The SEC filed a civil injunctive action in Texas alleging that Stanley Leitner and Bradley Stark, the latter a convicted felon on supervised release at the time, engaged in a fraudulent scheme that raised $13.8 million from Christian ministries by promising that some of the returns on the investments would be used for charitable purposes. The SEC complaint (here) alleges that the defendants touted Megafund Corp., a Texas company, as an investment vehicle to pool funds for "risk free" investments, and that $11 million was transferred from Megafund to an account with a bank in the Netherlands Antilles — better known as a black hole in the world of off-shore banking; the SEC also alleges that the defendants used money for personal expenses. Seventy investors were enticed with claims that an unnamed "Trader" at a "major U.S. Brokerage firm" would make the investments that would return 10% a month, or over 120% a year. Once again, if it sounds too good to be true . . . . (ph)
Category: Fraud
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Jules Fleder of Beverly Hills, CA, was indicted for being the mastermind behind an investment scheme that allegedly bilked investors in the Tyler, Texas, area of almost $6 million for supposed real estate developments in Texas, Virginia, and South Carolina. The SEC also sued Fleder and three other defendants for securities fraud (Litigation Release here), and Fleder agreed that the SEC could sell his assets, including a $3 million house in Beverly Hills that he shared with his wife, Kayatana Harrison. Although Harrison initially agreed to cooperate in the house sale, she has been a bit resistant since, and was held in civil contempt for failing to cooperate with the real estate agent. U.S. District Judge Michael Schneider also threatened to hold her in criminal contempt when she fled the hearing and tried to hail a taxi before her attorney persuaded her to return. According to a real estate agent, the house has been fouled by some "gifts" from a dog living there, and a hole in the roof has given it a musty smell; the agent also stated that Harrison has removed fliers advertising the house and told potential purchasers that it sits on an earthquake fault line and could slip off the hill on which it sits — of course, that covers a substantial amount of Southern California real estate.
The judge has ordered Harrison to vacate the house within two weeks and provide an inventory of goods she plans to take. Given the overheated Los Angeles real estate market, this may be one of the few bargains available in the area. A story in the Tyler Morning Telegraph (here) discusses the contempt and prosecution of Fleder. (ph)
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Frank Philips, a former Microsoft employee, was convicted on Friday, July 1, of ten counts of wire fraud and one count of using a false social security number related to a scheme to steal software from the company and then sell it on eBay. Philips made over $100,000 from his scheme. This wasn’t Philips’ first brush with the law, however, a fact that Microsoft apparently missed when it hired him. According to a press release (here) issued by the U.S. Attorney’s Office for the Western District of Washington (Seattle): "PHILIPS was hired at Microsoft in 2000 using a false social security number. PHILIPS had been sentenced in December of 1999 for Social Security Fraud for submitting to the FAA an application for an Airman Certificate, in which, in order to conceal his identity – i.e., the prior revocation of his Airman Certificate – Philips listed a false social security number. PHILIPS used a different false Social Security number with Microsoft and claimed he had never been convicted of a felony." What a shock that he didn’t disclose that pesky little felony conviction, and perhaps a little bit more thorough background check might have brought the problem to light before Microsoft took the hit. (ph)
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Fraud investigations and charges are not unique to the U.S. Looking at the Times U.K. of today we see a headline titled, "Baugur Fraud Charge Rocks Somerfield Bid." Baugur, an Icelandic company, states that its " main policy is to focus on investments in the retail, service and real estate sectors, in Iceland and northern Europe." According to the UK Times, here, Baugur "is also a main player in a consortium preparing to bid for the UK’s fifth largest supermarket group." The article states that "Jon Asgeir Johannesson, head of Icelandic investor Baugur, was charged with fraud." The article also states that "[m]ore than 40 separate charges have been brought against Johannesson, members of his family and other Baugur executives after a long-running investigation by the authorities in Iceland."
Earlier this week, the UK Times had a front page story on a fraud investigation into the "sick miners fund." The article by Andrew Norfolk stated that " [f]raud squad detectives are opening a criminal inquiry into a miners’ union that has earned millions of pounds from the world’s largest personal injury compensation scheme, The Times has learnt." See more here (punch in fraud investigation).
Several things to point out here –
1."fraud squad detectives" – in the US, the FBI has individuals who work on fraud cases, but would a separate division nationally that went to individual places to work on these cases be something useful? Not sure.
