An AP story (here) discusses the increasing use of satellite photographs of farms to investigate and prosecute crop insurance fraud schemes. The satellite images can show the acreage planted, type of crops grown, and irrigation patterns that can show whether the crops were actually damaged by an event, such as a storm or drought, that would trigger payments under the federal crop insurance program. The story discusses one case in North Carolina in which a farming couple had workers throw ice cubes on the crops and then beat them to simulate hail damage — that must have been a nasty sight. The husband was sentenced to a 76-month term of imprisonment and the wife to 65 months, plus an order to pay over $9 million in restitution. Big brother is watching on the farm, on the highway, and just about everywhere else these days. (ph — thanks to Delia Johnson for passing along the story)
Category: Fraud
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A decision issued by the United States District Court for the District of Oregon on Jan. 9 dismissing securities fraud charges against three defendants for due process violations in the civil investigation is notable because it looks to be part of a growing trend to scrutinize how the SEC and U.S. Attorney’s Offices coordinate their investigations. The decision, United States v. Stringer (opinion below), involves an accounting fraud prosecution of three former officers of FLIR Systems Inc. in which the defendants gave depositions and supplied documents in the SEC investigation and were then indicted on criminal charges based on the information provided. The defendants asserted that the SEC’s failure to disclose the close coordination of its investigation with the U.S. Attorney’s Office violated their Fifth Amendment due process right because they agreed to depositions and to provide documents that they otherwise would not have given if they had known prosecutors viewed them as targets of the investigation.
In dismissing the indictments, U.S. District Judge Ancer Haggerty found that these were not "parallel investigations" but that the Commission essentially conducted a criminal investigation on behalf of the prosecutors to take advantage of the discovery rules available and, more importantly, by sandbagging the defendants into not asserting their Fifth Amendment rights. The opinion states:
The court concludes that these were not parallel investigations. The USAO identified potential criminal liability and a few targets in the beginning of the investigation, and elected to gather information through the SEC instead of conducting its own investigation. The government was concerned that the presence of a criminal investigation would halt the successful discovery by the SEC, witnesses would be less cooperative and more likely to invoke their constitutional rights, and that the rules of criminal discovery would be invoked. Stringer Ex. 69, at 3 (June 6, 2001) (memorializing a telephone conversation between Echavarria and Garten wherein Garten explains that once there is an indictment "discovery is over. Criminal is totally 1 sided" and that he would then give everything and get nothing). The government was aware that there was no parallel proceeding.
The delay by the USAO was not for the purpose of reviewing evidence gathered by the SEC to make an informed decision as to whether the case warranted prosecution. From the beginning, the USAO consistently held the position that a criminal prosecution was likely. Almost a year after the SEC investigation began and two years before the USAO made its presence known, the USAO reiterated its position that the case would most likely warrant criminal prosecution, yet decided not to conduct a parallel criminal investigation.
Moreover, the USAO was actively involved in the SEC investigation: meeting regularly, receiving documents, requesting interviews be conducted in Oregon to establish jurisdiction, advising what information was needed for a successful criminal prosecution, specifically instructing on how best to conduct interviews to gather evidence for false statement cases, intentionally hiding its presence from FLIR’s attorneys, and repeatedly planning with the SEC as to when it would be best to surface and conduct an overt criminal investigation.
The strategy to conceal the criminal investigation from defendants was an abuse of the investigative process.
Interestingly, the court did not find that the SEC made any direct misstatements to the defendants. It quoted from one deposition in which the Commission staff member (Echavarria)refused to confirm whether there was a criminal investigation but directed the defendant and his attorney to contact prosecutors directly:
STRINGER’S ATTORNEY: My first question is whether Mr. Stringer is the target of any aspect of the investigation being conducted by the SEC.
ECHAVARRIA: The SEC does not have targets in this investigation.
STRINGER’S ATTORNEY: The other questions I have relate to whether or not, in connection with your investigation, the SEC is working in conjunction with any other department of the United States, such as the U.S. Attorney’s Office in any jurisdiction, or the Department of Justice.
ECHAVARRIA: As laid out in the 1662 form, in the "routine use of" section there are routine uses of our investigation, and it is the agency’s policy not to respond to questions like that, but instead, to direct you to the other agencies you mentioned.
STRINGER’S ATTORNEY: And which U.S. Attorney’s office might I inquire into?
ECHAVARRIA: That would be a matter up to your discretion.
