Workers compensation is one of those areas of the law that is better left unexamined. Unfortunately for the Ohio Bureau of Workers Compensation (BWC) and its CEO, James Conrad, the spotlight is now focused on a rather peculiar investment by the Bureau that seems to be missing. According to an AP story (here), the BWC bought approximately $55 million in rare coins through a Toledo dealer as part of an investment strategy to diversify its portfolio. Companies pay hefty premiums into state workers comp pools, and investment gains should lower the cost of insurance. About $10-12 million worth of coins, however, are missing, and the coin dealer, Tom Noe, is being investigated for the disappearance. Conrad resigned from the BWC because of the disappearance, and questions have been raised about the use of Noe because he was a substantial contributor to Governor Taft and other Republican candidates. Collectibles are notoriously hard to value — just ask Ellen about the value of her Beanie Baby stash — and subject to theft, unlike stocks and bonds. While the missing coins are only a small part of the BWC’s $15 billion investment fund, it shows that even a small-scale fraud can blow up once it is tied in with campaign contributions. (ph)
Category: Fraud
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A Fourth Circuit opinion in United States v. Blick (here) has a thorough discussion of the appeal waiver related to post-Booker sentencing issues, taking the approach adopted by all other circuits that a waiver of the right to appeal in a plea agreement is enforceable even though the Supreme Court’s decision on the Federal Sentencing Guidelines had not been announced. What is more interesting is how Blick ended up in this position. Blick was a principal and one-third owner of a consulting firm, with the responsibility for managing its business affairs. Over the course of about a year, he embezzled approximately $1.4 million, transferring the money overseas. Eventually, the embezzlement caught up with him, and he informed the other owners of the firm and was eventually indicted on wire fraud charges. He repaid about $750,000 of the money he took, and was sentenced for defrauding the firm of $655,000. Why did Blick embezzle all that money? It turns out that he was "assisting" a person in Nigeria to remove $20.5 million from that country into a safe account in Europe. How many of those e-mails do you get a week? It is simply amazing that people actually fall for these scams, although according to Wikpedia (here) this type of advanced fee fraud goes all the way back to the 16th century.
On a side note, Blick had a creative, if less-than-compelling, argument why the actual loss from his scheme should be zero, which could have a significant effect on his sentence. Blick argued that the firm suffered no loss because he owned one-third of it, and his ownership interest exceeded the $655,000 loss, so the "net loss" to the victim — the consulting firm — was really zero. In effect, he argued "I stole only my share of the company." Neither the district court nor the Fourth Circuit fell for the argument as easily as he agreed to participate in the Nigerian 419 plan. (ph)
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Jared Bowen, a former vice-president at Wal-Mart, has filed a whistleblower complaint with the Department of Labor over his termination by the company in late March, which he claims was in retaliation for disclosing expense-account abuses by former executive and board member Thomas Coughlin. The company reported to the U.S. Attorney in March that Coughlin had submitted false invoices for up to $500,000, and there is a grand jury investigation of Coughlin. Just to complicate matters, Coughlin’s attorney has hinted that the funds were used to make secret payments to union officials for information about organizing drives involving Wal-Mart employees (see earlier post here). Bowen asserts that he reported two instances of improper billing by Coughlin, but was terminated because he failed to report a third instance of misconduct involving Coughlin and that there was a "loss of confidence" in him.
Section 806 of the Sarbanes-Oxley Act created protections for employees of publicly-traded companies who report misconduct involving fraud (18 U.S.C. Sec.1514A here). The provision provides the following remedies:
(1) IN GENERAL- An employee prevailing in any action under subsection (b)(1) shall be entitled to all relief necessary to make the employee whole.
(2) COMPENSATORY DAMAGES- Relief for any action under paragraph (1) shall include–
(A) reinstatement with the same seniority status that the employee would have had, but for the discrimination;
(B) the amount of back pay, with interest; and
(C) compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees.
