A previously disclosed criminal investigation of Interstate Electronics, a subsidiary of L-3 Communications Holdings Inc., the large defense contractor, may be expanding into new areas. A Wall Street Journal story (here) discusses an investigation by the U.S. Attorney’s Office for the Central District of California (Los Angeles) involving defective parts for military radios that may now involve other military supplies, including artillery shells, for which L-3 Communications was a subcontractor. The company has not provided any information about the types of equipment on which Interstate Electronics works, and its 10-K filing in March 2005 makes vague reference to criminal investigations involving the company: "We are currently cooperating with the U.S. Government on several investigations, none of which we anticipate will have a material adverse effect on our consolidated financial position, results of operations or cash flows." An Interstate Electronics spokesman denied any knowledge of an expanded criminal investigation of the subsidiary’s products. A criminal indictment can have a very serious effect on military contractors, including possible debarment as a result of a criminal conviction. With expanded spending on the military since 9/11, the investigation and prosecution of procurement fraud and defective parts has received renewed emphasis from the Department of Justice. (ph)
Category: Investigations
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The internal investigation of American International Group Inc. keeps turning up more problems, according to a New York Times article (here). Although the internal investigation is not yet complete, and the regulators and prosecutors are far from wrapping up their many probes, there is evidence that AIG’s internal controls were easily evaded, and the company hid its control of at least two off-shore reinsurance companies, identified as Union Excess (Barbados) and Richmond Re (Bermuda). The company has until May 2 to file its annual report, which has already been delayed from mid-March and could be put off even further, although there would be a remote risk of delisting from the New York Stock Exchange if the delay becomes much greater. Speculation about the size of the charges arising from the various accounting problems uncovered has ranged as high as $8 billion from earlier estimates of $2.7 billion. The heat on former AIG executives to cooperate in the government’s criminal and civil investigations is sure to increase once the internal review is completed and the regulators and prosecutors take center stage. (ph)
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Serono S.A., the large biotech company, indicated in an SEC filing that it is preparing to settle an investigation of its U.S. subsidiary, Serono Inc., related to its sales of Serostim, a drug used to treat AIDS wasting, by reserving $725 million. Serostim is a human growth hormone, and can be used — and abused — by athletes. An earlier post (here) discussed the indictment of four former Serono sales executives related to alleged kickbacks given to doctors to entice them to write prescriptions for Serostim, a drug which costs $21,000 for a full treatment cycle. The sales push was dubbed "$6 Million in Six Days" — catchy, but perhaps a little hard to justify under the anti-kickback rules. Serono S.A.’s Form 6-K (the foreign private issuer financial disclosure form here) states:
The company has taken a provision of $725.0m, in connection with the previously reported Serostim investigation. The group’s principal US subsidiary, Serono, Inc., received a subpoena in 2001 from the US Attorney’s office in Boston, Massachusetts requesting that it produce documents for the period from 1992 to the present relating to Serostim. As part of an ongoing, industry-wide investigation by the states and the federal government into the setting of average wholesale prices and commercial practices, other pharmaceutical companies have received similar subpoenas. These investigations seek to determine whether such practices violated any laws, including the Federal False Claims Act or the US Food, Drug and Cosmetic Act or constituted fraud in connection with Medicare and/or Medicaid reimbursement to third parties. Serono has cooperated fully with the investigation and continues to do so. Although no final agreement has been reached, the company’s discussions with the US Attorney’s office have advanced to a point where it is now appropriate to take a provision that management believes will be sufficient to cover resolution of the investigation related to Serostim. Serono is committed to meet the highest standards of ethical behaviour. The company participated in the setting of industry-wide codes of conduct, and has in place a rigorous compliance program.
