Labels: bribery, Department of Justice, SEC, Siemens

Labels: Department of Justice, Louisiana, mcnulty memo, Peter Henning, prosecution guidelines, white collar crime

The changes, which could require local U.S. attorneys to obtain input from high-level Justice Department officials before seeking corporate indictments, could be unveiled by Deputy Attorney General Paul J. McNulty next month, according to sources briefed on the issue who spoke on condition of anonymity because the deliberations are not yet complete. The administrative revisions also may forbid government lawyers from forcing companies to stop paying attorney fees to employees ensnared in investigations, a move that was declared unconstitutional in June by a federal judge in New York.

Separately, Senate Judiciary Chairman Arlen Specter (R-Pa.) is drafting legislation that would bar prosecutors from forcing companies to waive their attorney-client privilege over internal documents in order to avoid criminal charges, a key part of the current guidelines. Specter, who has received support from Sen. Patrick J. Leahy (D-Vt.), could release the bill as early as Monday.

Debate about the appropriate use of prosecutorial power over business has simmered for years, reigniting in 2002 when the Justice Department charged Arthur Andersen LLP with obstruction of justice, a move that prompted partners and clients to flee and hastened the death of the audit firm...

For business groups, the biggest concern is waiver of the attorney-client privilege to avoid prosecution, a move that puts sensitive documents and e-mail messages -- often involving communication with company lawyers -- into the hands of prosecutors, securities regulators and, ultimately, plaintiff lawyers who can use the waivers to obtain potentially damaging information in costly class-action lawsuits.

Labels: Department of Justice, New York AG, pre-trial agreements

GICs guarantee institutions a certain rate of return on specific amounts of money. Providers promise to pay an agreed rate and get the money to invest in return. Profits are made on the spread between the rate the provider offers the buyer and the returns it can generate itself.

Municipalities often use GICs when they get large sums of money from a recent bond offering, but don't want to spend the cash straight away. Municipalities often ask brokers to help them track down the most attractive GICs.

"The investigations appear to be centered on broker activities in the municipal GIC market," said Thomas Abruzzo, managing director at rating agency Fitch and senior credit analyst for financial guaranty companies. "We don't anticipate that this will create problems for GIC providers, but that depends what things might be uncovered. It's an ongoing investigation and the story only started snowballing this week."

Labels: AIG, Department of Justice

Labels: Department of Justice

Labels: Department of Justice

Labels: Department of Justice

The SEC complaint alleges that the men overstated revenue at the medical device company in 2001 and 2002 , with the company overstating revenues as much as 33 percent in one quarter. The complaint also says that fraudulent accounting caused earnings to be overstated at least 16 percent in all of 2001. The company has already restated its earnings for both years and said that it doesn't plan to make any further corrections as a result of the investigation.

"Endocare's egregious and widespread fraud pervaded the executive suite," said the director of the SEC's Pacific regional offices in Los Angeles, Randall R. Lee, in a statement...

"This is just a continuation of what was settled with the company, and the SEC has taken the next step of filing charges with these individuals who have long been separated from the company," Endocare spokesman Matt Clawson said. The SEC or Justice Department isn't investigating the company itself.

Labels: Department of Justice, Endocare

The U.S. Securities and Exchange Commission and the U.S. Department of Justice each are investigating alleged stock option backdating at dozens of U.S. companies, with the SEC probing securities filings at more than 80 U.S. corporations.

With federal prosecutors and SEC investigators breathing down their necks, Texas corporations are hiring defense firms, and plaintiffs firms are beginning to file shareholder derivative or class-action suits related to alleged option backdating at Texas companies.

"This all heated up for us in June of this year," says Charlie Parker, a securities litigation partner in Locke Liddell & Sapp in Houston. "It's kind of become a rather large source of work for many lawyers," says Michael Gold, a corporate partner in Baker Botts in Washington, D.C. The work, Gold says, cuts across many practice areas.

"This is the kind of issue that kind of crosses a whole lot of legal and accounting ... issues. You have tax issues embedded in this. You have employee compensation issues embedded in this. You have corporate governance issues at the heart of this," Gold says. "In the purest, worst form, if the alleged conduct is true, it is fraud where there was a bad intent."

Labels: Department of Justice

Labels: Department of Justice

Labels: Department of Justice, Enron

US Congress slams Milberg Weiss indictment

The Lawyer
June 14, 2006

Milberg Weiss Bershad & Schulman, the US plaintiffs’ firm recently indicted for alleged referral fees, has picked up a powerful ally in the shape of the US Congress. Congress issued a statement slamming the US Department of Justice’s actions in indicting Milberg Weiss.

Signed by four Democrat Congressmen - Charles Rangel, Carolyn McCarthy, Gary Ackerman and Robert Wexler - the statement says: “The unprecedented recent indictment of Milberg Weiss Bershad & Schulman is a very thinly veiled attempt by the Bush Administration to accomplish by bullying and intimidation what it has not been able to do by law - to end class-action lawsuits, one of the few tools remaining to safeguard the American consumer.”

The statement comes almost a month after Milberg Weiss and name partners David Bershad and Steven Schulman were indicted by Los Angeles federal prosecutors for allegedly paying referral fees to named plaintiffs in shareholder lawsuits.

Labels: Department of Justice, Gary Weiss, Melvyn Weiss, Milberg Weiss

...The departures of David Bershad and Steven Schulman were announced Monday by Milberg Weiss Bershad Hynes & Lerach.

The U.S. Justice Department has been investigating the firm for nearly six years. The case is currently before a federal grand jury in Los Angeles.

In a memo circulated to firm employees Tuesday, Bershad said his decision to leave was mutually agreed upon with the company's management and that he would be available at its request to represent clients.

"I am taking this step in the belief that my action will improve the firm's chances to avoid unfounded charges that would be detrimental," said Bershad, who joined the firm nearly 40 years ago...

Labels: Department of Justice, Melvyn Weiss, Milberg Weiss

Sen. Grassley Asks SEC To Proceed With Investigation Into Reports Physicians Sold Trial Data to Wall Street Firms

Kaiser Network
Daily Health Policy Report
Capitol Hill Watch
May 09, 2006

Senate Finance Committee Chair Chuck Grassley (R-Iowa) last week asked the Securities and Exchange Commission to proceed with an investigation into whether physicians involved with clinical trials sell confidential information to stock analysts and investors, the Seattle Times reports (Mundy, Seattle Times, 5/8).

The Times in an August 2005 article reported at least 26 cases in which physicians sold information about ongoing trials to Wall Street firms. In response to the article, Grassley sent letters to SEC and the Department of Justice that requested investigations into the issue (Kaiser Daily Health Policy Report, 8/9/05).

Last week, Grassley sent SEC a Congressional Research Service report completed in November 2005 that states, "Thus, if the facts in the article are accurate, it is arguable that the described Wall Street analysts may be violating section 10(b) of the Securities Exchange Act." Section 10(b) is the anti-fraud statute of the law.

Grassley asked SEC to respond to the CRS report no later than June 2. In a letter to SEC Chair Christopher Cox, Grassley wrote that "the integrity of the scientific process itself is compromised by clinical researchers who disclose ... the details of ongoing research." SEC spokesperson John Heine declined to comment on the issue (Seattle Times, 5/8).

Labels: Department of Justice

Labels: Department of Justice

Labels: Department of Justice, New York AG

Labels: Department of Justice

U.S. won't indict high-profile lawyers

February 21, 2006
AP Newswire
Seattle Post Intelligencer

Federal prosecutors have decided not to seek charges against class-action lawyer William Lerach and his former partner, people familiar with the investigation said Tuesday. Lerach and Melvyn Weiss, former partners who had a bitter falling out in 2004, were told Friday that they would not be prosecuted in connection with a five-year investigation into whether they paid kickbacks to people who served again and again as the lead plaintiffs in shareholder lawsuits, some which date to the 1980s.

It is unclear whether Weiss' law firm, Milberg, Weiss, Bershad & Schulman, or other partners will be indicted, the people said on condition of anonymity because the Justice Department has not made any public comment about the lawyers.

Lawyers for Lerach and Weiss did not immediately comment Tuesday.

Retired lawyer Seymour Lazar was indicted in June, accused of accepting kickbacks from Milberg, Weiss in exchange for serving as plaintiff, or getting others to serve, in more than 50 suits. Paul Selzer, Lazar's lawyer, also was indicted on charges he laundered the payments to Lazar.

