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 and Securities: California Sues State Street Bank for Fraud

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

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

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

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

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

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 Securities: Financial Advisor Charged with Operating a Ponzi Scheme

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

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.