors is under review by the Department of Justice Office of Professional Responsibility.

It will be interesting to see if internal Justice Department reviews result in the dismissal of any other cases.

White Collar: FBI Changes Tactics in Fight Against Fraud

2009-04-06T17:08:00.004-04:00

The Federal Bureau of Investigation has a caseload of more than 2000 mortgage fraud investigations. This significant number of investigations is straining the resources of the agency. As a result, the FBI will begin fighting fraud using the techniques common to the investigation of non-white collar crime.

Traditionally, the investigation of fraud and white collar illegality has involved the analysis of large numbers of documents and the building of "paper" cases. The investigations involved the review of correspondence handled by those under investigation. In this way the government sought to build large cases in which the evidence implicated those in higher positions with knowledge and direction of the schemes. Such "paper" cases required significant time and resources.

In traditional non-white collar criminal investigation, the FBI has made a series of quicker cases against lower level actors and tried to "turn" them against those in higher positions. If an individual arrested and accused agreed to cooperate, the government would put a body wire on that individual and send him to meet with the higher up target. The theory behind these "quick hit" is to build a chain to the criminal leadership.

The two approaches usually have different results. The "quick hit" non-white collar approach tends to make a greater number of cases, but it usually fails to reach the top of the criminal ladder. The traditional "paper" investigation results in fewer cases, but those that are made tend to involve higher level people with greater potential sentences.

The change in strategy may result in more headlines and increased convictions statistics, but may fail to bring to just those most criminally responsible for mortgage fraud. It would be worthwhile to keep in mind the level of those being convicted as this strategy plays itself out.

For a further discussion of the issue, please see the Daily Business Review, "FBI Streamlines Its Investigative Strategy as Caseloads Soar," April 2, 2009, p. A2.

Health Care: Two Miami Doctors and Others Convicted of Bilking Medicare

2009-03-30T17:55:00.003-04:00

Two Miami physicians along with several other persons were convicted in federal court in Miami of conspiracy to defraud Medicare of millions by making fraudulent claims for treating HIV patients. Drs. David Rothman and Keith Russell and the others were convicted by a jury of engaging in a conspiracy to bilk Medicare.

Medicare paid clinics owned and operated by the defendants $2.5 million for HIV infusion treatments. The government proof was that the treatments were either medically unnecessary or never given to the patients. Testimony at trial established that owners of the clinics paid Rothman $200,000 and Russell $40,000 for writing the infusion prescriptions.

Infusion therapy is an outdated method of treating HIV that involves intravenous therapy. The current method of treating HIV is with antiretroviral drugs. These are typically administered orally and are commonly referenced as a antiretroviral "cocktail." This method of treatment has been very successful in turning HIV into a managed chronic disease.

The case is important because it is another example of the willingness of the government to bring a criminal action based on a theory of unnecessary medical treatment. Until relatively recently the government has shied away from cases alleging medically unnecessary treatment. However, the government has more recently shown a willingness to press the theory in a fraud context.

For a more in depth article on the conviction, please see The Miami Herald, "Doctors, Assistants Convicted of Medicare Fraud," March 18, 2009.

Securities: New Jersey Sues Former Lehman Executive and Directors

2009-03-27T16:46:00.003-04:00

The state of New Jersey has filed a law suit in New Jersey state court alleging fraud by the former executives and directors of the now bankrupt Wall Street firm Lehman Brothers. The complaint alleges that Lehman's executives misstated the firm's financial position in 2008, leading the state to make investments in Lehman's shares during that time.

The suit alleges that the state invested $182 million in Lehman stock during the period when the management of the company was making false public claims about the valuation of Lehman's assets and that the firm was liquid. Moreover, the complaint alleges false statements about Lehman's ability to manage its investment risk.

New Jersey also names directors of Lehman in its suit, alleging that the board was a hand picked rubber stamp for management's decisions, thus, failing to exercise supervision over management. The suit names the executives and directors and not Lehman Brothers itself because the company is in bankruptcy, which stays all litigation against it.

White Collar: Court Upholds Conviction of Qwest Ex-CEO

2009-02-26T16:17:00.002-05:00

The 10th Circuit Court of Appeals has upheld the insider trading conviction of former Qwest CEO Joseph Nacchio. The decision reinstates the federal conviction of April 2007, in which a jury found Nacchio guilty of 19 counts of insider trading.

In March of 2008, a three judge panel of the 10th Circuit vacated Nacchio's conviction and ordered a new trial. The panel found that the trial judge had improperly excluded expert testimony. After that appeal, the circuit court agreed to a request by Nacchio rehear the case en banc. The most recent decision overrules the prior appellate decision and reinstates the conviction and sentence of six years. The en banc panel consisted of nine judges who split 5-4 in deciding to reinstate the conviction.