Labels: Department of Justice, Melvyn Weiss, Milberg Weiss

Industries Get Quiet Protection From Lawsuits

By Myron Levin and Alan C. Miller
L.A. Times Staff Writers

WASHINGTON — Near sunrise on a summer morning in 2001, Patrick Parker of Childress, Texas, swerved to avoid a deer and rolled his pickup truck. The roof of the Ford F-250 crumpled, and Parker didn't stand a chance. His neck broke and, at 37, he was paralyzed from the chest down. He sued, and Ford Motor Co. settled for an undisclosed amount. "You can imagine what happens when you're belted in and the roof comes down even with the door," Parker said. "Your options are death or quadriplegia."

Parker's case and hundreds like it are behind a beefed-up roof safety standard proposed in August by the National Highway Traffic Safety Administration. But safety regulators tucked into the proposed rule something vehicle makers have long desired: protection from future roof-crush lawsuits like the one Parker filed.

The surprise move seeking legal protection for automakers is one in a series of recent steps by federal agencies to shield leading industries from state regulation and civil lawsuits on the grounds that they conflict with federal authority.

Some of these efforts are already facing court challenges. However, through arcane regulatory actions and legal opinions, the Bush administration is providing industries with an unprecedented degree of protection at the expense of an individual's right to sue and a state's right to regulate.

In other moves by the administration:

• The highway safety agency, a branch of the Department of Transportation, is backing auto industry efforts to stop California and other states from regulating tailpipe emissions they link to global warming. The agency said last summer that any such rule would be a backdoor attempt by states to encroach on federal authority to set mileage standards, and should be preempted.

• The Justice Department helped industry groups overturn a pollution-control rule in Southern California that would have required cleaner-running buses, garbage trucks and other fleet vehicles.

• The U.S. Office of the Comptroller of the Currency has repeatedly sided with national banks to fend off enforcement of consumer protection laws passed by California, New York and other states. The agency argued that it had sole authority to regulate national banks, preempting state restrictions.

• The Food and Drug Administration issued a legal opinion last month asserting that FDA-approved labels should give pharmaceutical firms broad immunity from most types of lawsuits. The agency previously had filed briefs seeking dismissal of various cases against drug companies and medical-device manufacturers.

In a letter to President Bush on Thursday, Rep. Jan Schakowsky (D-Ill.) said, "It appears that there may have been an administration-wide directive for agencies … to limit corporate liability through the rule-making process and without the consent of Congress." Administration officials said the initiatives had not been centrally coordinated.

"Under the constitution, federal laws take priority over inconsistent state laws," said Scott Milburn, spokesman for the White House Office of Management and Budget. "Decisions about … whether particular rules should preempt state laws are made agency by agency and rule by rule."

Preemption initiatives by regulatory agencies have drawn less public attention than controversial legislative moves supported by the White House. With administration support, Congress has restricted class-action suits and banned certain claims against gun makers and vaccine producers.

By embedding similar protections for businesses in regulatory changes, the administration has advanced Bush's repeated pledge to rein in what he calls junk lawsuits. On Thursday, for example, when the Consumer Product Safety Commission adopted a rule to curb mattress fires, it recommended for the first time that courts bar suits against manufacturers that comply with the new standard. Schakowsky called the move "part of an unfortunate and troublesome pattern … to undermine consumer rights."

In addition to trying to bar suits over vehicle roof failures, the highway safety agency in recent months has sought broad legal protection for manufacturers in two other rules on the grounds that lawsuits could undermine its safety goals. One rule related to rear seat belts and the other to visibility requirements for trucks. No similar exemption clauses have been attached to any other highway safety agency rule changes for 35 years.

Industry executives, lobbyists and lawyers have shuttled through jobs in the highway safety agency and other departments over the years, but in the Bush administration, auto industry ties have grown more conspicuous. Before becoming White House chief of staff, Andrew H. Card Jr. served as a General Motors Corp. vice president and as chief executive of the top auto industry trade group. The acting head of the highway safety agency, Jacqueline Glassman, was a senior attorney for DaimlerChrysler Corp. before she became the agency's chief counsel in 2002.

Jeffrey A. Rosen, who became general counsel at the Transportation Department in 2003, was a senior partner at Kirkland & Ellis, a powerhouse law firm that has defended GM in numerous product-liability suits and represents the Alliance of Automobile Manufacturers. Rosen denied using his position to benefit automakers. "We have issued a number of major rules in the two years that I have been here," he said. "Some of them are supported by industry, some are opposed."

Michael S. Greve, a resident scholar at the conservative American Enterprise Institute, has written that preemption is crucial to protect the economy from "trial lawyers, ambitious state attorneys general and parochial state legislatures."

But critics say the preemption push contradicts the conservative ideals of a limited federal government and states' rights — principles espoused by Bush. "This is the most aggressive federal government in the history of the United States," said California Atty. Gen. Bill Lockyer, a Democrat. Some say the election calendar is spurring the moves.

"The message has been clear in the last couple of years that if industries are going to get protection, they need to get it now," because no one knows what will happen in the next election, said Jonathan Turley, a George Washington University law professor.

Rollover accidents kill more than 10,000 people in the U.S. each year, and seriously injure an additional 16,000. Consumer groups say better roofs would have saved thousands of victims over time. Automakers counter with the "roof dive" theory — that rollover victims fall head-first to the roof as it strikes the ground, injuring themselves whether the roof holds or buckles. Thus, they say, the value of stronger roofs is practically nil.

Brian O'Neill, president of the Insurance Institute for Highway Safety, called this argument "patently nonsense." If it were true, he said, people would be "just as well-off in a rollover in a convertible as a hardtop." The highway safety agency always has agreed that roof failures can cause death and injury. Its roof-crush proposal estimates that 596 deaths and 807 serious injuries a year are linked to roof collapse.

Its proposed rule would increase the force a roof must withstand in a rollover from its current 1.5 times a vehicle's weight to 2.5 times — at a cost per vehicle of about $12. It would cover large trucks and SUVs of more than 6,000 pounds for the first time. The agency also is considering requiring stability control systems to reduce rollover risk. The revised roof rule would create "the strongest ever uniform set of minimum … standards" for automakers in the U.S., Transportation Department spokesman Brian Turmail said.

However, the safety agency is projecting relatively modest benefits from the upgrade: 13 to 44 deaths and 500 to 800 injuries prevented a year. One reason: Nearly 70% of existing vehicles already meet the proposed standard.

Critics call this a token improvement. The stiffest criticism, however, has been reserved for the effort to grant immunity from lawsuits. The safety agency says its push to preempt personal injury litigation is based on a concern that automakers, fearful of lawsuits, might beef up roofs to such an extent that the vehicles become top-heavy and more prone to roll over.

John G. Womack Jr., a former acting chief counsel at the safety agency, said that equating roof strength with weight was a "very debatable proposition." Other options are to use high-strength steel or widen the stance of vehicles to compensate for heavier roofs, he said.

Diverse groups — including Public Citizen, a consumer watchdog, and the National Conference of State Legislatures — have condemned the provision and questioned the highway safety agency's authority to protect automakers. Some have complained that if companies could not be held liable for damages, it would remove incentives for automakers to exceed minimum safety standards.

A bipartisan group of 26 state attorneys general said in a December letter to the highway safety agency that the lawsuit ban, if accepted by the courts, would shift significant costs of caring for seriously injured victims from the industry to taxpayer-funded programs such as Medicaid. It would also conflict with consumer rights, they said. "Such an extreme step is unwarranted in the absence of express congressional intent," they wrote.

Roof-crush suits have resulted in costly settlements and verdicts against automakers at a time of widespread financial trouble for the U.S. industry. In 2004, Ford paid $41 million in a case in which a California appeals court compared the company's use of a fiberglass and metal roof in the 1978 Bronco to "involuntary manslaughter."

The same year, a San Diego jury awarded damages against Ford of $367 million, later reduced by the judge to $150 million. In 2003, GM was hit with a $19.6-million verdict, described as the largest product liability award in Nebraska history. The San Diego and Nebraska cases are being appealed.

For victims like Parker, the prospect of manufacturer immunity is an especially bitter pill. The paralyzed Texas man, who had worked as a technician for a local utility, said he at least gained some financial security through litigation by extracting a settlement from Ford. Otherwise, he said, he and his wife "would have been living from hand to mouth."

