Category: Fraud

America- A Land of Opportunity

February 19th, 2006

The Boston Globe here provides a gripping story of an alleged pyramid scheme occurring in a United States Cambodian community. The net result is that several individuals face criminal charges and significant monies have been lost by people. The close culture may have factored into the scheme’s widespread acceptance and failure of law enforcement to intercede until significant damage was alleged to have occurred. This story emphasizes the importance of having diversity in federal law enforcement, and that the diversity be in both white collar and non-white collar investigations.

(esp)
Former Impath President Found Guilty of Securities Fraud

February 17th, 2006

Former Impath Inc. president and chief operating officer Richard Adelson was found guilty of securities fraud, conspiracy, and filing false statements with the SEC in connection with a scheme to inflate the medical information company’s earnings and revenues. Adelson was acquitted on seven other false statement and soliciting false proxy counts. The company’s former CEO, Anuradha Saad, received a three-month prison term in January 2006 after pleading guilty to soliciting false proxies that did not disclose her charges of over $120,000 in personal expenses to the company through her corporate credit card; four other executives entered guilty pleas related to the fraudulent accounting. Adelson was accused of helping to inflate Impath’s revenues by approximately $64 million from 2000 to 2002, and the company collapsed into bankruptcy in 2003. An AP story (here) discusses Adelson’s conviction. (ph)
Tough Times for a Couple CEOs

February 16th, 2006

With the high salaries, perquisites, stock options, and adulation heaped upon CEOs, one would think that the living is easy once a person enters the corner office. That may be true, but if you’re caught padding your resume a bit, it can trigger all sorts of negative publicity and a board of directors investigation. It seems that RadioShack Corp. CEO David Edmondson may have misstated the college degree he holds. His biography on the company website (here) states, "Edmondson graduated from Pacific Coast Baptist College in San Dimas, Calif., where he earned a degree in theology. He is also a graduate of Harvard Business School’s Advanced Management Program." While that is sufficiently vague, in the past Edmondson has claimed that he received a Bachelor of Science degree in theology and psychology. Unfortunately, his alma mater, Pacific Coast Baptist, does not offer a psychology major, and his degree is a ThG, which only requires three years of course work, not the the four years required for the B.S. A Reuters story (here) states that the Board of Directors has hired outside counsel to conduct an investigation and advise it on proper employment policies. Resume padding is nothing new, but it always amazes me that people would put down incorrect or non-existent degrees and think that it will pass unnoticed.

Things are even dicier at Chicago Bridge & Iron Co. N.V., which fired its CEO, Gerald Glenn, and chief operating officer on February 3. Although the company’s terse disclosure said nothing about the reasons for the termination, it has been involved in an extensive internal investigation into possible accounting fraud, and the terminations appear to be related to those issues. Rather than go away quietly, however, Glenn has filed a challenge to his termination in the Netherlands, where the parent company is headquartered. According to CB&I’s Form 8-K (here): "While as previously announced Gerald M. Glenn has been terminated as our Chairman, President and Chief Executive Officer effective February 3, 2006, Mr. Glenn remains a member of the Chicago Bridge & Iron Company N.V. Supervisory Board and a member of the management board of Chicago Bridge & Iron Company B.V. Effective February 8, 2006, Chicago Bridge & Iron Company B.V. resigned as the managing director of Chicago Bridge & Iron Company N.V. Mr. Glenn has filed suit in The Netherlands contesting the circumstances and effectiveness of his termination as Chief Executive Officer." Unlike resume padding, which may be embarrassing but probably not much more, accounting fraud is likely to draw significant attention from the SEC and U.S. Attorney’s Office in Houston, where CB&I’s U.S. subsidiary is headquartered. (ph)
Proposed Mortgage Fraud Crime