A global settlement would likely involve both civil penalties, a criminal fine, and reimbursement of federal health care programs. The $725 million figure, if that turns out to be the final amount, would be among the largest settlements in the healthcare fraud area. The size of Serono S.A.’s reserve indicates that the case is much broader than the "$6 Million in 6 Days" program, and may involve inflated billings, a broader array of kickbacks, or other healthcare fraud violations. The U.S. Attorney’s Office in Boston has specialized in these types of cases, including the $875 million penalty assessed TAP Pharmaceuticals related to the marketing of Lupron. Individual defendants from TAP Pharmaceuticals were found not guilty in the criminal prosecution. Let’s hope Serono’s ethical "behaviour" improves, too. (ph)
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From fellow LawProg blog CrimProf comes a link (here) to a story from Newsweek (here) about how TIAA-CREF hired one Sonia Radencovich for a tech position without checking her background. It seems that Sonia came from a "preferred vendor" and TIAA-CREF assumed the vendor had checked her background. Unfortunately, under her other name, Sonia Howe, less than two weeks before starting at TIAA-CREF she was sentenced to four years in prison for her part in the Martin Frankel insurance fraud that landed Frankel in jail for 16 years after he disappeared amid smoking documents in a fireplace in his Connecticut mansion. Her role in Frankel’s scheme was described by the U.S. Attorney’s Office for the District of Connecticut in this way in a press release after her sentencing (here):
HOWE, a purported trustee of the Thunor Trust, the entity through which FRANKEL allegedly controlled the insurance companies, was convicted of participating in the racketeering enterprise through which FRANKEL and others were able to obtain the insurance company assets and convert them to their own use and benefit. HOWE admitted that she created bogus monthly statements and confirmation slips that were sent to the insurance companies that falsely reflected that the insurance company assets were safe and secure. HOWE was also charged with and admitted laundering the proceeds of the fraud through her receipt of various funds.
HOWE was described by the prosecutor as instrumental in Frankel’s successful “ponzi scheme” that left seven insurance companies looted and in receivership. However, HOWE cooperated with federal authorities and was granted a downward departure from the applicable guideline range of 188-235 months in prison as a result. The Court also departed on the basis of HOWE’s stated motivation for becoming enmeshed in Frankel’s scheme, that is, her belief that her children had been abused by their father and her efforts to prevent further harm to them.
According to the Newsweek story, Radencovich/Howe worked at TIAA-CREF for two months, and downloaded data from accounts related to at least three colleges (Purdue, Michigan, and Harvard) on to her personal laptop computer. It’s not clear whether she did anything with the data.
TIAA-CREF has garnered a bit of bad publicity lately. It removed two board members last year because of disclosure issues related to consulting work they did with the company’s auditors, Ernst & Young, and the SEC initiated an informal investigation of E&Y regarding auditor independence (the firm was replaced by PwC last month). Also, the company’s current CFO, Elizabeth (Betsy) Monrad, worked at General Re before joining TIAA-CREF and had some contact with the reinsurance transaction that is the focus of the widespread investigation of AIG and General Re. In the interest of full disclosure, not that anyone should care in the least, I have a sizeable chunk of my retirement money invested with TIAA-CREF — although perhaps I will change that to "had." (ph)
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The South Carolina Board of Medical Examiners suspended the license of Dr. James Shortt for allegedly writing large prescriptions for testosterone. Dr. Shortt is at the center of an investigation of possible steroid use by Carolina Panthers players shortly before the 2004 Super Bowl who received the drugs with prescriptions written by him. According to the Board’s Temporary Order of Suspension (available here), beginning on January 4, 2004, Dr. Shortt wrote prescriptions for four unidentified men for testosterone "in doses and frequency that were extremely unlikely to have been prescribed with any legitimate medical justification, and they were not consistent with any acknowledged medical indication for this drug . . . ." It is not clear if the unidentified men are in fact NFL players, and Dr. Shortt has denied any wrongdoing. An AP story (here) discusses the investigation of Dr. Shortt and the football players. (ph)
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The SEC’s investigation of Delphi has led to its former parent, General Motors, being subpoenaed for records relating to its accounting in two transactions between the company. A Wall Street Journal article (here) describes the subpoenas as relating to a previously disclosed $237 million payment by Delphi to GM related to product recalls, and an $85 million credit from GM to Delphi related to retiree health benefits. The issue of supplier rebates and warranty payments has come under the SEC’s scrutiny in the past few months because these payments can be used as a type of "cookie jar" for companies seeking to smooth out their earnings. The investigation of Delphi has already led to the firing of its CFO and other finance executives (see earlier post here), and there does not appear to be a quick resolution in sight yet for Delphi and other companies. If the SEC finds any systematic abuses in the area, then the investigation is likely to spread to other auto suppliers, unwelcome news as the auto industry struggles with falling demand for its products. (ph)