He criticized the preemption clause, saying it was as if the industry had "this red phone and they just pick it up and it automatically dials NHTSA." The immunity clause was unexpected, even to some in the industry. "Whether this was some conspiracy or whether it was a pleasant surprise, I really don't know," said Barry Felrice, director of regulatory affairs with DaimlerChrysler in Washington. Spokesmen for GM and Ford said that their companies had not lobbied for the lawsuit ban but that they supported it.

Bill Walsh, a former highway safety agency senior executive who worked on the rule before retiring in 2004, said the immunity language "was dropped in from out of the blue." Preempting lawsuits, he said, was "different from how we normally operated … in issuing regulations." Rosen, the Transportation Department's general counsel, said this was not the first time the highway safety agency had tried to override state liability laws.

During the 1990s, the agency joined automakers in arguing that they shouldn't be sued for not installing air bags at a time when the agency allowed either air bags or automatic seat belts. In 2000, the Supreme Court agreed that such suits were preempted but said that compliance with a standard ordinarily "does not immunize a manufacturer."

Card, the White House chief of staff, and Glassman, the agency's chief counsel, declined to discuss how the roof-crush lawsuit preemption originated. Rosen said he did not want "to get into the specifics of who said what to whom…. As a legal matter, I'm obliged to protect the deliberative process."

The Rev. Lawrence Harris of Pittsgrove, N.J., sees the issue from the vantage point of his wheelchair. Had his claim been preempted after a devastating accident with his family in North Carolina, he might not be preaching on Sundays. Harris, then 46, was wearing a seat belt but suffered a fractured spine in 1997 when his Ford Econoline van rolled over. Except for minimal movement in his hands, he was paralyzed from the chest down.

With the damage award he won from Ford, Harris installed a roll-in shower and wheelchair lift in his house, hired a caretaker to help him dress each morning, and modified a van so he could continue as pastor of Olivet United Methodist Church. Without the lawsuit, he said, "I would not be able to do the things I'm able to do." If automakers are immune, Harris said, "where is the check and balance going to be for them?"

Within days of its roof-crush proposal, the highway safety agency again backed the auto industry in challenging California's efforts to cut emissions. The Alliance of Automobile Manufacturers had gone to court to stop the state Air Resources Board from regulating tailpipe emissions of carbon dioxide and other greenhouse gases, contending the rule was preempted.

Because carbon dioxide emissions drop when less fuel is burned, the industry attacked the rule as a backdoor attempt to regulate fuel economy — under federal law, the exclusive domain of the highway safety agency. The agency agreed. On Aug. 23, it issued new mileage standards for light trucks, saying that its authority over fuel economy meant that "a state law that seeks to reduce motor vehicle carbon dioxide emissions is … preempted."

Industry lawyers filed papers the next day in U.S. District Court in Fresno informing the judge of the agency's position. California's global warming rule, which would first apply to 2009 models, is not all that's at stake in the Fresno case. Ten states have copied California's emission rule, and all those rules could be wiped out if the industry wins.

Rosen's former law firm, Kirkland & Ellis, represents the Alliance of Automobile Manufacturers in the suit to block California's global warming rule. The suit was filed in late 2004, a year after Rosen left the firm to join the Transportation Department. Transportation spokesman Turmail said Rosen did not discuss the matter with the law firm. In considering the safety agency's position on the matter, Rosen acted in the government's interest, Turmail said.

Eleven U.S. senators from both parties and 29 House Democrats from California have urged Transportation Secretary Norman Y. Mineta to reverse the agency's opposition to the emissions standard. "Rather than attempting to thwart such state efforts, the federal government should encourage states to develop innovative solutions to serious public health and environmental problems," the senators wrote to Mineta in December.

Kirkland & Ellis also represented automakers in another case against California regulators. In 2002, the industry — backed by the Justice Department — challenged a state rule that required production of a certain number of non-polluting vehicles.

Rosen said he did not participate in that case while he was with the law firm. The case was settled when the state agreed to remove language that the industry said amounted to regulating fuel economy. The Bush administration also helped two industry groups overturn a regulation requiring the purchase of cleaner-running fleet vehicles such as buses and garbage trucks in Southern California.

The Engine Manufacturers Assn. and Western States Petroleum Assn. claimed the rule by the South Coast Air Quality Management District was preempted by federal law. Their challenge was rejected in federal district court and by a federal appeals court. When the case went to the U.S. Supreme Court, the Justice Department filed a brief siding with the industry. The high court agreed that the local rules were preempted.

In the past, said California's Atty. Gen. Lockyer, when industries challenged state regulations, "the federal government abstained from those lawsuits." Now, he said, there's "a policy of rubber-stamping whatever business wants, and that's too bad." The idea behind another California law was simple: Tell credit cardholders on monthly bills how long it would take to retire their debt if they paid the minimum amount. But major banks issuing most of the nation's credit cards didn't like it. In a 2002 court challenge, they attacked the state's credit disclosure law with help from a powerful ally.

The U.S. Office of the Comptroller of the Currency joined forces with the American Banking Assn., Citibank and other plaintiffs, arguing in a friend-of-the-court brief that the law interfered with federal authority to regulate national banks, and with powers granted to the banks by their federal charters. A federal judge blocked the law from going into effect, and the state lost a subsequent appeal. Intervention by the comptroller's office "definitely tipped the balance," said Gail Hillebrand, a lawyer for Consumers Union, which had backed the state's position.

In recent years, the comptroller's office on many occasions has helped national banks and their subsidiaries fend off investigations or enforcement actions by state officials on preemption grounds. In 2004, for example, the agency helped to shoot down a California law that would have required customer permission before banks shared their personal information with business affiliates. Although a U.S. District Court judge upheld the privacy law, an appeals court ruled last year that its major provisions were preempted by federal law.

Last year, the agency went to court on the side of a banking association to block an investigation by New York Atty. Gen. Eliot Spitzer into possible racial bias in the lending practices of several banks. A federal judge agreed that Spitzer's investigation "impermissibly infringes" on the authority of the comptroller's office. The state is appealing.

Turf battles over banking regulation have occurred in the past, but the Office of the Comptroller of the Currency has become more aggressive in pushing preemption under Bush. Agency officials say they have zero tolerance for abusive practices and bristle at complaints that they might be chasing off state watchdogs to the detriment of consumers.

The banks "have an enormous body of consumer compliance laws and regulations that we apply to them at the federal level," said Julie L. Williams, the agency's senior deputy comptroller and chief counsel. But Arthur E. Wilmarth Jr., a George Washington University professor specializing in banking law, said, "The OCC hasn't been, shall we say, a very zealous enforcer on the consumer side…. States have been far more vigorous."

Greve, the American Enterprise Institute scholar who has been a mainstay of the conservative brain trust promoting preemption, said well-connected industry law firms were part of a policy network providing legal and political rationale for the effort. He called them "a merry band of Washington lawyers … who know how to push the buttons" and get things done.

Levin reported from Los Angeles and Miller from Washington. Times researcher Janet Lundblad in Los Angeles also contributed to this report.

Labels: DaimlerChrysler, Department of Justice, Eliot Spitzer, New York AG

Conditions still ripe for ... another Enron?

By Carrie Johnson and Ben White
The Washington Post
February 12, 2006

Four years after the collapse of Enron spurred the most sweeping revisions in business regulation since the Great Depression, experts warn that the ingredients for a similar financial disaster remain. Despite new laws and regulations, companies still face enormous pressure to meet short-term financial goals, creating a powerful motive for accounting fraud. Outsized executive compensation grows by the year, offering another rich incentive to cook the books. And there is no certainty that Congress will continue to fund regulatory budgets at current levels.

But some things have changed since December 2001, when Enron's sudden descent into bankruptcy protection rocked investor confidence and left the markets reeling. Accountants face independent oversight for the first time in 70 years. Most corporate board members take their jobs far more seriously. Wall Street is somewhat less willing to accommodate clients' interests.

Nearly a dozen experts contacted by The Washington Post, including regulators, accountants, chief executives and board members, agreed to fill out a corporate governance report card on the eve of the Enron trial. The Houston energy trader's implosion exposed wide gaps in the safety net designed to protect shareholders. Former executives Kenneth Lay and Jeffrey Skilling are standing trial in Houston on fraud and conspiracy charges.