February 15th, 2006

Senator Barack Obama of Illinois introduced legislation to combat mortgage fraud that includes an interesting provision that would create a new federal criminal law. The bill, S. 2280 (available below), is entitled (unfortunately) the "Stop Transactions which Promote Fraud, Risk, and Underdevelopment Act" or "STOP FRAUD Act," and it would provide for a central data base to track mortgage fraud and fund federal and state anti-fraud efforts in the area. Section 2 of the bill would create Section 1351, "Mortgage Fraud," that would make it a federal crime for a "mortgage professional" to engage in a scheme to defraud or make false/fraudulent statements in connection with a real property loan, with a maximum punishment of 35 year and a $5 million fine. The statute is narrower than the mail and wire fraud statutes, which are often used to prosecute mortgage fraud cases, because of the limitation to conduct by mortgage professionals. That term is defined as including appraisers, lawyers, real estate brokers, mortgage underwriters, and "any other provider of professional services engaged in the mortgage process" — how is that for a circular definition: mortgage professionals are providers of professional services related to mortgages. Mortgage scams in which straw purchasers engage in sham transactions to inflate the value of property and then take out a large mortgage would not be covered by the statute unless the perpetrators were themselves mortgage professionals.

Even more interesting is proposed Section 1351(c), which permits private parties to bring a private right of action for violations of the provision, regardless of the amount in controversy, citizenship of the parties, or exhaustion of administrative remedies. Creating such a broad private right of action, with no real guidelines on the scope of the potential suit, is uncommon, and perhaps unprecedented. Off the top of my head, the only criminal provisions that I am aware of that also include express private rights of action are the False Claims Act and RICO, while the antitrust and securities laws also rely on private actions as a means of enforcement along with federal civil and criminal enforcement. RICO and qui tam actions have very specific pleading requirements, while the mortgage fraud suit would seem to be, in effect, a federal common law fraud action limited to mortgage professionals. If enacted, this provision would raise interesting questions about whether the principle of respondeat superior would permit a law suit against the mortgage professional’s employer, whether punitive damages are recoverable, and perhaps most importantly, whether a prevailing party could be awarded attorney’s fees. On a different note, is there any way that the use of silly acronyms for laws can be stopped, or at least curtailed? (ph)

Download mortgage_fraud_legislation.pdf
A Second Mistrial for Cendant Executive

February 10th, 2006

The prosecution of former Cendant executive Walter Forbes ended in a second mistrial after 27 days of jury deliberations. Forbes was CEO of CUC International before its merger with HFS, which created Cendant. Shortly after the merger, details of significant accounting fraud at CUC emerged, leading to multibillion dollar settlements of securities fraud civil suits and the prosecution of CUC’s CFO, another senior executive, Kirk Shelton, and Forbes. The CFO entered a guilty plea and was the star witness in the two trials, the first ending in a guilty verdict on some counts for Shelton — who has been sentenced to a ten-year prison term — and a hung jury for Forbes. That jury was out 33 days, so the case is clearly a close one. Whether the government will try a third time is not clear at this point, and after two trials it may be that the case cannot be won.

In his trial, Forbes offered the "honest-but-ignorant CEO" defense. A New York Times column by Floyd Norris (here) notes Forbes’ testimony that he did not read the company’s quarterly filings with the SEC (Form 10-Q): "I don’t think they would have expected me to be reading 10-Q’s." All that accounting stuff is really confusing, anyway. Much of the government’s case hung on the testimony of the CFO, who was permitted to retain $5 million from his days at CUC as part of the plea agreement, a decision that opened him to significant impeachment. A Bloomberg story (here) discusses the government’s prosecution of Forbes. (ph)
Drugs, But Not Drugs

February 7th, 2006

The health law white collar area has been booming these last few years, as many prosecutions have related to fraud in this industry. Just as one thinks that the government is moving in a different direction, more cases pop up. Sometimes the cases add a new dimension – like the use of the internet. Fraud Update here has links to two recent ones:

1. USA Chuck Rosenberg, Southern District of Texas reports a conviction here for:

"counterfeit labeling and false trademarks on pharmaceutical drugs. United States District Judge Ewing Werlein found [the accused] guilty after pleading guilty on Friday, February 3, 2006, to the federal charge. . . . The investigation leading to the August 2005 indictment of [the accused] began in the fall of 2004 when investigators of Eli Lilly and Company became aware that [the accused] was using the website address of bestonlineviagra.com to advertise and sell prescription drugs, including Cialis, at prices that led them to believe the drugs were either stolen or counterfeit."