The only avenue left for Nacchio's legal defense team is to seek Supreme Court review.

White Collar: UBS and Justice Department Reach Deferred Prosecution Agreement in Massive Tax Fraud

2009-02-18T17:52:00.005-05:00

UBS, the world's largest private bank has reached a deferred prosecution agreement with the U.S. Department of Justice. The agreement requires UBS to pay $780 million to settle charges that it helped wealthy Americans evade payment of taxes. The agreement pierces Swiss secrecy laws as it requires the bank to turn over the the U.S. government the names of American account holders. This list could include as many as 19,000 names. These people will become liable to civil tax proceedings and, in some instances, may be charged with criminal tax violations.

In the agreement UBS admitted to engaging in a conspiracy to defraud the IRS. The other members of the conspiracy would be the account holders who failed to pay adequate taxes.

The agreement imposes on the bank the obligation to make periodic reports to the United States about its offshore undeclared banking business that involves U.S. residents. While UBS will probably close these accounts, the agreement still requires it to provide evidence of the closing of each account.

UBS probably avoided an imminent indictment by entering the agreement. Prosecutors believe that UBS helped Americans to hide $20 billion, which resulted in tax evasion of $300 million annually.

For a further discussion of the settlement, please see The New York Times, "UBS Reaches Deal Over Offshore Services," February 19, 2009.

Securities: SEC Brings Fraud Charges against Stanford

2009-02-18T16:12:00.002-05:00

The Securities and Exchange Commission has filed a civil complaint against R. Allen Stanford and his holdings alleging a massive fraud of $8 billion. The suit, filed in federal court in Dallas, Texas, sought and obtained an order freezing Stanford's assets and ordering repatriation. SEC staff is working with Antigua's authorities to enforce the freeze in that jurisdiction.

The complaint alleges that representatives of Stanford sold prospective investors certificates of deposits from a banking institution located in Antigua, promising higher returns than other banks offered. Stanford and his agents told the investors that the bank was able to pay the high returns because they had placed the funds in high return investments. Moreover, they assured the investors that the monies were in highly liquid investments and that a staff of analysts monitored the investments. Additionally, the complaint alleges that Stanford and his agents assured investors that the investments were subject to annual audits by Antigua's regulators.

In fact, the complaint states that Stanford had placed the monies in private equity and real estate investments. Moreover, the government alleges that Stanford did not employ a staff of analysts to monitor the investments, nor did Antigua perform annual audits.

The SEC apparently increased the pace of its investigation of Stanford after suffering withering criticism for its failure to uncover the Madoff scheme.

Finally, it seems almost inevitable that the Department of Justice is conducting a parallel criminal investigation and may bring charges against Stanford and others.

For in depth news coverage of the Stanford matter, please see the New York Times article of February 17, 2009, and the Wall Street Journal article of February 18, 2009.

Securities: SEC Reaches Bifurcated Settlement with Bernard Madoff

2009-02-09T16:53:00.003-05:00

The SEC has announced that it reached a partial settlement with Bernard Madoff. The parties have submitted a proposed settlement to a portion of the case to the federal judge hearing the matter.

The SEC refers to such settlements as "bifurcated" settlements. In this instance, as in other bifurcated settlements, Madoff agrees not to contest fraud allegations and the imposition of disgorgement and penalties. The issues that remain open are the amounts of the disgorgement of Madoff's ill-gotten gains and the amount of the penalty that he will pay.

The SEC and Madoff's defense team will now concentrate on negotiating the monetary amounts in the settlement. If the parties are unable to do so and the case goes to trial, the trial will be limited to the issues of the amount the Madoff defrauded from investors to determine disgorgement and as legal argument the amount of the appropriate monetary penalty. The trial would not consider whether Madoff is liable for fraud as that is part of the proposed settlement.

This proposed settlement and the ultimate disposition of the SEC's civil case does not bear on the criminal action brought by the Department of Justice against Madoff. That case is proceeding separately.

Securities: Ninth Circuit Takes Restrictive View of Collective Scienter Theory

2009-01-15T15:39:00.002-05:00

The United States Court of Appeals for the Ninth Circuit in the Invision Technologies, Inc., Securities Litigation matter determined that the plaintiff class had failed to adequately allege scienter and refused under the facts of the case to apply the doctrine of "collective scienter."

The litigation arose in connection with a proposed merger between Invision Technologies and General Electric. On the eve of the merger in July 2004 Invision issued a press release casting doubt on the merger due to the discovery of possible violations of the Foreign Corrupt Practices Act. The announcement resulted in an immediate and substantial drop in the share price of Invision stock. The company ultimately settled with the U.S. Department of Justice and the Securities and Exchange Commission, and the merger closed.

