The SEC announced a settlement with former Qwest Communications executive vice president Gregory Casey, who was one of the defendants in a securities fraud action related to the company’s accounting for transactions that were designed to inflate revenues and earnings through round-trip agreements. As part of the settlement, Casey will pay $1,390,344 of disgorgement (plus $456,481 in prejudgment interest) and a $250,000 civil penalty; he will also be barred for five years from serving as an officer or director of a public company (see Litigation Release here). The Commission’s civil fraud action continues, and among the defendants is Qwest’s former CEO, Joseph Nacchio. (ph)
Category: Fraud
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Frank Devine entered a guilty plea to conducting a ponzi scheme that defrauded investors of over $4 million. Devine was a Kendall County — in the Chicagoland area — Republican precinct leader who impressed investors with his political connections, including giving one person a tour of Speak of the House Dennis Hastert’s office in order to induce an additional $100,000 investment in the scam. Rep. Hastert’s office knew nothing about Devine’s scheme. A Chicago Tribune article (here) discusses the guilty plea. (ph)
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Tax charges often appear as accompanying charges with white collar fraud and corruption cases. In addition to charging the taking, bribing, or extorting of money, it is common to see charges for the failure to pay taxes on this money.
An example of this is seen in a recent press release here by the USA for the District of New Jersey. In this release USA Christopher J. Christie informed the public that "[a] former human resources manager who defrauded her employer of more than $350,000 and evaded paying taxes on the money was sentenced today to 37 months in prison."
The press release notes that:
"Buturla pleaded guilty on Oct. 25, 2004, to one count of wire fraud and one count of tax evasion, according to Assistant U.S. Attorney Bohdan Vitvitsky.
"Buturla was formerly a human resources manager at Agip USA, a former New York City subsidiary of Agip International, an Italian multinational corporation. Buturla admitted at her plea hearing that in the years1998 to 2000 she had defrauded Agip USA by exploiting her position to manipulate her then-employer’s payroll system."
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eToys Inc. was one of the many dot.com companies that flamed out once business reality set in, and it filed for bankruptcy in 2001 in Delaware. Well-known bankruptcy attorney Paul Traub (of Traub, Bonacquist & Fox in New York) recommended to the Delaware Bankruptcy Court that Barry Gold be appointed CEO to oversee the liquidation of the company. Traub represented eToys creditors in the bankruptcy. Unfortunately, what was not disclosed at the time is that just a short time before that recommendation, Traub and Gold formed a company, Asset Disposition Associates, a liquidation company. Although their company did not have any dealings with the eToys bankruptcy, the business relationship is something that would usually be disclosed to the bankruptcy court. An article in the Wall Street Journal (here) discusses the case, including a motion by the bankruptcy trustee seeking the return of $750,000 in fees paid to Traub’s firm for its work on behalf of creditors.
The article also notes that the "Three Amigos" of investigations — the SEC, DoJ, and NY Attorney General’s Office (i.e. Eliot Spitzer) — have been in touch with individuals involved in the bankruptcy. While bankruptcy is usually a world of its own, bankruptcy fraud cases against lawyers for failure to disclose conflicts of interest have been brought. Among the most well-known, especially to the New York bar, is the prosecution and conviction of John Gellene (then of Milbank Tweed), who failed to disclose his representation of a creditor of a bankrupt company (182 F.3d 578 (7th Cir. 1999). Unlike other types of fraud, in which the government usually must prove a gain to the defendant and some loss by the victim, in bankruptcy fraud cases the harm can be to the court and the bankruptcy process from a failure to disclose, without the need to prove any monetary harm. For those interested in the Gellene case, an outstanding book that uses the prosecution as a starting point for a discussion of conflicts in the world of corporate law and finance is Eat What You Kill: The Fall of a Wall Street Lawyer by Prof. Milton Regan at Georgetown University Law Center. (ph)
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Paul McGreal on the Corporate Compliance Prof Blog has an excellent post (here) on the settlement that Sony reached with the New York Attorney General’s office regarding payola — one of my all-time favorite made-up words. In a practice as old as radio, Sony settled a claim that it made payments and gave other items of value to radio station employees to get songs by its artists on the air, or played during favorable times (i.e. not just the graveyard shift at the stations. As Paul points out, "[T]he problem appears to be a serious breakdown in (or lack of) internal controls that assure compliance" with applicable rules prohibiting payola, including a federal statute making it a crime (47 U.S.C. § 508). (ph)
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In the "If it sounds too good to be true, it is" category, an AP story (here) describes the scheme that triggered an indictment:
Richard J. Dompier of Vale, N.C., started the New Millennium Group in Roseburg in 1998, selling one-ounce silver ingots through the mail and over the Internet for $98 each on promises buyers would receive a series of commission checks totaling $15,853.50 in 14 months, the indictment said. He had bought 70,000 ingots from the Franklin Mint for $10.50 each.