Accountants exploited loopholes to curry favor with companies that paid their fees. Executives collected more than $400 million in salary and bonuses but denied knowing about fraud on their watch. Investment bankers engaged in sham deals to help clients meet quarterly profit targets. Boards of directors waived conflicts-of-interest policies and turned a blind eye to overly aggressive business practices. And overwhelmed regulators failed to devote enough resources to combat fraud.

Congress passed the Sarbanes-Oxley Act in July 2002, imposing new duties on corporate executives, auditors and directors. The Securities and Exchange Commission (SEC) and the Justice Department spent tens of millions of dollars to root out malfeasance. Along the way, prosecutors won criminal convictions and decades-long prison terms for former leaders of Adelphia, Tyco and WorldCom.

But the government efforts may have backfired, inspiring a dangerous overconfidence among investors.

"I just don't think we are as far along as we need to be," said former SEC Chairman Harvey Pitt, who led the agency when it brought the biggest-ever fraud case against telecommunications company WorldCom in 2002. "Many shareholders may have been led to believe that [reforms] have cured all the problems and we're home free. Unfortunately, that's a prescription for disaster"...

Labels: Department of Justice, Enron, Tyco

Opportunity for Corporate Fraud Has Shrunk -- but It's Still There

By Carrie Johnson and Ben White
Washington Post Staff Writers
Thursday, January 26, 2006; D01

Four years after the collapse of Enron Corp. spurred the most sweeping revisions in business regulation since the Great Depression, experts warn that the ingredients for a similar financial disaster remain.

Despite new laws and regulations, companies still face enormous pressure to meet short-term financial goals, creating a powerful motive for accounting fraud. Outsized executive compensation grows by the year, offering another rich incentive to cook the books. And there is no certainty that Congress will continue to fund regulatory budgets at current levels.

But some things have changed since December 2001, when Enron's sudden descent into bankruptcy protection rocked investor confidence and left the markets reeling. Accountants face independent oversight for the first time in 70 years. Most corporate board members take their jobs far more seriously. Wall Street is somewhat less willing to accommodate clients' interests.

Nearly a dozen experts contacted by The Washington Post, including regulators, accountants, chief executives, board members and investor advocates, agreed to fill out a corporate governance report card on the eve of the Enron trial.

The Houston energy trader's implosion exposed wide gaps in the safety net designed to protect shareholders, some of which remain today. Former executives Kenneth L. Lay and Jeffrey K. Skilling go to trial Monday on fraud and conspiracy charges.

Accountants exploited loopholes to curry favor with companies that paid their fees. Executives collected more than $400 million in salary and bonuses but denied knowing about fraud on their watch. Investment bankers engaged in sham deals to help clients meet quarterly profit targets. Boards of directors waived conflicts-of-interest policies and turned a blind eye to overly aggressive business practices. And overwhelmed regulators failed to devote enough resources to combat fraud.

Congress passed the Sarbanes-Oxley Act in July 2002, imposing new duties on corporate executives, auditors and directors. The Securities and Exchange Commission and the Justice Department spent tens of millions of dollars to root out malfeasance. Along the way, prosecutors won criminal convictions and decades-long prison terms for former leaders of Adelphia Communications Corp., Tyco International Ltd. and WorldCom Inc.

But in a sense, the government efforts may have backfired, inspiring a dangerous overconfidence among investors...

Labels: Department of Justice, Enron, Tyco

More U.S. SEC book-cooking actions hit Fortune 500

By Kevin Drawbaugh
Reuters
Dec 7, 2005 4:33 PM ET

WASHINGTON - The U.S. Securities and Exchange Commission -- once hopelessly outgunned by big business -- each year is bringing more financial reporting actions involving the Fortune 500 corporate elite, officials said on Wednesday.

In fiscal 2005, 24 percent of SEC financial reporting actions hit Fortune 500 companies, their executives or those they do business with, like auditors and vendors, the SEC said. That proportion was up from 20 percent in 2004, 17 percent in 2003 and just 5 percent in 1998, it said.

"This increase is reflective of increased staff resources over the years, as well as our willingness and ability to take on some of the largest and most complex cases," SEC Enforcement Division Chief Accountant Susan Markel told Reuters.

The figures come at a time when corporate scandals are no longer splashed across the nation's front-pages as they were in 2001-2004 after the Enron scandal. Congressional pressure for greater SEC scrutiny of large companies has eased, as well. But the latest figures show a steady increase in SEC actions against the largest companies and related parties.

For instance, healthcare services group HealthSouth Corp. -- a Fortune 500 company until two years ago -- in June agreed to pay $100 million to settle an SEC action alleging a massive 1996-2002 accounting fraud.

Media giant Time Warner Inc. -- No. 32 on the 2005 Fortune list -- agreed in March to pay $300 million to settle SEC charges that, among other things, from 2000 to 2002 it overstated its AOL online advertising revenues.

Telecommunications group Qwest Communications International Inc. -- No. 154 on the 2005 list -- in October 2004 agreed to a $250-million fine to settle SEC allegations of fraudulently recognizing revenues between 1999 and 2002.

Increased frequency of SEC actions against major companies like these has more to do with the companies themselves than with the SEC, however, said Seth Taube, a partner at the law firm of Baker Botts and a former U.S. prosecutor and SEC attorney.

"In the post-Enron world, both the SEC and the Justice Department reward self-investigation and self-reporting," Taube said, referring to recent statements from both agencies on how companies can win the government's favor by voluntarily coming forward with problems and cooperating with investigators.

"That makes the job of the SEC easier because industry itself untangles the web and presents it neatly to the commission. This is a sign that corporate America has responded" to post-Enron legal reforms, Taube said.

In an example of how the SEC is widening its focus to take in more of what it calls financial reporting "gatekeepers," Big Four accounting firm KPMG in April agreed to pay $22 million to settle SEC charges over its 1997-2000 audits of Xerox Corp. , ranked No. 132 on the Fortune list.

In a similar action, Big Four firm Deloitte & Touche in the same month agreed to pay $50 million to settle with the SEC over past audits of cable company Adelphia Communications , No. 456 on 2002's list.

The SEC brought more than 600 enforcement actions in fiscal 2005. About 29 percent were financial fraud cases, making it the biggest class ahead of others like insider trading. Revenue recognition cases are the most common type of financial fraud.

The original article appears here.

-- MDT

Labels: Department of Justice, Enron, insider trading, KPMG

Investment firm reaches settlement with SEC, avoids lengthy investigation

November 11, 2005
By Kairi Kurm
Baltic Times

TALLINN - Lohmus, Haavel & Viisemann, the Estonian investment firm whose employees were accused by the U.S. Securities and Exchange Commission of using insider information on stock trades, reached an out-of-court agreement with the market watchdog and thereby avoided a possible embarrassing hearing that had been scheduled for Nov. 8.

“Last night an agreement was made to cancel the court session and ease the arrest of assets,” Rain Tamm, LHV Group board chairman, said on Nov. 8, adding that a U.S. judge would have to approve the settlement. Tamm stressed that the agreement did not automatically imply LHV’s guilt.

Piret Loone, an Estonian representing LHV through Shearman & Sterling in the U.S. court, released a statement saying that the agreement was an important step forward but didn’t guarantee that the company’s accounts, arrested last week by a U.S. court, would be freed up. LHV officials said they wanted to cooperate with both the Estonian Financial Supervisory Authority and the U.S. SEC in order to clarify all accusations related to the firm.

The SEC has claimed that the firm’s employees profited from trade on U.S. public companies by using more than 360 confidential press releases belonging to Business Wire, a real-time business news agency used by brokers and traders around the world. The watchdog believes that the traders may have racked up some $7.8 million in profits on the illegal trades.

The employment contracts of Kristjan Lepik, Oliver Peek and three other employees suspected in the illegal trades, have been suspended. Peek was a member of LHV’s investments services team, and Lepik an LHV partner and head of the bank’s trading department. Rain Lohmus, one of the firm’s founders, and whose account was reportedly involved in illegal trading, stepped down from his position as chairman of the firm’s council.

Many were surprised to learn that Lohmus had also been a client of Oliver Peek. “Usually we do not comment on our customers’ data, but we found that it was important to say [Lohmus was involved],” said Tonis Haavel, one of the firm’s founders. Lohmus left for Moscow on Nov. 2, the morning news of the scandal broke, and didn’t return before Nov. 4. Haavel couldn’t say if Lohmus had been aware of possible illegal trading.