The responses were those that I was taught to give when I was at the SEC, yet here they were insufficient to permit the criminal prosecution to go forward. One case like this might be an aberration, but the decision in Stringer comes on top of the district court’s opinion in U.S. v. Scrushy, 366 F.Supp.2d 1134 (N.D.Ala. 2005), that found a similar pattern of undisclosed SEC/U.S. Attorney coordination resulted in a due process violation and required the suppression of evidence. In Stringer, the district court went even further by dismissing the entire case, finding that "the USAO intentionally shielded its intentions behind the guise of a civil prosecution, resorting to subterfuge to maintain the secrecy of its involvement."
A year ago, I would have said a motion alleging a due process violation like that brought in Scrushy or Stringer was doomed because courts permitted coordinated investigations, and that the prosecutors could simply piggyback on the civil agency’s inquiry. Indeed, after Enron, the civil and criminal authorities touted their cooperation through the President’s Corporate Fraud Task Force (website here) that includes "an inter-agency group that focuses on maximizing cooperation and joint regulatory and enforcement efforts throughout the federal law enforcement community." One of the members of the Task Force is the Chairman of the SEC, and these district court decisions may call into question the government’s use of coordinated civil and criminal investigations.
I suspect the Department of Justice will appeal the district court’s decision in Stringer because it may view the success of challenges like this to pose too great a threat to its ability to conduct parallel investigations. Regardless of whether it appeals, this is a development that could have a substantial effect on how the government pursues investigations in areas as diverse as health care, securities/commodities, and environmental that involve civil regulatory agencies with substantial technical expertise not normally available in a U.S. Attorney’s Office. (ph — thanks to a reader in Oregon for sending along the opinion)
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The press blog of the U.S. Attorney’s Office for the District of Maryland describes the indictment of Bryn Phillips for defrauding her employer, Old Mutual Financial Network (OMFN), and a group of banks of over $800,000 in the past three years. The blog (here) recites two schemes allegedly perpetrated by Phillips that leaves me wondering how she could have gotten away with it for so long:
[F]rom approximately October 2, 2002 until December 30, 2004, Phillips caused Wachovia Bank and Municipal Employees Credit Union (MECU) to transfer $708,049.42 in monies, funds, and credits from OMFN corporate accounts into accounts she controlled. The indictment alleges that Phillips falsely represented to Wachovia Bank that OMFN gave her authority to cause the issuance of wires transferring monies from OMFN accounts at Wachovia Bank to Wachovia Bank and MECU accounts controlled by Phillips. She caused checks to be drawn against OMFN’s account at Wachovia Bank that were payable to entities controlled by Phillips, and/or her relatives and associates, and withdrew and wired monies from OMFN accounts which OMFN had intended to be used as payment for OMFN business expenses, to Wachovia accounts under Phillips’s control. Phillips also allegedly used names and passwords of employees under her supervision to execute wire transfers from OMFN corporate accounts into accounts she controlled.
The indictment also alleges a second fraud scheme. OMFN issued Phillips a corporate credit card for business expenses of OMFN. Phillips initially submitted reimbursement requests to other OMFN employees and later reviewed and authorized payments for the corporate credit card herself. The indictment alleges that from September 2003 to January 20, 2005, Phillips made a number of unauthorized purchases and obtained a variety of products, services and trips through the unauthorized use of OMFN corporate credit cards including services and lodging at the Venetian Hotel in Las Vegas, Nevada; personal property including two Louis Vuitton handbags, a $4,095 pink mink jacket with fox trim, and jewelry; home improvements; and professional basketball tickets. She allegedly submitted fake credit card statements to OMFN causing her to obtain more than $150,000 from OMFN in improper reimbursements.
Phillips is 30 years old, and I suspect she is not a senior executive of OMFN, an insurance holding company whose subsidiaries have over $22 billion in assets (website here). I can’t help but wonder if anyone was looking at the credit card receipts and asked whether that mink jacket with fox trim had the company’s logo on it, or maybe why the two Louis Vuitton handbags weren’t in the supply cabinet. Where are the internal auditors when you really need them? (ph)
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The Federal Trade Commission has set up a website, OnGuardOnline (here), to help consumers in dealing with the various types of cybercrime we all run into every day. Hardly a day goes by that I don’t receive a notice from "PayPal" or some bank that my account information needs to be updated, or an urgent message asking help in transferring a large amount of money from a bank in Sierra Leone, the Ivory Coast, or the like. The FTC site has information about identity theft, phishing, spam fraud, and spyware. In addition to links to other federal agencies, such as the Department of Homeland Security and the SEC, there is also a page that gives information and links for filing complaints with the appropriate agency. (ph)
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The United States Supreme Court denied certiorari in a racketeering case involving mail fraud’s honest services provision. (See Chicago Tribune here).