2. R. Alexander Acosta, USA for the Southern District of Floirda reports an 84 count indictment that involves an alleged "multimillion dollar health care fraud scheme." (here)

" As set forth in the Indictment, between June 2001 and September 2005, the defendants conspired to commit health care fraud by submitting fraudulent prescription drug claims to more than one hundred private health insurance companies . . . for prescription medications that were either not prescribed, not requested, and/or not delivered to the patients named in the claims."

As seen in so many recent white collar cases, the government tacked on money laundering charges in this indictment.

(esp)
Is White Collar Crime A Texas Thing?

February 4th, 2006
While everyone is focusing on Houston, Texas and the Enron trial, USA Johnny Sutton, over in Western District of Texas has been pretty busy with white collar cases.
- A former bank vice president, who plead guilty to one count of bank fraud and one count of misapplication by a bank officer or employee, was sentenced to 46 months in prison and ordered to pay restitution. She was alleged to have stolen 1.2 million from the Bank of Sierra Blanca. (see here)
- A San Antonio businessman "pleaded guilty to one count of conspiracy to commit money laundering" "admit[ting] to defrauding an insurance company of more than 1.3 million. (see here)
- And looking at the list of very recent press releases here it looks like this USA’s office has been busy with everything from alien smuggling charges, an ebay scam, and "foreign earned income exclusion case."
(esp)
Two Former Bank of China Employees Charged with $485 Million Fraud and Money Laundering Scheme

February 2nd, 2006

Two former Bank of China employees and their wives have been charged with fraud, money laundering, and RICO violations related to a fraud that netted approximately $485 million. According to the Department of Justice press release (here):

Xu Chaofan (a/k/a Hui Yat Fai), Xu Guojun (a/k/a Hui Kit Shun), Kuang Wan Fang (a/k/a Wendy Kuang), Yu Ying Yi, and Kwong Wa Po were charged in the 15-count superseding indictment. The charges in the indictment stem from an elaborate scheme to defraud the Bank of China of at least $485 million, orchestrated by former managers Xu Chaofan, Xu Guojun and a third former bank manager, Yu Zhendong (a/k/a Yu Wing Chung) who has pleaded guilty in connection with this investigation and is cooperating. The scheme allegedly involved efforts by the bank managers to launder the stolen money through, Hong Kong, Canada and the United States, among other countries, and then immigrate to the United States from China with their wives by obtaining false identities and entering into sham marriages with naturalized U.S. citizens. The bank managers’ true wives, Kuang Wan Fang and Yu Ying Yi, allegedly assisted their husbands in laundering the proceeds of the fraudulent scheme and violated U.S. immigration laws by entering this country illegally and then securing United States citizenship and passports through fraudulent means.

(ph)
Iraq Contracting Officer to Plead Guilty

February 1st, 2006

Robert Stein, who was a contracting officer for the Southern Region of the Coalition Provisional Authority in Iraq, has agreed to plead guilty to charges of fraud and conspiracy related to a scheme to steal upwards of $2 million through contract awards to a businessman identified as Philip Bloom. Stein awarded approximately $8.6 million worth of contracts to Bloom, each less than $500,000 because that was the limit of his authority without further authorization. In an example of the type of stuff no one engaged in a fraud would ever commit to paper, but for some reason is written into an e-mail, Stein wrote to Bloom that "I love to give you money" related to a $200,000 to build a police academy. In response to an e-mail from Bloom regarding using different company names for the contracts, Stein responded, "Since we are paid in cash it really doesn’t matter tax wise." That’s right, if you’re evading taxes, but it surely does matter for a fraud (and tax evasion) case. In addition to Bloom, an AP story reports (here) that five Army reserve officers have also been implicated in the fraud/kickback scheme. Of course, there may have been another tip-off to possible problems involving Stein: he was convicted in 1996 of bank fraud and sentenced to an eight-month term of imprisonment (see earlier post here). (ph)
How Do You Have a “Non-Meeting” with a Real Person?