2. Sentences – why did people I spoke with at the International Society for the Reform of Criminal Law (ISRCL) look at me like I was from another planet when I told of the high sentences the U.S. was giving on some recent white collar cases? Have we forgotten the basics of punishment theory?
(esp)
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The SEC accused Dr. Terry Allen and his stock service, Terry’s Tips, of securities fraud for making false statements on his website regarding returns from following his "autotrading" options trading program. Among the claims on the website (www.terrystips.com) are the following:
Figure Out Your Profit BEFORE YOU INVEST!
You can figure the exact profit you will make before you invest. This amount will remain the same regardless of whether the stock stays the same, or is 60% higher in two years. I will show you exactly what two trades you should make, and give you the formula which you can use to calculate what your profit will be based on market prices on the day you invest. If it isn’t at least 100%, I will give you back DOUBLE THE MONEY that you paid me to learn this trading secret.
If Your Stock Falls 30%, You Still Make A Profit!
Just in case you are wrong, and your stock doesn’t stay the same or go up, you still have a chance to come out ahead. In fact, if the stock falls 30%, you still make a profit. In most cases, it wouldn’t be a big profit. But how often do you make a profit when your stock falls by 30%?
I sure would love to "know" my profit before I invest, and according to the SEC Litigation Release (here): "The complaint alleges that Terry’s Tips and Allen have had more than 1200 clients who have invested through its autotrading programs. The complaint also alleges that Terry’s Tips and Allen published performance projections in which they stated subscribers could expect annualized returns of 100% by following Allen’s trading strategies, while at the same time portfolios following these strategies were actually experiencing substantial losses." If it sounds too good to be true, that’s your tip-off. (ph)
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Five defendants, including the chairman of the Democratic party in East St. Louis, IL, Charles Powell, Jr., were convicted of conspiracy and vote fraud for offering voters small amounts of cash, cigarettes, and liquor to vote in the 2004 Presidential election. The other defendants were a former director of regulatory affairs for the city, and three Democratic precinct committee members. In March, four other precinct committee members entered guilty pleas and cooperated in the prosecution (see U.S. Attorney’s Office press release here). The prosecution relied on tape recordings that included Powell discussing paying $5 per vote. An AP story (here) discusses the guilty verdict. (ph)
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A Wall Street Journal article (here) indicates that one Paul Tullman, who entered into a guilty plea last year to tax charges, may be cooperating in the grand jury investigation of alleged payments made by Milberg Weiss to representative plaintiffs in securities class action and shareholder derivative suits (see earlier posts here and here). The law firm was an unnamed coconspirator in an indictment hand up last week against Seymour Lazar, who was a representative plaintiff in a number of cases in which Milberg Weiss was lead counsel. Tullman, like Lazar, is an attorney (and also a stockbroker), but the Journal article indicates that payments he received related to referring clients to the law firm, not for serving as a representative or named plaintiff. A quick Westlaw check did not disclose any cases in which Tullman was among the named plaintiffs in a case in which Milberg Weiss was counsel.
A referral fee is permissible under the legal ethics rules, so long as the fee-sharing arrangement is disclosed to the client and, in some states, the referring attorney must do some work on behalf of the client. There must be an attorney-client relationship between the referring attorney and the client for the payment of a referral fee, otherwise the payment would be improper, just like a payment to a person working in an emergency room who refers patients to a lawyer is unethical. While payments to a representative plaintiff would be unethical for the attorney, and improper for the plaintiff acting as a fiduciary for the class, a referral fee is a legal fee that, if properly disclosed to the client and the court, would not be problematic. If Tullman is cooperating, it will be interesting to see what information he can provide about possible payments to representative clients, the focus of the investigation to this point. (ph)
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The potential that Milberg Weiss, one of the leading plaintiff class action firms, will be indicted triggered an interesting reaction from the firm, which argued that the government should not indict the partnership for wrongdoing by individual lawyers because of the effect on innocent employees. Earlier posts here and here discuss the indictment of Seymour Lazar for accepting payments from an unnamed New York law firm with California offices — Milberg Weiss acknowledges that it is the law firm named as an unindicted coconspirator — for serving as the named or representative plaintiff in over 50 class actions involving consumer complaints, securities fraud, and shareholder derivative claims. An article in the Wall Street Journal (here) discusses the law firm’s response to the government investigation in which it cites the prosecution of Arthur Andersen as showing the harm that can befall innocent employees from an indictment of an organization.