Betty Loren-Maltese was the President of the Town of Cicero, Illinois, appointed upon the death of husband, who died from cancer. She was charged with RICO conspiracy and five counts of mail and wire fraud. Despite the fact that the government failed to show any money going to her, she was convicted of these crimes. One of the arguments she made in her Petition for Certiorari was that the Court needed "to decide whether the ‘honest services’ statute is unconstitutionally vague and to resolve a conflict in the circuits over how to interpret the statute so that it complies with due process."
This is not the first time that the Supreme Court has denied certiorari on a claim involving 18 U.S.C. sec. 1346, the section that allows for mail and wire fraud to be premised on a "right to honest services." This denial reminds one of the many cases that had a similar argument rejected prior to the Supreme Court’s acceptance of the case of McNally v. United States, a case that reversed the government’s use of an "intangible rights" doctrine and destroyed many of the convictions that had been obtained by the government.
Will it take a long line of cases being denied cert. before the Supreme Court eventually takes a case to resolve whether a statute premised on the clause "honest services" is too vague to be constitutionally sound?
(esp)
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The saga of Thomas Coughlin, former vice chairman of Wall-Mart and hunting buddy of company founder Sam Walton, appears to be coming to a close with reports that he will enter a guilty plea to wire fraud and tax evasion charges. The issue first flared in March 2005, when Coughlin was removed from the board and his retirement benefits terminated by the company when an internal investigation revealed that over a number of years Coughlin had engaged in a number of relatively small personal transactions that were billed to Wall-Mart as business expenses, totaling upwards of $500,000. The purchases included Wall-Mart gift cards, hunting equipment and rifles, and even a personal computer for Coughlin’s son. A plea by Wall-Mart vice president Robert Hey, who reported to Coughlin, detailed the fraud and referenced an unidentified Wall-Mart executive as the recipient of the benefits, so it was only a matter of time before Coughlin was indicted.
When the story first broke, Coughlin claimed that the transactions related to a secret anti-union campaign he conducted on behalf of Wall-Mart, a plausible story given the company’s reputation in that area (among others these days). While a plea deal does not preclude Coughlin from asserting that position, it will require him to affirm that he defrauded Wall-Mart and that the benefits constituted personal income that should have been reported. It will be difficult to assert at sentencing that his conduct was for the benefit of the company. A Washington Post story (here) discusses the potential plea agreement.
A case like this highlights a point seen in a number of white collar crime prosecutions when a high-level, and well-paid, executive or professional engages in misconduct that involves seemingly trivial amounts. Is it worth it? Wall-Mart’s 2004 proxy statement (here) discloses that for 2004 Coughlin earned $983,894 in salary, an incentive payment of $2.8 million, a restricted stock award of $2 million, and other compensation (i.e., perks not including the ones he stole) of $252,082, which in addition to his ownership of 948,832 shares, which are worth over $40 million. The annual dividends on his stock holdings alone probably exceed the amount of the fraud he will admit, so in the end it’s not the money. Instead, I think it is a sense of entitlement, and a belief that one is not doing anything wrong because the person is not a criminal like those people who rob a 7-11. We all believe we’re ethical and honest, although sometimes it takes a little extra convincing to get out the door in the morning. (ph)
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Lobbyist Jack Abramoff entered a guilty plea in U.S. District Court for the Southern District of Florida to pending conspiracy and wire fraud charges related to his purchase of the SunCruz gambling ships, his second acknowledgment of criminal conduct in two days. Because the conduct took place before 2002, the maximum penalty for each is five years, and his sentence will coincide with the one he receives for the corruption and tax evasion charges to which he pled guilty in Washington, D.C. A copy of the plea agreement is available on Findlaw (here). With Abramoff’s acknowledgment of guilt, and the speculation regarding who he may try to implicate, a number of politicians have returned his donations or said they will donate them to charity. That includes President Bush, whose campaign committee will donate $6,000 to the American Heart Association — but not the $100,000 Abramoff helped to raise through donations by others as a "Pioneer" in the 2004 campaign — and former House Majority Leader Tom DeLay, who received $57,000. It seems that those who willingly accepted Abramoff’s largess are trying to put as much distance as possible between themselves and his group of lobbyists. An AP story (here) discusses the reaction of politicians who received Abramoff campaign contributions. (ph)