Plaintiffs filed a class action suit alleging fraud based on statements made by Invision in its merger documents with GE. The plaintiffs alleged false statements in the merger documents as the basis for the fraud.

The issue confronting the court was whether the plaintiffs had sufficiently alleged scienter by the corporation. The Private Securities Litigation Reform Act requires plaintiffs to plead with specificity the acts giving rise to a strong inference that the defendant acted with culpable knowledge. A general allegation of motive and opportunity or recklessness is insufficient.

The court held that the plaintiffs had to demonstrate knowledge by the Invision official named in the complaint. The Ninth Circuit rejected the use of collective scienter as adequate pleading. (Pleading "collective scienter" involves allegations raising the inference of knowledge as to a corporate defendant without raising such allegations as to an individual defendant within the corporation.) While the court did not go so far as to reject the theory of collective scienter outright in the circuit, it held that the theory would not meet legal requirements in the current case.

The court determined that the allegations of falsity were sufficiently focused on a single individual to require that the complaint adequately allege scienter on the part of that person. The court held that the complaint had failed to do so and affirmed the district court's dismissal.

It is important to note that the Second and Seventh Circuits have adopted the "collective scienter" theory while the Fifth and Eleventh Circuits appear to have rejected it completely.

White Collar - Federal Court Dismisses Count of Indictment against Noted Miami Attorney

2009-01-13T11:21:00.002-05:00

The United States District Court for the Southern District of Florida dismissed a count of an indictment against a noted criminal defense attorney. The count at issue had charged the attorney and others with conspiracy to launder money. In essence, the facts alleged are that reputed cocaine smuggler, Fabio Ochoa, retained a team of attorneys to defend him in a criminal action brought by the United States. The defense team retained the defendant criminal attorney to perform an investigation into the source of the funds being used by Ochoa The purpose was to verify that such funds were not tainted.

The attorney performed the investigation and determined that the source of the funds was lawful. The funds were transferred from Ochoa to the attorney's account. The attorney then authorized a series of wire transfers from his account to the defense team. Almost $5.3 million were transferred in this manner.

The government charged a count of a multi -count indictment alleging that the defendant attorney and others conspired to launder criminally derived proceeds having a value greater than $10,000 with the purpose of paying Ochoa's legal fees.

The charge was based on a conspiracy to violate 18 U.S.C. Section 1957(f)(1). The defendant argued that there is an exemption to that section when the transaction is necessary to preserve a person's right to representation. The government argued that the exemption language of the statute had been superseded by the Supreme Court in Caplan & Drysdale Chartered v. United States, 491 U.S. 617 (1989). The government argued that the Supreme Court had held in that case that there is no Sixth Amendment right to use illegal narcotics proceeds to pay attorneys' fees. The district court determined that the government had erred in its analysis of Caplan & Drysdale. It ruled that the Supreme Court had held only that the Sixth Amendment did not prohibit the forfeiture of criminal proceeds paid to attorneys. Thus, the mere transaction of paying fees to a criminal defense attorney could not stand as a basis for the money laundering charge.

The defendant pressed further arguing that the Section 1957 exemption extended not only to attorneys for criminal defendants, but to anyone in the chain involved in the payment for legitimate defense services. The court refused to extend the exemption this far. It held that the statute did not exempt everyone handling tainted funds involved in providing defense services. However, the court refused to decide which others would fall within the exemption.

It bears remembering that this was one count of a multi-count indictment. The remaining counts were unaffected by the decision.

The case may be found under United States v. Gloria Florez Velez, et al., Southern District of Florida, case no. 05-20770-CR-Cooke/Bandstra.

Securities and White Collar: Subprime Mortgage Meltdown Enforcement and Civil Litigation Heating Up

2008-12-22T15:13:00.004-05:00

All levels of government are becoming involved in responding to the subprime mortgage meltdown. In addition private litigants are beginning to file legal actions.

The federal government's enforcement response will be spearheaded by the Securities and Exchange Commission and the Department of Justice.

The SEC has created a subprime task force to investigate cases associated with the subprime meltdown. The areas of investigation are numerous. Some of the issues will involve SEC filings such as whether companies properly reported the value of collateralized debt obligations including securitized mortgages. Others will involve whether those selling securities based on debt made adequate disclosure to prospective investors of the value of the offerings and the risks involved in trading them. Another issue is whether parties conducted proper due diligence before offering securities or recommending securities to clients. There will also be questions of whether insiders traded on non public information as the markets were about to collapse.

The Department of Justice will focus on many of the same questions. With DOJ the issue will be whether targets and subjects of the investigations acted with sufficient knowledge to constitute a criminal fraud. It is likely that the Department of Justice will model its actions on the efforts to investigate and prosecute fraud arising from the savings and loan scandals of the very early 1990's.