According to one report, Lohmus opened a $2-million account with LHV Trader in April this year, with the money eventually being deposited with U.S.-based Interactive Brokers. As a result of subsequent transactions, the size of his account swelled to $8.3 million by November.

According to the SEC, the illegal trading activity involved five different accounts, including those of Peek and Lepik. Peek reportedly received $2 million and Lepik $200,000 in nine months this year. “The in-house investigation is ongoing, and we are giving [the SEC] the information they request. It is very voluminous,” Haavel told The Baltic Times.

The firm LHV claims that young the men were trading as private individuals. In every statement, it emphasizes that the investment bank had nothing to do with any possible illegal trading of its former employees, and that the company has in no way profited from any such trading.

Still, the accusations have damaged the company’s reputation. Several customers have pulled their funds from LHV’s accounts, and Vilniaus Akropolis, Lithuania’s largest mall operator, cancelled its contract with LHV. Vilniaus Akropolis had been planning an IPO with the firm.

The SEC has frozen the accounts of about 180 LHV customers. Currently only those who used the LHV Trader investment services on the U.S. market through certain brokers cannot receive their money.

“Our lawyers have spoken to [the SEC]. The commission is in principle ready to unfreeze the accounts of our other clients. When it will happen, we don’t know,” Haavel said, adding that LHV has a total of 4,500 customers. “According to the securities’ act, companies like us keep clients’ assets totally separate.”

The firm’s partners have pledged to increase owners’ equity to $1 million if necessary to cover the claims. The SEC investigation was launched after a drug company, InKine, noticed a spike in trading on its shares on June 23, just before news was released about a planned merger. About 46 percent of the volume came from Estonian traders, who earned some $300,000 by selling the shares immediately after the merger was announced.

The same scheme was used in July when various earning announcements were released by eBay and Yahoo. In those cases, even larger sums were used. Business Wire made a statement defending the integrity of its data system, stating that traders could not have acquired secret access. Still, Tamm told the press that Peek and Lepik may have come across a security gap in Business Wire’s system.

Estonia’s Financial Supervision Authority has started a separate supervisory procedure into the matter. Meanwhile, a U.S.-based hedge fund manager, speaking on the condition of anonymity, told The Baltic Times that she had assumed on June 23 that whoever placed the order was related to InKine, Salix, one of the investment banks advising on the deal, or perhaps lawyers who had worked on the transaction.

“I just knew someone got very lucky that day, and I assumed it wasn’t luck that prompted them to take that big of a piece of some biotech firm in Philly no one had ever heard of before,” she said. “I had no idea who placed them. Just that someone sure was very timely and bold.” In the fund manager’s opinion, had the traders been “less greedy” on InKine, they never would have been caught, since the total share volume that day would have been within “normal” ranges.

She said that their other deals would have never aroused suspicion anywhere except among the inside compliance people of LHV and U.S. brokers Cyber Trader and InterActives. The latter are supposed to alert regulators if a client is making too many so-called “in-the-money-trades” ahead of major news stories, she said.

Jakob Frenkel, a former SEC enforcement lawyer and former U.S. federal criminal prosecutor, told The Baltic Times, “In cases like this, the SEC probably will demand penalties of $15 – 20 million, plus recovery of the profits from trading. But the SEC will first need to build its case and bring into the grasp of the U.S. courts the individuals charged.”

Frenkel, who is now with Shulman, Rogers, Gandal, Pordy & Ecker, added, “Of greater concern should be whether the SEC is working with U.S. federal or Estonian criminal prosecutors with the objective of criminal prosecutions and jail as the consequence. The allegations are of the type that would suggest the SEC will try to get criminal prosecutions too.”

The fund manager said that, if those traders cooperate, they might only pay a civil fine and avoid prosecution. “I think the Estonian securities regulators will deal with them, unless the Department of Justice wishes to make ‘examples’ of them.”

Other local investment bankers panicked about what the scandal could do to the industry’s reputation. Allan Martinson, managing partner of Martinson Trigon Venture Partners, said, “I can’t see a single person who won from this case. LHV lost, and the work of many years disappeared. Investors lost, Estonia lost, even the U.S.A. lost. This loss is a fact. What caused the loss, a crime or a work accident, is not that important. The effect of the LHV story is bigger than the conviction or justification of two boys,” he said.

As the U.S. fund manager said, “In a way, I respect how bright those boys were. I hope they cooperate - much more leniency is given to those who admit they made a mistake and clean up their act –at least over here [in the U.S.A.]. The regulators are overworked, and they hate it when people lie or refuse to cooperate. It makes them have to work much harder which means other matters get overlooked.”

Labels: database, Department of Justice, insider trading

Legal fight looms after J&J threatens to drop plan to buy Guidant

By Barry Meier and
Andrew Ross Sorkin
The New York Times
November 3, 2005

Johnson & Johnson has threatened to abandon its plan to acquire Guidant, a troubled maker of heart devices, setting the stage for a financial and legal confrontation between the two companies over a deal valued at $25.4 billion.

The development, announced on Wednesday, was a stunning reversal for a deal that was applauded when it was announced in December as both a handsome payoff for Guidant shareholders and a way for Johnson & Johnson to enter the growing market for implanted heart devices.

But along the way, Guidant, the second-largest U.S. maker of heart devices, found itself ensnared by safety issues and product recalls that appeared to spin out of control.

Guidant disclosed in late May, for example, that one of its defibrillators had repeatedly failed because of an electrical flaw. That disclosure led to regulatory scrutiny, a string of product recalls and, most recently, a Department of Justice investigation.

In a statement, Johnson & Johnson, based in New Brunswick, New Jersey, said on Wednesday that it believed that the recalls and federal investigations had materially affected Guidant's "short-term results and long-term outlook."

Guidant, based in Indianapolis, responded that any impact from the recalls would be short-term and that Johnson & Johnson was legally obligated to complete the deal by Friday as originally negotiated.

Guidant's legal problems also grew more complex on Wednesday as the New York State attorney general, Eliot Spitzer, filed a lawsuit accusing the company of fraud in connection with sales of a defibrillator model that short-circuited in some cases. The lawsuit seeks to force Guidant to disclose device malfunction data and disgorge its profit from sales of the defibrillator.

The deal's breakdown could present a challenge to Johnson & Johnson's strategy of growth by acquisition.

Guidant and Johnson & Johnson did not rule out continuing talks, but with the original deal valued at $76 a share, any new agreement will depend on whether the two sides can compromise on a lower price. People involved in those talks described the latest moves by both companies as a high-stakes game, with neither particularly interested in walking away just yet.

But these people suggested that a gap remained between the price that Johnson & Johnson is now willing to pay and the price that Guidant is willing to accept. These people said Johnson & Johnson was hoping to pay no more than something in the mid-$60s a share, while Guidant was seeking a price in the low $70s.

While some analysts said Johnson & Johnson appeared to have the negotiating edge, other analysts said Guidant executives might choose to sue Johnson & Johnson because they believe that the company's stand-alone value is close to $60 a share. On Wednesday, Guidant closed at $60.40 a share, down 4.3 percent, or $2.70 a share.

"They are playing chicken, and right now it appears that J&J has the upper hand," said Joanne Wuensch, an industry analyst with Harris Nesbitt.

The centerpiece of any legal fight will revolve around a single but complex issue: whether Guidant's product recalls and related events have had a materially negative impact on its future sales and profit. Not surprisingly, both companies on Wednesday staked out their positions. In its statement, Johnson & Johnson said it believed that developments had clouded Guidant's future prospects. For its part, Guidant characterized those effects as "near-term."

Courts have found that a significant negative impact must extend beyond the near term to qualify as grounds for terminating a contract. In 2001, a Delaware court ruled that Tyson Foods was not justified in terminating its merger deal with IBP, a beef processor. Tyson had argued that undisclosed financial problems at an IBP subsidiary had invalidated the deal.

Guidant's chief executive, Ronald Dollens, said in a statement, "We believe that the fundamentals of our business are strong and our markets and products have attractive prospects for growth."

Spokesmen for both companies declined to comment beyond their public statements or make executives available for interviews. Johnson & Johnson issued its statement immediately after the Federal Trade Commission on Wednesday gave it conditional approval to acquire Guidant.

It was in mid-December that Johnson & Johnson announced its plan to purchase Guidant, with the $25.4 billion deal representing the company's biggest acquisition by far. The move represented a decision by Johnson & Johnson to move into the market for implantable defibrillators and pacemakers, a field that is rapidly growing because of an aging population.

