The Independent Inquiry Commission Into the United Nations Oil-for-Food Programme issued its third interim report (here) and identified two senior officials in the Programme who it concluded engaged in criminal wrongdoing. The report analyzes the role of Benon Sevan, the Executive Director of the UN Office of the Iraq Programme, and Alexander Yakovlev, a UN procurement office, and concludes that they solicited bribes. The Commission further recommends that the UN waive the immunity that protects each from prosecution. A statement (here) by the UN chief of staff announced that Secretary-General Annan intends to waive the immunity, and that "[w]ith specific regard to Mr. Sevan, the United Nations is already cooperating with inquiries from the Manhattan District Attorney and is in the process of replying to a request for cooperation from the U.S. Attorney for the Southern District of New York. With regard to Mr. Yakovlev, the UN’s Office for Internal Oversight Services (OIOS) last month contacted the U.S. Attorney for the Southern District of New York to alert them that internal, ongoing investigations of Mr.Yakovlev had turned up prima facie evidence of criminal wrong doing and has shared that evidence with the U.S. Attorney’s office." With the immunity from prosecution gone, look for prosecutors to file charges in the near future against each for his role in a program that was rife with corruption. (ph)
Category: Fraud
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The SEC filed a civil fraud action against two former Citigroup executives, including Thomas Jones, the former head of its Global Investment Management division, for setting up an affiliated transfer agent to handle mutual fund transactions for Citigroup customers but did not pass along the savings to those investors. As discussed in an earlier post (here), Citigroup settled the SEC action by agreeing to pay $208 million in disgorgement, interest, and civil penalties. The SEC charged Jones and Lewis Daidone, CFO of the division, with aiding and abetting fraud under the Investment Advisors Act, and according to the Commission’s Litigation Release (here):
The complaint alleges that Jones, the former chairman and chief executive officer of the asset management division, directed an effort to negotiate a deal that would permit Citigroup to reap much of the profit that the funds’ third party transfer agent had been making. Jones approved the final structure of the deal fully aware that the affiliated transfer agent was projected to make tens of millions of dollars in profit each year for doing minimal work. The complaint further alleges that Jones intentionally or recklessly acted in disregard of his fiduciary duty by failing to take steps to ensure the funds’ independent directors were fully informed of the details of the proposal and that Jones approved the presentation delivered to the funds’ boards seeking approval of the self-dealing transaction knowing or recklessly disregarding that the presentation was materially misleading.
The complaint alleges that Daidone, a senior vice president of the Adviser and the funds’ treasurer and chief financial officer, participated in the negotiations with the existing third party transfer agent and was the person responsible for making the presentation to the funds’ boards in a way that led the boards to believe the affiliated transfer agent proposal was in the funds’ best interests, which was not true.
According to a Reuter’s story (on CNN.com here), Jones’ attorney asserted that he was a "victim" of the fraud and "not a perpetrator." (ph)
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The wide-ranging investigation of the reinsurance industry for its "finite insurance" products that were used by purchasers to engage in earnings management shows no signs of abating, according to Berkshire Hathaway’s most recent quarterly report (here). The company’s 10-Q — filed as usual on a Friday after 5:00 p.m. — has disclosures about the various government investigations and related civil litigation in the section entitled "Legal Proceedings" that is growing in size each quarter. According to the company:
General Reinsurance Corporation (“General Reinsurance”), a wholly owned subsidiary of General Re Corporation (“General Re”) and an indirect wholly owned subsidiary of Berkshire, is continuing to cooperate fully with the U.S. Attorney for the Eastern District of Virginia, Richmond Division (the “U.S. Attorney”) and the Department of Justice in Washington (the “DOJ”) in their ongoing investigation of Reciprocal of America (“ROA”). The U.S. Attorney and the DOJ have continued to request additional information from General Reinsurance regarding ROA and its affiliate, First Virginia Reinsurance, Ltd. The U.S. Attorney and the DOJ have also interviewed a number of current and former officers and employees of General Re and General Reinsurance, and have indicated they plan to interview additional such individuals. General Reinsurance and four of its current and former employees, including a former president, originally received subpoenas for documents from the U.S. Attorney in connection with the U.S. Attorney’s investigation of ROA in October 2003. One of the individuals originally subpoenaed in October 2003 has been informed by the U.S. Attorney that this individual is a target of the U.S. Attorney’s investigation. General Reinsurance has also been sued in a number of civil actions as described below.