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Former Washtenaw (Michigan) Assistant County Prosecutor Charles Carpenter entered a no contest plea to identity theft related to obtaining a credit card in his disabled mother’s name and stealing money from her. Carpenter, who had been charged originally with five felonies before the plea, joined the prosecutor’s office in 2000 after moving to Michigan from Tennessee, where he also worked as a prosecutor. Carpenter was sentenced to two years probation and switched to being an inactive member of the Michigan bar, although that will not prevent the imposition of sanctions — possibly disbarment — by the Michigan Attorney Disciplinary Board. An article in the Ann Arbor News (here) discusses the case.
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Former General Re CEO Ronald Ferguson asserted his Fifth Amendment privilege rather than testify in the SEC and DOJ investigation of AIG-General Re reinsurance transactions, and promptly lost his consulting contract with Berkshire Hathaway. Ferguson was CEO of General Re when Berkshire Hathaway acquired the company in 1998, and left that position in 2001 when the company suffered substantial underwriting losses. A press release issued by Berkshire Hathaway (here) states that Ferguson had been subpoenaed to testify in the investigation. He now joins, among others, former AIG CEO Maurice Greenberg and former AIG CFO Howard Smith as one of the senior executives to have invoked the Fifth Amendment to resist answering questions in the investigation. As discussed in an earlier post (here), New York Attorney General Eliot Spitzer’s office is conducting a grand jury investigation that has already heard from one AIG executive, Joseph Umansky. The pace is quickening as another one rides the Fifth Amendment privilege bus. (ph)
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A story in the North County Times (San Diego) discusses the NASD’s funding of a study to analyze why the elderly are the targets of investment scams. George Chamberlin sums it up (here): "I could have saved these guys a lot of money. The reason the elderly are targeted for investment scams is the same reason that Willie Sutton said he robbed banks: That’s where the money is." I’m always leery of criticizing studies based just on the title, and there is certainly value in determining whether there are particular schemes or pitches that work well on the elderly. That said, scam artists focus on the elderly because of particular vulnerabilities of many of them, such as isolation and a lack of access to unbiased financial (and legal) advice; pressures from living on a fixed income in the face of increasing costs (especially medical and prescription costs), a lack of investing experience, and susceptibility to high-pressure sales tactics. These traits are not exclusive to the elderly, and many scams also target immigrants and religious groups (the latter particularly fall prey to appeals based on trust of a fellow church member). The elderly are like banks because they do have assets, and as the baby boomers age, the schemes targeting those near retirement age and the newly-retired will only increase. Let’s hope the NASD is investing its research dollars well. (ph)
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A second energy trader working for The Williams Cos. entered a guilty plea in the Northern District of California to submitting false trade information to a publication in order to manipulate the price of natural gas (7 U.S.C. Sec. 13(a)(2)). Brion McKenna, formerly an energy trader with Williams Energy Marketing & Trading in Tulsa, admitted submitting false information about natural gas trades to two industrynewsletters, Inside FERC’s Gas Market Report and NGI’s Bidweek Survey — two sure-fire cures for insomnia for most, but wildly influential publications in the industry. According to a press release issued by the U.S. Attorney’s Office (here):
In pleading guilty, Mr. McKenna admitted that between approximately mid-September, 2000, to June 30, 2002, he conspired with others at Williams Energy Marketing & Trading to report fictitious trades to two industry newsletters, Inside FERC’s Gas Market Report and NGI’s Bidweek Survey. McKenna submitted the fictitious trades for the purpose of manipulating the published index prices in order to increase the value or profitability of Williams’ natural gas positions.
"This is the second plea by a Williams trader to the manipulation of natural gas index prices," said U.S. Attorney Kevin V. Ryan. "This plea confirms that Williams traders conspired to manipulate natural gas prices in the West Coast, East Coast, Gulf Coast and Rocky Mountain regions of the country."
Mr. McKenna admitted that most of the trades he reported were deliberately fabricated and that he would routinely circulate a spreadsheet containing fictitious trades for input from other traders. Mr. McKenna also admitted that his predecessor taught him how to complete and submit the spreadsheet with fictitious trades designed to benefit the company’s positions.