Defibrillators are devices that send out an electrical charge to disrupt a potentially fatal heart rhythm; a pacemaker controls a heart that is beating too fast or too slowly.

Spitzer's lawsuit, filed on Wednesday in New York State Supreme Court in Manhattan, accuses Guidant of fraud in connection with its failure to alert doctors about the electrical flaw in the defibrillator known as the Prizm 2 DR. In a statement, Spitzer said doctors needed safety information about implanted devices to determine which model was most appropriate for a patient.

"We would not permit this type of conduct in connection with the sale of cars or washing machines," said Spitzer, who last year sued drug companies to force them to disclose more clinical trial data. "It is simply unconscionable that it occurred with a critical medical device."

Late Wednesday, a Guidant spokesman, Steven Tragash, said the company had not seen the lawsuit. The company, however, has said repeatedly that it has done nothing wrong.

In a recent filing with the drug regulator, Guidant also said it planned to release more detailed data to doctors to show how many units of a particular model had failed because of severe malfunctions like a short circuit that prevented a unit from delivering therapy. The company has declined to say when it will begin disclosing that data.


NEW YORK Johnson & Johnson has threatened to abandon its plan to acquire Guidant, a troubled maker of heart devices, setting the stage for a financial and legal confrontation between the two companies over a deal valued at $25.4 billion.

The development, announced on Wednesday, was a stunning reversal for a deal that was applauded when it was announced in December as both a handsome payoff for Guidant shareholders and a way for Johnson & Johnson to enter the growing market for implanted heart devices.

But along the way, Guidant, the second-largest U.S. maker of heart devices, found itself ensnared by safety issues and product recalls that appeared to spin out of control.

Guidant disclosed in late May, for example, that one of its defibrillators had repeatedly failed because of an electrical flaw. That disclosure led to regulatory scrutiny, a string of product recalls and, most recently, a Department of Justice investigation.

In a statement, Johnson & Johnson, based in New Brunswick, New Jersey, said on Wednesday that it believed that the recalls and federal investigations had materially affected Guidant's "short-term results and long-term outlook."

Guidant, based in Indianapolis, responded that any impact from the recalls would be short-term and that Johnson & Johnson was legally obligated to complete the deal by Friday as originally negotiated.

Guidant's legal problems also grew more complex on Wednesday as the New York State attorney general, Eliot Spitzer, filed a lawsuit accusing the company of fraud in connection with sales of a defibrillator model that short-circuited in some cases. The lawsuit seeks to force Guidant to disclose device malfunction data and disgorge its profit from sales of the defibrillator.

The deal's breakdown could present a challenge to Johnson & Johnson's strategy of growth by acquisition.

Guidant and Johnson & Johnson did not rule out continuing talks, but with the original deal valued at $76 a share, any new agreement will depend on whether the two sides can compromise on a lower price. People involved in those talks described the latest moves by both companies as a high-stakes game, with neither particularly interested in walking away just yet.

But these people suggested that a gap remained between the price that Johnson & Johnson is now willing to pay and the price that Guidant is willing to accept. These people said Johnson & Johnson was hoping to pay no more than something in the mid-$60s a share, while Guidant was seeking a price in the low $70s.

While some analysts said Johnson & Johnson appeared to have the negotiating edge, other analysts said Guidant executives might choose to sue Johnson & Johnson because they believe that the company's stand-alone value is close to $60 a share. On Wednesday, Guidant closed at $60.40 a share, down 4.3 percent, or $2.70 a share.

"They are playing chicken, and right now it appears that J&J has the upper hand," said Joanne Wuensch, an industry analyst with Harris Nesbitt.

The centerpiece of any legal fight will revolve around a single but complex issue: whether Guidant's product recalls and related events have had a materially negative impact on its future sales and profit. Not surprisingly, both companies on Wednesday staked out their positions. In its statement, Johnson & Johnson said it believed that developments had clouded Guidant's future prospects. For its part, Guidant characterized those effects as "near-term."

Courts have found that a significant negative impact must extend beyond the near term to qualify as grounds for terminating a contract. In 2001, a Delaware court ruled that Tyson Foods was not justified in terminating its merger deal with IBP, a beef processor. Tyson had argued that undisclosed financial problems at an IBP subsidiary had invalidated the deal.

Guidant's chief executive, Ronald Dollens, said in a statement, "We believe that the fundamentals of our business are strong and our markets and products have attractive prospects for growth."

Spokesmen for both companies declined to comment beyond their public statements or make executives available for interviews. Johnson & Johnson issued its statement immediately after the Federal Trade Commission on Wednesday gave it conditional approval to acquire Guidant.

It was in mid-December that Johnson & Johnson announced its plan to purchase Guidant, with the $25.4 billion deal representing the company's biggest acquisition by far. The move represented a decision by Johnson & Johnson to move into the market for implantable defibrillators and pacemakers, a field that is rapidly growing because of an aging population.

Defibrillators are devices that send out an electrical charge to disrupt a potentially fatal heart rhythm; a pacemaker controls a heart that is beating too fast or too slowly.

Spitzer's lawsuit, filed on Wednesday in New York State Supreme Court in Manhattan, accuses Guidant of fraud in connection with its failure to alert doctors about the electrical flaw in the defibrillator known as the Prizm 2 DR. In a statement, Spitzer said doctors needed safety information about implanted devices to determine which model was most appropriate for a patient.

"We would not permit this type of conduct in connection with the sale of cars or washing machines," said Spitzer, who last year sued drug companies to force them to disclose more clinical trial data. "It is simply unconscionable that it occurred with a critical medical device."

Late Wednesday, a Guidant spokesman, Steven Tragash, said the company had not seen the lawsuit. The company, however, has said repeatedly that it has done nothing wrong.

In a recent filing with the drug regulator, Guidant also said it planned to release more detailed data to doctors to show how many units of a particular model had failed because of severe malfunctions like a short circuit that prevented a unit from delivering therapy. The company has declined to say when it will begin disclosing that data.

Labels: Department of Justice, Eliot Spitzer, New York AG

Refco debacle widens and now involves Austrian bank

By : Joe Lauria in New York
October 30, 2005
The Business, Online

AUSTRIAN bank BAWAG is set to file lawsuits against Refco, as the widening scandal involving the US futures trader has prompted a former Refco executive to co-operate with US authorities trying to get to the bottom of the affair.

Austrian regulators last week also launched an investigation into the Refco debacle and expect to release a first report in a fortnight on BAWAG’s role in the accounting scandal. BAWAG is Austria’s fourth-largest bank. It was listed as Refco’s biggest creditor in papers filed by Refco in the US bankruptcy court this month. BAWAG is owed E350m ($424m, £238m) by Refco’s former chief executive, Briton Phillip Bennet, as well as E75m by Refco itself.

BAWAG, owned by Austria’s trade unions, is working with a battery of US?lawyers preparing the lawsuits against several targets, the bank said. The main target is Bennett, to whom BAWAG continued to lend money until 9 October, the day he was suspended by Refco. The next day he was arrested and charged with securities fraud and hiding $430m in debt from the company and its shareholders...

...The US probe was given a boost last week when Santo Maggio, president of the Refco Capital Markets unit, agreed to co-operate with the Justice Department and the Securities and Exchange Commission (SEC). Maggio had been put on leave by the Refco board on 10 October, the same day Bennett was arrested. As a Refco insider, Maggio’s participation is expected to help investigators pressure other executives to co-operate as they build their case. A judge last week gave prosecutors only until Monday to get an indictment against Bennet from a Grand Jury. The deadline could be extended.The US investigators have broadened their probe beyond the original charges against Bennett for hiding debt. They are also looking into the connections between Bennett and BAWAG. The SEC is also probing the role played by Grant Thornton, the accounting firm, which had audited Refco’s books. The investment banks that underwrote Refco’s $583m initial public offering (IPO) in August are also under investigation...

Labels: Department of Justice, Grant Thornton, Phillip Bennett, Refco

Refco executive Maggio cooperating in widening inquiry

October 28, 2005
By Kevin Drawbaugh
Reuters, UK

A senior Refco executive who was put on leave earlier this month is cooperating with U.S. authorities in a widening fraud investigation of the futures and commodities broker, a person close to the case said on Thursday.