It is also likely that state attorneys general will undertake criminal and civil enforcement actions to protect their residents.

Finally, individuals will file suites to obtain recompense for monies the feel were lost due to fraud. These suits may mimic the allegations of actions brought by the SEC. It is likely that the next several years will produce an explosion of private litigation stemming from the subprime mortgage meltdown.

Securities - Deep Pockets in Madoff Scam

2008-12-22T14:26:00.004-05:00

As the fallout from the alleged $50 billion Bernard Madoff fraud continues, investors may wonder where they can look to reclaim allegedly stolen funds. The answer may depend on how those investors became involved with Madoff.

In situations where an alleged defrauded investor dealt only with Madoff and his companies, that investor may only be able to bring an action against Madoff and those companies. If there was a fraud, the investors who dealt directly with Madoff can proceed against him directly or wait for a presumed pay out by the court appointed receiver. Ultimately, this would provide the investor with only pennies on the dollar.

Individuals who invested through third parties or relied on third parties for advice may be in a somewhat more advantageous position. Again, assuming that a fraud occurred, investors in this group could bring actions against the third parties upon whom they relied. Thus, these persons could allege that the third party advisers or investment vehicles violated their respective duties to these investors by not taking appropriate care and performing adequate due diligence before involving their clients in the alleged scam.

In the latter situation, it is important for the prospective litigant to analyze the written representations of the third party advisor(s) to determine whether they honored the promises made to handle the investments with appropriate care. If they did not, these parties could be "deep pocket" targets for victims of the alleged fraud.

For an interesting article about a hedge fund that, for a number of years, has involved clients in the Madoff investment see www.nytimes.com/2008/12/22/business/22fairfield.html?ref=business.

Securites and Health Care - Scrushy Asks Court to Dismiss Bribery Conviction

2008-12-03T16:36:00.003-05:00

Ex HealthSouth Corp. CEO Richard Scrushy and former Alabama governor Donald Siegelman have asked the U.S. Court of Appeals for the Eleventh Circuit to overturn their bribery convictions. Scrushy was convicted for providing the former Alabama governor a $500,000 campaign contribution in return for a seat on a state hospital regulatory board. Siegelman was convicted for taking the money.

Siegelman and Scrushy both argued to the court that the government failed to prove that Siegelman offered Scrushy a seat on the board in return for the campaign contribution. Moreover, Siegelman's arguments bring into focus the issue of whether in today's lobbying climate a politician can be held criminally responsible for accepting donations from a supporter who wishes to receive consideration in return.

The essence of the issue is whether the government has proved a quid pro quo existed around the contribution. The defendants argue that a bribery conviction must involve an agreement to such quid pro quo and that a contribution with a mere hope of future benefit is insufficient as a basis for a bribery conviction.

The case has received significant comment and attention as questions have arisen concerning whether the prosecution was politically motivation by the Justice Department since Siegelman is a Democrat.

The Eleventh Circuit has scheduled oral argument for December 8, 2008.

Securities - Investment Advisor Forced to Disgorge Irrespective of his Loss

2008-12-03T16:17:00.004-05:00

In the case of SEC v. Seghers, the Fifth Circuit determined that an investment advisor who lost his own investment while engaging in fraud still had to pay disgorgement.

The case alleged that an investment advisor knowingly provided inaccurate information to a hedge fund. The complaint also alleged that he failed to disclose errors to the hedge fund, which affected the fund's value.

After trial, the jury found the defendant liable for fraud, and the court imposed an injunction and a civil penalty. However, the court refused to order disgorgement of ill gotten gains, reasoning that, because the investment advisor had lost his own money in the fraud, he did not realize an unjust enrichment.

On appeal the Fifth Circuit held that the district court erred and that the investment advisor was unjustly enriched by the scheme. The court reasoned that profits obtained through a fraudulent scheme are ill gotten games, even though such profits are later lost by the wrongdoer.

Securities - 10th Circuit Affirms Consultant Fraud Liability

2008-11-07T17:59:00.004-05:00

In SEC v. Wolfson, an action alleging violations of securities fraud provisions, the Tenth Circuit Court of Appeals affirmed a decision by a Utah district court that a consultant was liable as a primary violator.

In the case the consultant drafted periodic reports for the reporting company. Those reports contained material misstatements and omissions. On appeal the consultant argued that the SEC had failed to show that the consultant was the primary violator. He argued it was the reporting company that was actually responsible for the improper filings.

The Tenth Circuit reasoned that the consultant knew the misstatements and omissions, for which he was responsible, would be disseminated to the investing public. The fact that the company made the filings in its own name did not insulate the consultant from liability. To the contrary, the court determined that the consultant had played a central role in the fraud by preparing the filings while knowing that they would reach the public.