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The internal investigation at Delphi, the large auto parts supplier, is coming to a close, with more executives being dismissed for their involvement in improper accounting. In early March, the company announced the dismissal of its CFO, Alan Dawes, and two other accounting executives (see earlier post here), and Delphi’s Form 8-K filing (here) on May 16 adds to the list of those losing their jobs over the accounting problems:
As previously reported, the independent investigation by the Company’s Audit Committee of the Board of Directors is substantially complete and the Company is in the process of preparing restated financial statements for audit and review by its independent auditors, Deloitte & Touche LLP. At the same time as management has been preparing the restatement, the Audit Committee is finalizing its review of the conduct of various individuals who had supervisory authority for others involved in or were directly involved in certain of the principal transactions under investigation. Certain lower and middle level executives in the Company’s finance staff will be resigning from the company.
The SEC and criminal investigations should now move to center stage as the case shifts into the next phase with individuals tied to the accounting problems identified. With CEO J.T. Battenburg slated to leave the company by the end of the year, Delphi will look to settle any civil and criminal cases as soon as possible so the new CEO starts with a clean slate. (ph)
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The so-called Detroit Terrorism trial, which ended with the government admitting that its theory of prosecution was unsupported by the evidence, resulted in an apology by outgoing Deputy Attorney General James Comey recently. An AP story (here) quotes Comey as stating, "I think that the people we represent — the people of the United States — were owed an apology for the way the work was done in that particular matter." While the government dismissed the terror-related charges against the two defendants convicted of those offenses in the earlier trial, it did subsequently indict both men on fraud charges related to an attempted insurance fraud involving a claim for $15,000 from a fake auto accident — a claim that was never paid. An AP story (here) reveals internal DOJ e-mails around the time of the trial regarding the fraud charge, expressing concern that bringing such a charge might be perceived as "vindictive" if brought after the defendants were acquitted or a mistrial declared. The e-mails give a rare inside look at assessment of the charges by the prosecutors. One defendant entered a guilty plea to the fraud charge, a second one awaits trial.
An additional aspect of the case that remains active is the investigation of Richard Convertino, one of the prosecutors, and others for conduct related to the investigation and trial. Convertino resigned on Monday from the Department of Justice, which will likely end the investigation by the Office of Professional Responsibility (see AP story here). (ph)
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A jury awarded financier Ronald Perelman $604.3 million in damages against Morgan Stanley related to its faulty advice regarding the sale of his interest in the Coleman Company to Sunbeam in 1998 (AP story here). Morgan Stanley advised Sunbeam in the acquisition, and Perelman accused the firm of failing to disclose Sunbeam’s fraudulent financials. Perelman case was aided enormously by Morgan Stanley’s pratfalls during discovery, in which the trial judge found the firm purposely refused to provide discovery of e-mails and gave misleading responses to the court. The judge finally entered a default on the fraud claim against Morgan Stanley, requiring Perelman to show only his damages from the firm’s complicity in Sunbeam’s false financial statements. It is not easy to make Perelman out to be the good guy in a case, but this is the rare instance in which a firm’s (overly?) aggressive discovery tactics caused it significant harm. The SEC has also taken an interest in Morgan Stanley’s discovery conduct in the case. A thorough Wall Street Journal article (here) discusses the e-mail problems at the firm. Morgan Stanley issued a press release (here) which states:
"The verdict, while disappointing, is not surprising, given the unprecedented and highly prejudicial rulings imposed by the trial judge," the company said in a statement. "Morgan Stanley was not permitted to defend itself on the merits. As a result, the jury heard allegations, instead of true facts, and Morgan Stanley was denied a fair trial. Far from being part of the Sunbeam fraud, Morgan Stanley was a victim of that fraud, losing $300 million when Sunbeam collapsed, one of the many true facts that the jury was not allowed to hear."
Funny how e-mails have a way of making (and breaking) so many cases these days. Now, Morgan Stanley faces the punitive damages phase of the trial, which may result in a further award to Perelman. (ph)
MattBray.net 