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

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.

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

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: Wells Fargo Seeks Settlement in Wachovia Money Laundering Investigation

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.

Healthcare: Detroit Area Physician Convicted of Healthcare Fraud and Jailed

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.

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

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: Western Union Settles Money Laundering Charges with Arizona

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: Property Owners Sue Credit Suisse for Fraud

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: Another Huge Ponzi Scheme, Another Conviction

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

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.

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

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 Crime and Securities: 3 Indicted in Securities Scheme

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: Florida Political Fundraiser Indicted

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

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