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McAfee, Inc., then known as Network Associates, settled an SEC securities fraud action (complaint here) alleging that the company engaged in "channel stuffing" to report inflated sales and income from 1998 to 2000 — wasn’t that the height of the internet bubble, if memory serves? McAfee agreed to pay a $50 million civil penalty and to use an outside monitor to ensure that it properly accounts for its sales. The SEC has already sued three former Network Associates officers in connection with the fraudulent accounting, two of whom — the former CFO and controller — were charged with criminal violations. According to the SEC’s Litigation Release (here):
McAfee defrauded investors into believing that it had legitimately met or exceeded its revenue projections and Wall Street earnings estimates during the 1998 through 2000 period. In reality, however, McAfee had used a variety of undisclosed ploys during the period to aggressively oversell its products to distributors in amounts that far exceeded the public’s demand for the products. While engaging in this “channel stuffing,” McAfee improperly recorded the sales to distributors as revenue. McAfee offered its distributors lucrative sales incentives that included deep price discounts and rebates in an effort to persuade the distributors to continue to buy and stockpile McAfee products. McAfee also secretly paid distributors millions of dollars to hold the excess inventory, rather than return it to McAfee for a refund and consequent reduction in McAfee’s revenues. In other instances, McAfee used an undisclosed, wholly-owned subsidiary, Net Tools, Inc., to repurchase inventory that McAfee had oversold to its distributors. All of these actions were inconsistent with Generally Accepted Accounting Principles and led to McAfee’s October 2003 restatement of its financial results for 1997 through 2003.
And we all believed companies with price/earnings ratios over 100 were good buys in 2000. Maybe not. (ph)
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No surprises in the Abramoff Plea today. The Information has three charges – conspiracy, mail fraud, and tax evasion. (See Information here– CNN) It is thirteen (13) pages, and includes a range of different activities.
Probably what everyone wants to know is – what names are mentioned in this Information; and is there any indication of who might be the next to fall; and will all the dominoes fall here?
Obviously Scanlon’s name is mentioned, but he has already pleaded guilty to conspiracy. (see here)
In the conspiracy count (a section 371 charge) one finds mention of a "Wireless Company," "Staffer A," "Staffer B," and "Representative # 1." (I was taught if you have a #1 you need to have a #2, but I don’t see #2 mentioned in this Information). The mail fraud count is not a "money or property" charge, but rather uses the "honest services" provision of 1346, and it mentions "Representative # 1." (If the Supreme Court one of these days finds section 1346 to be vague — after all, what is honest services– will Abramoff have waived his rights to contest this issue because he has plead guilty?) And the final charge, tax evasion, is premised on section 7201.
This being an Information, as opposed to an Indictment, allows the prosecution and defense to better control the possible sentence in this case. The Wall Street Journal reports here, that the sentence is ten(10) years, although the Washington Post notes here that it carries a sentence of thirty years (30), but the cooperation reduces it to ten (10) years. And the restitution to be paid in this case should certainly assist the government’s deficit.
So far we have Adam Kiden pleading guilty, and also Scanlon, and now Jack Abramoff. The government’s pattern is to get the lower levels talking and to move up the ladder. It reminds me of building a snowperson (called it a snowman back then). You keep rolling it across the ground and it picks up more snow until it gets very large. This is likely to be a VERY big snowperson.
(esp)
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Two defendants charged with health care fraud related to a scheme to submit false billings to Medicare for durable medical equipment received sentences of 50 and 34 months on Dec. 30. Virgilio Miranda and Lazaro Martinez received the sentences for their role in a scheme described in a press release (here) issued by the U.S. Attorney’s Office for the Southern District of Florida as "involving two Miami durable medical equipment (DME) companies, AID Medical Equipment, Inc. and Progressive Services, Inc., both of which were alleged to have been placed into ownership under [Lemay] Chang’s name to conceal the involvement of others, including Miranda and Martinez, in the scheme, which involved the submission of approximately $3 million in Medicare claims." Miranda and Martinez also pled guilty to conspiracy to tamper with a witness when they tried to persuade Chang to leave the U.S. after he received a grand jury subpoena and delivered a $70,000 cash payment to him. Chang received a 16-month sentence in an earlier proceeding, and the defendants were ordered to pay $2.66 million in restitution. (ph)
MattBray.net 