Santo Maggio, president of the Refco Capital Markets unit, was put on leave by the Refco board on October 10 when it ousted chief executive Phillip Bennett, who has been arrested and charged with hiding $430 million (241 million pounds) of debt from the company and its shareholders.

The Department of Justice and the Securities and Exchange Commission are investigating the matter and are fast moving beyond the charges brought against Bennett in his arrest warrant, said sources familiar with the matter...

...Maggio's agreement to cooperate will allow federal investigators to follow a typical pattern of obtaining information from a cooperating executive that can then be used to pressure other executives and build a case, lawyers said.

The original article appears here.

-- MDT

Labels: Department of Justice, Phillip Bennett, Refco

S. Africa's police, spies squabble over elite unit

October 19, 2005
By John Chiahemen
Reuters

JOHANNESBURG (Reuters) - South Africa's police and spy agencies are locked in a damaging power struggle that could undercut efforts to improve security in one of the most crime-ridden countries in the world. A row over which government department should control the FBI-style Scorpions investigation unit has openly split President Thabo Mbeki's cabinet and brought into the open wrangling among heads of his intelligence agencies.

A special commission ended public hearings last week and will advise Mbeki whether the Scorpions should fall under police control, as their critics demand, or retain their elite status in the Justice Ministry's National Prosecuting Authority (NPA). Many analysts worry that bringing the Scorpions under the police -- whose poorly paid and poorly trained members are barely managing to cope with one of the highest crime rates in the world -- could further undermine the fight against crime.

"The Scorpions were set up to do their own part of crime fighting, and they do a good job -- better than some expected, perhaps," said political analyst Herman Van der Linde. In a submission to the commission, Mbeki's spy chief, Billy Masetlha, accused the Scorpions unit of compromising national security "because it relies on and interacts with foreign intelligence agencies".

According to a leaked version of the submission, he also said the unit's outsourcing of forensic work to foreign companies like Kroll International meant vital information could pass into the hands of foreign agencies. Masetlha was backed at the commission by national police chief Jackie Selebi and, surprisingly, by Justice Minister Bridgette Mabandla, whose ministry now oversees the Scorpions.

Opposing them were Intelligence Minister Ronnie Kasrils and Vusi Pikoli, head of the NPA and its Scorpions unit, whose official name is the Directorate of Special Operations (DSO). Mbeki and his cabinet have denounced Masetlha's submission in which he named Scorpion agents he said were cooperating with the U.S. Central Intelligence Agency and Britain's MI5.

In a statement, the cabinet said it wanted to "distance government from statements ... which seek to question the integrity of officials employed in the DSO and to cast aspersions on cooperation that our institutions have with their international counterparts". Government spokesman Joel Netshitenzhe told Reuters the submission "does not reflect our policy of cooperating with international agencies on issues like fighting terrorism".

TURF WARS

Masetlha, who until last year headed Mbeki's presidential intelligence unit, is director-general of the country's domestic intelligence network, the National Intelligence Agency (NIA). The NIA has become increasingly alarmed by the growing involvement of the Scorpions in external intelligence, notably their hunt abroad for South Africans suspected of working in the black market for nuclear components, security sources say.

But political analysts said underlying the row was Mbeki's contentious sacking of his popular deputy, Jacob Zuma, who was investigated by the Scorpions and charged with corruption in a case that has split the ruling African National Congress (ANC). As a former operative in the ANC's exiled armed wing during the fight against apartheid, Masetlha would have worked under Zuma, who was head of the ANC's military intelligence unit. Many NIA officials were in the same unit.

Critics say Mbeki has turned the Scorpions into an instrument for political vendetta. Zuma says the graft charges following the conviction of his former financial adviser were trumped up to prevent him succeeding Mbeki in 2009.

Labels: Department of Justice, Kroll

Labels: Department of Justice

High Court Upholds SEC Ability to Freeze Pay

October 13, 2005
WebCPA.com


The Supreme Court voted to let stand a ruling against two former executives of Gemstar-TV Guide International, supporting the ability of the Securities and Exchange Commission to freeze payments to executives under federal accounting fraud law.

Under the Sarbanes-Oxley Act of 2002, the SEC was granted the power to block payments to executives. Following an investigation of a $250 million accounting scandal at Gemstar, the SEC froze $37 million in termination payments to former executives Henry Yuen and Elsie Leung, who promptly challenged the law. A trial judge in the U.S. Court of Appeals for the Ninth Circuit in San Francisco ruled that the freeze was allowed, and later was overruled by a Ninth Circuit panel. The appeals court then reheard the case and overturned its original ruling.

Gemstar's businesses include the TV Guide magazine and electronics licensing. Both former chief executive Yuen and former chief financial officer Leung were forced out in late 2002 after the company was discovered to have inflated advertising sales since 1999. Yuen would have received nearly $30 million in severance. Both said that their termination fees and unpaid salaries did not meet the "extraordinary payments" requirement the law set for holding up money to corporate officers.

The SEC is moving forward to prosecute Yuen and Leung on civil fraud charges in December. Yuen has reached a plea agreement with the Justice Department, but it is under review by a federal judge. Gemstar filed objections to that agreement last week.

Labels: Department of Justice

CIA runs Scorpions

October 10, 2005
News24 South Africa

Johannesburg - The National Intelligence Agency (NIA) has accused some members of the Directorate of Special Operations, also known as the Scorpions, of spying for foreign governments. It claims that the elite investigative body is breaking the law by running its own intelligence unit.

The NIA is unhappy about the Scorpions' alleged working relationship with US-owned Kroll, a risk-management company with perceived strong ties to former Central Intelligence Agency (CIA) operatives. There are also concerns about the Scorpions' apparent close and regular liaisons with the American embassy in Tshwane.

The Scorpions and the National Prosecuting Authority (NPA) are also said to "have become the platform from where the old (apartheid) guard seeks to consolidate and direct criminal justice processes in South Africa".

Senior investigators at the elite unit, many of whom handle sensitive probes into matters of national security, are said to have "resisted" being vetted by the NIA which is the usual practice with all other state agencies that deal with security issues and state information.

These allegations are contained in confidential correspondence submitted to Judge Sisi Khampepe before this week's public hearings into whether the Scorpions should remain in the NPA or be incorporated into the South African Police Service (SAPS).

Earlier this week, Khampepe rejected police attempts to hold certain parts of the hearings in camera. This forced some of the parties to revise their submissions to prevent sensitive information from making its way to the public.

But City Press can reveal that, even before this week's hearings in Tshwane, a war of words had been raging with the NIA and the police on one side and the Scorpions on the other.

At the heart of the conflict between the three state agencies is the political battle over the future of the Scorpions - a powerful investigative unit whose activities have brought down - political leaders such as former deputy president Jacob Zuma, ex-ANC MP Tony Yengeni and struggle icon Winnie Madikizela-Mandela.

The NIA and the police want the Scorpions to relocate to the SAPS. They want the unit's mandate changed to prevent its continued overlap with other security structures.

Their stance received a major boost this week when Justice Minister Brigitte Mabandla, whose ministry is indirectly in charge of the Scorpions, told the commission that the relations between the police and the Scorpions had "irretrievably broken down" and were unlikely to improve if the status quo remained.

In a confidential replying affidavit written by deputy national director of public prosecutions, Leornard McCarthy - who also heads the Scorpions - it emerged that the NIA believed the Scorpions "are vulnerable to exploitation by foreign entities" and that some of its members have "regular meetings with representatives" of the US embassy.

The Scorpions are accused of breaching "counter-espionage protocol" and failing to heed warnings from the NIA.

Responding to the NIA submission, McCarthy said the document contained "unsubstantiated hearsay and innuendo" and that it "bears the hallmark of sinister motives".

"Furthermore, the matters contained in the NIA document were never raised at the inter-ministerial committee or the co-ordinating committee. . .Because there was no substance or truth in the said allegations, the matters were never raised in the said fora," McCarthy said.

Key to the NIA's misgivings about the Scorpions is the claim that the unit runs its own intelligence body that does not account to the National Intelligence Co-ordinating Committee (Nicoc) which is in charge of the country's intelligence services.

But McCarthy denied this.

He said the DSO only "gathers, keeps and analyses information relating to matters falling within its mandate". He said the former national director of public prosecutions, Bulelani Ngcuka, once requested that the Scorpions be granted status at Nicoc but was told "it will not be possible".