Dompier was charged with cheating investors out of $2.5 million, and apparently used some of the proceeds to sponsor a NASCAR driver and to start a motorcycle company. No commodity, particularly silver, can increase 15,000% in a little over a year, unless of course it’s a scam. One wonders if any of the investors remembered the Hunt brothers and their little foray into cornering the silver market back in the late 1970s, only to see their investment collapse. (ph)
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Patrick Quinlan, who was CEO of MCA Financial Corp., which invested in Detroit-area real estate and financed it operations by selling securities, received a ten year prison sentence after pleading guilty two years ago to conspiracy to commit mail, wire and securities fraud. The company collapsed in 1999, triggering losses to investors of over $265 million that made it the largest securities fraud in Michigan history. The sentence was the maximum allowable under the statute; at the time of the offenses, the fraud statutes (which would control the sentence for conspiracy in this case) had a ten year maximum, which was increased to thirty years by the Sarbanes-Oxley Act. Although Quinlan apologized to investors, U.S. District Court Judge Nancy Edmunds found that he had not accepted responsibility by still blaming other executives and MCA’s accountants for the fraud. According to a Detroit Free Press article (here), Judge Edmunds stated that Quinlan was "the dominant force at MCA, the architect of the fraud and the most culpable person in the scheme to defraud." (ph — in the interest of full disclosure, I consulted on a malpractice lawsuit against the company’s outside law firm, which was dismissed on summary judgment).
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Michael Alcott tried to postpone his bank fraud trial by submitting a fake doctor’s note to the district court stating that he had terminal cancer. As discussed in an earlier post (here), upon learning about this little ruse, the court revoked his bail and ordered him held pending the start of trial. Alcott has now entered a guilty plea to bank fraud charges that included submitting a financial statement on the letterhead of a local accounting firm — faked, once again. According to a press release (here) issued by the U.S. Attorney’s Office for the District of Massachusetts (Boston), another charge was a Travel Act violation because, while on pre-trial release on the bank fraud charges, Alcott tried to extort a doctor in California for $150,000 by threatening to reveal that the doctor had a close personal relationship with a woman from an escort service — Alcott apparently learned about the liaison because he also partook of the escort service’s offerings. Extortion, fake doctor’s notes . . . sounds like Alcott had way too much free time while awaiting trial. Any bets on whether the judge will buy the "acceptance of responsibility" argument at sentencing? (ph)
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U.S. District Judge E. Richard Webber (E.D. Mo.) sentenced Richard Drury to a 42-month term of imprisonment for his conviction on four counts of mail fraud related to creating false invoices for returns of expired drugs. Drury was chief operating officer for a company called Easy Returns Worldwide Inc. (catchy name), and a press release (here) issued by the U.S. Attorney’s Office described the scheme this way:
As part of the services that they provided to client pharmacies, Easy Returns returned recently expired pharmaceuticals to the appropriate manufacturers for a credit to the client pharmacy for a 5-10% fee paid by the pharmacy. The fee was based on the expected credits from the manufacturer. As part of the services provided to client distributors, Easy Returns destroyed recently expired pharmaceuticals and the distributor received a credit from the manufacturer. Between August 2000 and January 2002, Drury, as COO of Easy Returns, devised and participated in a scheme to create fraudulent returns to pharmaceutical manufacturers, causing the manufacturers to credit various pharmacies for returns that did not belong to them. These pharmacies paid a 33% fee to Drury and Easy Returns for the false returns credited to them.
In addition to the jail sentence, Drury was ordered to pay restitution of approximately $725,000. Another substantial term in a white collar crime case. (ph)
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Operation Safe Pilot has resulted in the indictment of forty individuals.
U.S. Department of Justice, United States Attorney for the Northern District of California reports here that 30 defendants were charged with violations of 18 USC 1001 (False Statements to a Government Agency), and 10 additional individuals were charged with violations of 18 USC 1018 (Making and Delivering a False Official Writing). The allegations against the indicted individuals were that "[w]hile claiming to be medically fit to fly an airplane, the defendants were also collecting disability benefits from the Social Security Administration based on serious medical and psychological conditions, which would have prevented them from operating an aircraft."
The Press Release states that:
"Operation Safe Pilot began with a review of 40,000 pilots residing in the northern half of the State of California. Federal agents identified numerous pilots with current flight medical certificates, who were receiving disability benefit payments. Although the operation identified pilots who claimed to be suffering from an array of illnesses, agents focused only on the most egregious claims of disabilities. The illnesses ranged from schizophrenia, bipolar disorder, drug or alcohol addiction, disabling back condition, or the presence of severe heart condition.
Federal Agents selected the most blatant instances of fraud which totaled 40 pilots. Of those 40 pilots, a number were airline transport and commercial pilots, as well as medical doctors."
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