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The United Food and Commercial Workers Union has filed a complaint against Wal-Mart asking the NLRB to investigate allegations that former executive Thomas Coughlin submitted false invoices to finance an anti-union campaign that included secret payments to union officials for information. Coughlin was removed from the Wal-Mart Board of Directors in late March, having retired from his executive position in January, because of what Wal-Mart described as a number of false invoices submitted to reimburse personal expenses, totaling in a range of $100,000-500,000 (see earlier post here). Last week, a Wall Street Journal story described Coughlin’s involvement in a "Union Program" and his assertion that the invoices were to reimburse him for expenditures in fighting union organizing efforts (earlier post here). The UFCW’s letter (see press release here) to the NLRB states "the charge complains that Wal-Mart, acting through officers, employees and agents, including those at the highest levels of management, systematically denied workers their democratic right to exercise a choice for union representation. Wal-Mart’s actions seemingly involved the criminal misappropriation of company funds to create an illegal anti-union slush fund." Wal-Mart has already supplied information from its internal investigation of Coughlin to the U.S. Attorney’s Office, and given the tenor of the UFCW-Wal-Mart relationship, the question of secret payments will not go away soon. (ph)
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In The Shawshank Redemption, prisoner Andy Dufresne overhears sadistic Captain Hadley complaining about having to pay taxes on lottery winnings and asks the Captain, "Do you trust your wife?" After nearly being thrown off a roof, Dufresne explains how Hadley can avoid taxes by giving the winnings to his wife, assuming he trusts her. On March 11, just three days before resigning as CEO of AIG, Maurice Greenberg gave his wife Corinne 41,399,802 shares of AIG stock, worth approximately $2.2 billion (SEC Form 4 here and explanatory rider here). Greenberg has since resigned as chairman of AIG’s board, although he remains in control of two off-shore companies that own a substantial block of AIG shares. There has not been any statement of the reasons for gift, and the usual reasons for transferring shares (estate planning, diversification, etc.) would not apply to a spousal gift of the shares, as best I can tell. Is the transfer designed to keep the shares away from claimants in the civil securities fraud and derivative cases that abound, or perhaps even a criminal case? Needless to say, I haven’t gotten my wife anything nearly this expensive in quite a while.
Greenberg met yesterday with government investigators from four agencies (NY Attorney General, SEC, DOJ, and NY Insurance Commission) and invoked his Fifth Amendment privilege over 100 times (see NY Times story here). While the usual practice in criminal cases is to permit a blanket assertion of the privilege without requiring the witness to appear, in civil cases the government can use the person’s refusal to answer as evidence (albeit not conclusive proof) of a violation by permitting a jury to draw an inference that the person’s answer would have been incriminating regarding the subject of the question. If the question is not asked, then no inference about its subject matter can be drawn. Assertion of the Fifth Amendment at this point does not prevent Greenberg from testifying down the road. In asserting the Fifth Amendment, Greenberg is reported to have stated that the he needed more time to prepare for the deposition under oath. While it is not the "privilege to get more time to prepare," it is unlikely the government could challenge the assertion of the Fifth Amendment, especially because the presence of the DOJ investigators at the deposition clearly indicates a criminal component to the case. (ph)
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Well there were no surprises yesterday (see post here) – the press tells that Greenberg will be silent; Buffett on the other hand talked, but said little. (NYTimes, Wall Street Jrl) And if they are asking Buffett about a telephone call from Nov. 2000, then one can certainly imagine why Greenberg chose to take the 5th. (some of us with a lot less on our plates in comparison to these men, can’t remember what they ate for dinner 3 weeks ago, nonetheless a telephone conversation over 4 years ago.) So where is Spitzer going, who are the targets, who are the witnesses, and what does Spitzer hope to achieve with this investigation? Stay tuned . . .
(esp)
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It looks like a fraud investigation is being conducted by the US Attorneys Office in Milwaukee and the focus is on what a former employee of S.C. Johnson may have done. The investigation is about an "alleged multimillion-dollar mail- and wire-fraud scheme involving rigged trucking contracts by a longtime executive of consumer-products company S.C. Johnson & Son Inc." The bottom line is whether this corporate exec was receiving compensation above and beyond what was permitted by the corporation. (see more in the Wall Street Journal here)
To the consumer the bottom line may be whether products such as "Pledge" went up in price because someone in the company might have been getting some kickbacks.
Several things to consider here:
1. Should the government be investigating an alleged internal fraud within a company? The company started an internal investigation and some may argue that it should be left to this civil arena. Let the market drive the price.
2. But does the government need to protect the consumer when a company may have failed to be cognizant of internal fraud occurring within? Is that much at least owed to the market and to shareholders?
3. The company in this case was ranked #7 on the Fortune best places to work. (see announcement) How will this affect that ranking, and should it? The company also emphasizes social responsibility. (see here) Does this say that no matter how hard a company tries, they may not be able to control all the employees?
(esp)
MattBray.net 