General Re, Berkshire, and certain of its other insurance subsidiaries, including National Indemnity Company (“NICO”) have also been continuing to cooperate fully with the U.S. Securities and Exchange Commission (“SEC”) and the New York State Attorney General (“NYAG”) in their ongoing investigations of non-traditional products. The U.S. Attorney and the DOJ have also been working with the SEC and the NYAG in connection with these investigations. General Re, Berkshire and NICO have been responding to subpoenas from the SEC and the NYAG originally issued in January 2005 by providing information relating to transactions between General Reinsurance or NICO (or their subsidiaries) and other insurers. In particular, General Re and Berkshire have been responding to requests from all of the governmental authorities involved in these investigations for information relating to certain transactions that may have been accounted for incorrectly by counterparties of General Reinsurance (or its subsidiaries). Berkshire understands that the government is reviewing the role of General Re and its subsidiaries, as well as that of their counterparties, in these transactions. The SEC, NYAG, DOJ and the U.S. Attorney have jointly interviewed a number of current and former officers and employees of General Re and General Reinsurance as well as Berkshire’s Chairman and CEO, Warren E. Buffett, and have indicated they plan to interview additional such individuals.The italicized parts above note that the various agencies plan to interview more employees, and those frequently lead to requests for additional documents to determine the accounting for transactions discussed, and perhaps can reveal new areas of inquiry. Berkshire Hathaway’s disclosure also notes that another senior officer of a General Re subsidiary, Milan Vukelic of the Faraday Group, was terminated in July in connection with an investigation by the Australian authorities related to finite insurance transactions. Don’t look for a quick resolution of the various investigations, much to Warren Buffett’s chagrin, no doubt. (ph)
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The federal government settled its long-running civil False Claims Act case against Harvard University and two University advisors who worked on a program funded by USAID to provide advice to the post-Communist Russian government on how to structure a market economy. Harvard agreed to pay $26 to settle the false-billing claims, and the two advisors, Andrei Shleifer and Jonathan Hay, will pay approximately $4 million; a firm controlled by Shleifer’s wife, through which the false billings were made, has already repaid $1.5 million. According to a press release (here) issued by the U.S. Attorney for the District of Massachusetts:
The United States’ case provided extensive evidence that, despite the clear terms of the agreements, SHLEIFER, and HAY were making prohibited investments in Russia in the areas in which they were providing advice. The United States further demonstrated that SHLEIFER and HAY were self-dealing by using their positions, as well as USAID-funded resources, to advance their own personal business interests and investments and those of their wives and friends. Their self-dealing activities included using their influence over the Russian Securities Commission to which they were key advisors to secure for themselves and their wives the first ever launched and licensed mutual fund in Russia. The terms of the USAID grant strictly prohibited any investments in Russia by American advisors funded under the grant . . . The United States alleged and demonstrated that SHLEIFER, HAY and HARVARD never disclosed any of these prohibited personal business activities and/or investments to USAID.
The civil case was certainly a black-eye for Harvard, which failed to properly oversee Shleifer and Hay’s activities. (ph)
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Fen-Phen, a weight loss drug, was removed from the market in 1997. (See here). As one might suspect, it was followed by lawsuits to compensate those injured, and a class action settlement. (see here).
A recent sentencing in Mississippi concerns fraud related to this settlement. A DOJ Press Release states here that, "[a] Mississippi woman has been sentenced to 31 months in prison for her role in falsifying prescription documents on behalf of others in order to obtain funds from a settlement fund established for injuries caused by the so-called ‘fen-phen’ drugs." The press release states that the defendant "participated in the scheme to file false prescription documents on behalf of others in order to obtain funds from a $400 million settlement fund established following a suit against American Home Products, the maker of the diet drugs Redux and Pondomin, for injuries caused by fen-phen. Johnson was also ordered to pay $750,000 in restitution."