February 1st, 2006

The "scared straight" speech given by Boeing general counsel Doug Bain (from the Seattle Times here) to the company’s top executives about significant legal (and moral) problems at the company is certainly striking for its candor, and Peter Lattman on the Wall Street Journal Law Blog has a thorough recap (here) of the highlights (and lowlights) of the talk. Bain mentioned a number of instances in which Boeing’s conduct falls well short of the type of ethical, much less legal, standards expected of a corporation, particularly one involved in sensitive government defense contracts. One particular part of the speech caught my attention, concerning the contacts between former Boeing CFO Michael Sears and top Pentagon procurement officer Darleen Druyun that led to the aborted hiring of Druyun even though she had not recused herself from Boeing contract awards and admitted she favored the company, which was where her daughter also worked. One would expect a chief financial officer to know the requirements for negotiating with a government official, and that one must adhere to fairly strict guidelines. Yet, Sears described his meeting to recruit Druyun as a "non-meeting," as recounted by Bain:

On October 17, 2002, Mike Sears [then chief financial officer of Boeing] flew in a company airplane down here to Orlando and met with Darleen Druyun [then chief acquisitions officer for the Air Force] and offered her a job. The question everyone keeps asking is, why? The rules on dealing with government employees are not hard. In fact, during the meeting Darleen told him, ‘I have not recused myself from Boeing business.’ As best we can figure out, Darleen told Mike in Orlando that she had just received a handshake offer, which she had accepted, from Lockheed Martin. It’s my personal belief that Mike then went into a sales mode. He not only wanted to make sure that he got Darleen; he wanted to make sure that Lockheed Martin did not. The next day, Mike sent an e-mail that said "I had a ‘non-meeting’ with Darleen Druyun." If this were all we were facing, we might have been able to deal with it better. But there were a lot of other events that came out. It turned out, in August 2002 Mike had had Darleen come to Chicago and even though the R word was never used, the prosecutors say ‘This looks like a recruitment meeting.’ So maybe the Oct. 17 conversation was not a one-off. During the month of September, there was a string of e-mails between Mike and Darleen’s daughter, who was employed as an HR person in St. Louis. The e-mails clearly are negotiations for Darleen coming to work for us. Again, if this is all we were dealing with, we might have had a different issue. However, in the year 2000, Darleen sent a copy of the résumé for her future son-in-law to Mike, asking for his assistance in getting him a job. Mike merely sent on the resume, did not ask for anything to be done. But the people who received it assumed Mike was going to say ‘Make it happen’ — and they did. A few months later, this had worked, Darleen sent the résumé of her daughter to Mike. Same thing happened. Mike sent the résumé along, and the people made it happen. All this stuff came together when Darleen was sentenced and she said ‘I might have favored Boeing in awarding contracts’ because of the favors Boeing had done for her in hiring the son-in-law and the daughter.

So, the cultural questions: How come nobody said to Mike, ‘What in the hell do you mean by a non-meeting’? How come in the year 2000 nobody said, ‘Should we really be hiring the relatives of our chief procurement officer for the largest customer we have on the defense side?’ It also raises the question, Do we have a culture of silence — don’t ask the tough questions?

Both Sears and Druyun ended up being sentenced to federal prison. Bain is right that a culture of "getting it done" at any cost can land a company in serious trouble, such as the investigations of Boeing being conducted by two United States Attorney’s Offices. What can possibly impel a senior corporate officer to describe a conversation with a government official who makes decisions regarding the award of contracts to the company, or its competitors, as a "non-meeting" on the assumption that a wink-and-a-nod will make it go disappear? Maybe Boeing can change, and Bain’s speech is certainly a start in addressing the issue of corporate accountablilty beyond simply asserting that these are mere "agency costs." (ph)