White Collar and Securities: New Investigation of Hedge Fund

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

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

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

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

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

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

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

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

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

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

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

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.

Securities: SEC Charges San Diego Area Man with Affinity Fraud

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/.