(esp)
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In many white collar cases, prosecutors start at the bottom and move up the ladder as they secure new information and the assistance of lower level employees through the use of cooperation agreements. Pleas are often offered to employees within a corporation to testify against higher-ups. And as recently seen in many cases, the government tries to secure a plea of a chief financial officer before proceeding up the ladder.
In the case of MCA we saw five pleas before moving to the CEO. Pleas included "MCA’s former President and Chief Operating Officer," "MCA’s former Chief Financial Officer," "MCA’s former Controller," "MCA’s former Vice President for Marketing Syndication," and "the former head of MCA’s Special Loan Group." (DOJ Press Release 2-24-04)
And then we reported here the plea entered by Patrick Quinlan, who was CEO of MCA Financial Corp. The company "invested in Detroit-area real estate and financed its operations by selling securities." Quinlan received ten years on a plea to charges of conspiracy to commit mail, wire and securities fraud. When he plead guilty, the press release of the Eastern District of Michigan stated:
"MCA was a privately held concern that raised capital in large part by selling debt and pass-through securities to the general public. Through his guilty pleas today, Mr. Quinlan admitted that from as early as 1993 until its seizure by state regulators in January 1999, MCA engaged in a scheme to defraud its investors and institutional lenders by misrepresenting its true financial condition through the preparation and use of false and fraudulent financial statements that were regularly filed with the SEC and made available to brokers and investors and to banks and other institutional lenders. As the result of paper transactions involving low-income housing in the City of Detroit between MCA and numerous off-book partnerships controlled by Mr. Quinlan, millions of dollars in sham assets and revenues were created and included in MCA’s balance sheets and statements of income."
The government secured another important plea today with "John P. O’Leary, a former senior vice president for corporate finance" pleading guilty "to one count of concealing a felony" in return for "prosecutors drop[ping] 12 other fraud and conspiracy charges." (see here AP). This has all individuals initially charged in the matter now entering pleas.
(esp)
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The old saw is that the best way to steal from a store or bank is to work for it, especially if you’re a trusted employee. Similarly, when the accounting firms advise clients on their internal controls, one of the key steps to ensuring that employees do not embezzle is to require double checking of expense submissions so that one person cannot submit false bills or set up fake accounts. It appears that big four accounting firm Deloitte & Touche’s internal controls may not have been up to snuff, based on the indictment (and arrest) of a former manager for Deloitte Consulting LLP, Jamie Watkins, on mail and wire fraud charges for stealing approximately $500,000 from the company. According to a press release (here) from the U.S. Attorney’s Office for the Central District of California:
Watkins allegedly exploited Deloitte expense reimbursement programs to defraud the firm out of approximately $550,000 from June 2000 until October 2003. The Indictment alleges that Watkins used several schemes to perpetrate the fraud on Deloitte. In one scheme, Watkins used her company credit card to pay for personal items knowing Deloitte would pay the account balance. Using her company credit card, Watkins allegedly paid her property taxes and made numerous purchases, including jewelry, clothing and a wine cellar. Second, Watkins sought and received reimbursement payments for purported business-related purchases that Watkins paid for with a company credit card. Watkins allegedly had no out-of-pocket expenses, but she submitted documentation claiming business-related expenses. Finally, Watkins allegedly created false invoices for non-existent purchases and submitted reimbursement forms and phony receipts to receive reimbursements. Based on Watkins’ allegedly fraudulent acts and false representations, Deloitte made reimbursements and paid off the account balance on Watkins’s company credit card.
I assume this won’t become a case study for the firm for its internal controls testing for other companies. (ph)
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The sentencing for former Tyco CEO Dennis Kozlowski and CFO Mark Swartz is still set for Tuesday, August 2, so barring a late postponement, New York State Supreme Court Justice Michael Obus will impose a term of imprisonment on the defendants. The most serious charge on which the jury convicted Kozlowski and Swartz was first degree grand larceny, which under New York law is a class B felony "when the value of the property exceeds one million dollars," which was certainly the case here (see N.Y. Penal Law Sec. 155.42 here). Unlike the federal Sentencing Guidelines, which require a fairly intricate analysis of the circumstances surrounding the conviction and the relevant conduct of the defendant in the crime that leads to a "offense level" that gets plugged into a sentencing grid, New York provides for a range of sentences based on the type of offense and gives the sentencing judge discretion within that range to impose a term of imprisonment (i.e. an "indeterminate sentence"). Under N.Y. Penal Law Sec. 70.00(2)(b) & (3)(b) (here), the minimum sentence for a class B felony is from 1 to 8.3 years, and the maximum is 3 to 25 years (i.e. the minimum is 1/3 of the maximum).