Is Andersen an apt precedent? One important difference between the two situations is that Andersen’s conduct was not directly related to its primary business as an accounting and consulting firm, and there was never an issue that its accounting at Enron, even if questionable, constituted criminal conduct. If Milberg Weiss attorneys made payments to individuals to serve as representative plaintiffs, and that conduct can be tied to the firm, then this goes to the core of the law firm, which is to represent clients before the courts in an honest and ethical manner. The payments would not only be improper, but more importantly would involve deceiving the court, opposing counsel, and the class members about the firm’s involvement in the case. That strikes me as categorically different conduct than Andersen’s document shredding, and calls into question the entire culture of the firm.
The impact of an indictment on Milberg Weiss will also have a different effect on the "innocent" employees and partners of the firm than the Andersen conviction. Accounting firms are licensed by the states, and the criminal conviction would have resulted in Andersen losing its license in almost every jurisdiction in which it practiced in the U.S., preventing the firm from providing services to publicly-traded companies. While lawyers are licensed by the states, law firms are not, so lawyers with no involvement in the misconduct will still be able to pursue their trade and can try to switch to a different firm or start their own firm. The support staff will suffer significant disruptions, but the number of law firms is much greater than the number of public accounting firms, so the job market is probably much better for them. While accounting went from the "Big Five" to the "Big Four" with Andersen’s demise, there is no such effect on the plaintiff class action bar which has a number of firms that operate, and they may be in the market for experiences lawyers and support staff. The effect of the Andersen indictment went well beyond just that firm because of the oligopoly that exists in public accounting, a problem that will not affect the Department of Justice’s analysis of Milberg Weiss as it has on whether to pursue criminal charges against KPMG for its tax shelter business (see earlier post here).
That’s not to say that the indictment of a law firm should be pursued without considering the impact of a criminal conviction on its employees and partners. But if a law firm acts unethically in its representation of clients by paying kickbacks to representative plaintiffs, the harm to other clients of the firm will be substantial. While Andersen’s other clients were affected by the criminal conviction, Milberg Weiss’ clients may be represented by lawyers who do not put the client’s interests first. (ph)
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A judge in Milan, Italy, ordered Parmalat CEO and founder Calisto Tanzi to stand trial beginning Sept. 28 on charges related to the accounting fraud that led to the company’s bankruptcy. In addition, Italian officers of Bank of America, accounting firm Grant Thornton, and Parmalat’s accountant Deloitte & Touche, are among others who will also be tried in the case. The Milan charges are the result of one branch of the investigation of Parmalat’s collapse, which included falsified documents on Bank of America stationary indicating large accounts at off-shore banks that never existed, except of course on the company’s balance sheet that was widely circulated to investors in its bonds. An investigation in Parma, Italy, site of the company’s headquarters, is continuing. On the civil side of the Parmalat case, Morgan Stanley agreed to pay €155 million to settle claims by Parmalat related to underwriting of the company’s bonds (8-K here). An AP story (here) discusses the charges against Tanzi and others. (ph)
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The Milberg Weiss firm, in its various incarnations, is one of the leading plaintiff securities class action and shareholder derivative firms in the country. The firm and William Lerach, once a name partner and now the lead partner at Lerach Coughlin Stoia Geller Rudman & Robbins, may be the unindicted coconspirators in the prosecution of Seymour Lazar for accepting kickbacks in connection with his service as a representative plaintiff in various civil cases (see earlier post here). The indictment refers to "a New York law firm with principal offices in New York and California," which certainly is a description of Milberg Weiss before it broke up in May 2004. Milberg Weiss had represented Lazar as one of the representative plaintiffs in class actions, including Churchill Village LLC v. GE, In re MCA Shareholder Derivative Litigation, In re Xerox Corp. Securities Litigation, and In re Biogen Securities Litigation; the firm also represented the plaintiffs in a class action against Hertz in California in which one Adam Lazar was the named plaintiff (Lazar v. Hertz Corp.). An article in The Recorder (here) states that the government is trying to pressure Lazar, who is accused of using family members in addition to himself as the representative plaintiff, to cooperate against Milberg Weiss and Lerach. In a statement, Milberg Weiss asserted that "[w]e are outraged that these allegations have been made against the firm and reject them as baseless." (See AP story here) This case could get a whole lot more interesting, and have a major impact on the securities bar, if some of the leaders of that bar — who are also large political contributors in the fight against restrictions on class actions — are linked to improper payments. (ph)
MattBray.net 