What makes things dicey for Kozlowski and Swartz is that, under New York law, a sentence of more than six years means that they will be sent to a maximum security prison, such as Attica or the Downstate Correctional Facility in Fishkill, NY (doesn’t that sound inviting). While federal prisons are not necessarily pleasant, a minimum security camp is much less structured, and threatening, than a New York State Correctional Facility, especially a maximum security prison. As discussed in a CNN.Com article (here), the usual practice in New York is to take the prisoner from the courtroom immediately after sentencing to begin serving the term of imprisonment, although the person will be processed for approximately six weeks until being sent to the assigned prison. If Justice Obus does not grant Kozlowski and Swartz bail pending appeal, which is a distinct possibility, they could be in a New York prison by the end of the summer. (ph)
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A permanent injunction was entered at the the SEC’s request freezing the assets of Alanar Inc. and Vaughn A. Reeves, Sr., Vaughn A. Reeves, Jr., J. Christopher Reeves, Joshua C. Reeves — along with six companies controlled by the Reeves family — for violations of the antifraud provisions of the federal securities laws. As described in the SEC’s complaint (here) and Litigation Release (here):
the Commission charged that the Reeves’ investment scheme was an “affinity fraud.” The Commission alleged that by employing solicitations appealing to the Christian faith of many investors, the Reeves succeeded in raising over $120 million from investors in church bonds (bondholders) and over $50 million from investors in the Bond Funds (Bond Fund investors). Through their control of Alanar, the Bond Funds and the Paying Agents, the Reeves allegedly misused funds that churches paid to the Paying Agents to be held in trust for the benefit of bondholders, misused Bond Fund investor proceeds, and misrepresented the rates of return of the Bond Funds. For instance, from September 2003 to May 2005, the Reeves and the Paying Agents allegedly diverted $8 million worth of church funds held in trust for the repayment of bondholders into an online brokerage account. The Reeves allegedly used those funds to trade stock and equity options, loan money to at least one church and to make unsecured loans to themselves and companies they controlled. Similarly, the Reeves allegedly caused the Bond Funds to loan investor proceeds to other Bond Funds, and transferred almost $5 million worth of Bond Fund investor proceeds to their companies.
Churches and their members are often easy prey in investment schemes because of the trust between members who share, at least ostensibly, the same religious beliefs. (ph)
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The U.S. Attorney’s Office for the District of Colorado has asked for a 150-day delay in discovery in the SEC’s securities fraud case against former Qwest executives, including former CEO Joseph Nacchio. The SEC filed its complaint (here) in March 2005, and it alleges that the company improperly recognized over $3 billion in revenue from round-trip transactions and other accounting maneuvers, and also improperly excluded $71 million in expenses. Since then, two defendants have reached agreements with the government: former CFO Robin Szeliga has entered a guilty plea to insider trading (earlier post here), and former executive vice president Gregory Casey settled the claims by agreeing to disgorge almost $1.4 million, pay a $250,000 civil money penalty, and agree to a director-and-officer bar (earlier post here). The U.S. Attorney’s Office is seeking the delay to permit it to complete an investigation of involvement of the individuals in the accounting for the transactions without the civil discovery interfering in the criminal review.
Parallel proceedings are common in this area, and the courts usually grant the prosecutor’s request for a delay to complete an investigation because courts do not like to interfere in grand jury investigations, although the judge may not give the U.S. Attorney’s Office all the time it wants because the investigation has been going on for almost three years now and the transactions occurred from 1999 to 2002. An AP story (here) discusses the government’s request and notes that Nacchio and two other defendants want to continue with limited discovery in the SEC case. (ph)
MattBray.net 