Ngcuka left the NPA last year amid claims by former intelligence operative Mo Shaik that he had spied on his comrades during apartheid. These allegations were proved false at the Hefer Commission last year. "It is only recently when the current national director raised the issue... that I, as head of DSO, was invited to sit on the Nicoc Principals' Forum," McCarthy said.

Other NIA claims against the Scorpions and the NPA are that:

• The DSO employs foreign nationals like a Ms De Gabrielle, an American who, says McCarthy, was assigned by the US department of justice and its local counterpart to advise the NPA on financial and commercial prosecutions;

• The DSO has formal relations with foreign intelligence structures and the NPA concluded a memorandum of understanding with the Chinese intelligence services;

• Certain members of the NPA have "undeclared links with foreign intelligence services";

• Foreign intelligence services have infiltrated DSO using private-sector companies that the Scorpions sometimes work with during investigations;

• A senior DSO official provided a German agent with copies of DSO documentation - the official has links with the French Intelligence Service ;

• In carrying out its operations, the DSO sometimes uses private security companies run by foreign intelligence services or with links to apartheid-era spooks; and

• Senior DSO officials "compromise sensitive information" by leaking it to the media.

McCarthy denies the allegations.

Labels: Department of Justice, Kroll

United Kingdom: A Month in Money Laundering - August 2005

September 19, 2005
By John Hammersley
Deloitte & Touche, LLP

Welcome to the August 2005 edition of A Month in Money Laundering. This edition includes news on an agreement by Latin American banks to share information related to money laundering crimes (2 August), changes to Indian Central Bank KYC rules (3 August), and grants from the Asian Development Bank to Thailand and the Philippines to develop anti-money laundering measures (15 and 24 August). These issues and others are summarised in this edition of A Month in Money Laundering.

Regards
Michael Corrigan
Partner, Governance and Regulation
Deloitte & Touche LLP

2 August

Latin American banks agree on joint initiative on money laundering. 623 banks based in Latin America have resolved to share information related to financial crime and money laundering. The agreement is part of the US Government's "Buddy Banks" initiative, designed to prevent money laundering in the region. The banks will discuss best practice models and techniques for detection of money laundering activities. The plan is being supported by the US Treasury Department. It has been estimated that some US$1bn is laundered in Latin America each year.

3 August

Australia and Indonesia open joint law enforcement centre. The final stage of a new regional centre for joint law enforcement efforts between Indonesia and Australia was opened in Indonesia by Australian Justice Minister, Chris Ellison, today. The centre includes classrooms and conference facilities for training anti-money laundering officers. The Australian Government is contributing more than AUS$38 million over five years to the development of the facility.

Indian Central Bank relaxes money laundering identification rules. The Reserve Bank of India (RBI) has responded to industry pressure and relaxed its 'know your customer' (KYC) rules on deposit accounts for amounts between US$1,100 and US$45,000. Previously rules required banks to establish customers’ identities by relying on documents such as a passport or driving licence but in many instances this was proving difficult. Several banks complained to the RBI of the enormous burden of identifying customers who are often illiterate, poor and undertaking relatively small transactions. In some circumstances, new customers may now be identified by way of referral from an existing customer.

4 August

Spanish anti-money laundering office reports increase in activity. Spanish anti-money laundering agencies have reported a rise in money laundering activity during 2004. Some 334,452 cases of suspected money laundering were reported to Sepblac, the Spanish antimoney laundering office in 2004, an increase of 14 per cent on 2003. The office also announced that fines for breaches of money laundering regulations totalled just under some €28m for the year.

IMF hosts training workshop for African countries. The International Monetary Fund (IMF) has conducted a five-day workshop on Combating the Financing of Terrorism (CFT) in Tunisia. The workshop was held in collaboration with the Joint African Institute and was attended by representatives from Djibouti, Egypt, Eritrea, Ethiopia, Libya, Sudan and Tunisia. The IMF's Legal Department, the World Bank, and the United Nations Office against Drugs and Crime provided training to 30 delegates on developing a legislative framework on money laundering.

5 August

Nauru aiming to be removed from FATF list of non-cooperative countries. Money laundering experts in Nauru have said the country should be removed from the Financial Action Task Force's (FATF) list of non-cooperative countries and territories when the group meets in October. Dr Kieren Keke, Chairman of Nauru's anti-money laundering unit, cited the Government’s significant progress towards developing anti-money laundering reforms. The Asia Pacific Review Group of the FATF have approved a visit to Nauru within the next month. Dr Keke added, "I can say with confidence that Nauru does not pose any money laundering risk to the international community and this is a statement that senior officials of the APG have made directly to me".

6 August

Vietnam to issue guidance for banks on money laundering decree. The State Bank of Vietnam (SBV) is to issue guidance on the implementation of the new anti-money laundering decree in response to concerns about the complexity of the rules and the security of confidential information. The decree requires credit organisations to report to the Anti-Money Laundering Centre any cash transaction over US$13,300 and any savings deposit of more than US$33,000. The guidance stresses that no third party individuals or organisations can access information contained in reports without the permission of the Government.

8 August

Ukrainian ministers resolve to toughen fight on money laundering. The Cabinet of Ministers’ resolution requires ministries to submit their response to proposals on implementation of an anti-money laundering framework to the State Department for Financial Monitoring within a month. The proposal provides for analysis of the current anti-money laundering framework in the country and guidance on the development of the system to international standards. The proposals follow the Ukraine’s removal from the FATF’s list of noncooperative countries and territories and it is hoped that the implementation of stricter rules will help the international perception of Ukraine’s financial markets.

9 August

US Treasury Secretary praises Latvia’s progress with preventing money laundering. John Snow, US Treasury Secretary, has praised the Latvian Government’s measures against money laundering. Mr Snow praised the involvement of the Prime Minister as head of Latvia’s anti-money laundering task force and pledged US help in providing training for Latvian officials and financial experts. He also raised the possibility of increased information exchange between the countries. The Latvian Prime Minister, Aigars Kalvitis, has openly voiced his aim for Latvia’s inclusion in the Financial Action Task Force (FATF).

10 August

European Commission (EC) assists Philippines’ campaign against laundered money. The Philippines Government has agreed a deal with the EC aimed at fortifying the Philippines’ Anti-Money Laundering Council (AMLC) campaign against laundered money. The Government has said that the project will help prevent and minimise money laundering by strengthening the investigatory powers of the Central Bank and the AMLC. The staff of supervising authorities, financial institutions, and judicial and law enforcement agencies will benefit from training in anti-money laundering rules and procedures, and basic financial investigation methods.

11 August

Africa holds sub-regional workshop on anti-money laundering. This workshop, funded by the Commonwealth Secretariat aims to develop cooperation between the public and private sectors on money laundering issues. This five day workshop will cover various topics including the responsibilities of governments, financial institutions, law enforcement agencies and the requirements of international standards as well as addressing current issues.

12 August

Financial Action Task Force require New Zealand to adopt firmer controls against money laundering. Following a recent evaluation of the nation’s financial sector by the Financial Action Task Force (FATF), New Zealand Foreign Minister, Phil Goff, admitted that "some re-regulation will be required." While the FATF found no specific evidence that New Zealand was being used to launder money or finance terrorism, the report called for more stringent anti-money laundering regulations to ensure that problems did not arise in the future.

15 August

Asian Development Bank (ADB) provides grant to Thailand to help fight money laundering. The grant of US$300,000 will help Thailand formulate a 3 year action plan to comply with requirements of the FATF recommendations. Thailand has taken a number of steps to combat money laundering over recent years but still has gaps that it needs to fill. "Thailand can benefit from more developed countries' experiences while sharing its own experiences in establishing legal and institutional frameworks with its Mekong neighbours." said ADB official, Shigeko Hattori.

16 August

Singapore passes Bill with tougher measures for remittance firms and money changers. A new Bill passed in Parliament will require remittance licence holders to carry out business only if they are incorporated as a company with a minimum paid-up capital of US$100,000. "The higher entry requirement will ensure these companies have a minimum level of financial resources to implement anti-money laundering measures and make weaker players exit the market", said Mr Tharman Shanmugaratnam, Deputy Chairman of the Monetary Authority of Singapore (MAS).

17 August

Indonesia and Singapore work on draft extradition agreement. Delegates have held a two day technical meeting to discuss a draft extradition agreement. During the meeting, delegates exchanged versions of the draft document. Indonesian Foreign Minister, Hassan Wirayudha, said at least 20 crimes, including, money laundering and terrorism financing, will be included in the final draft. Indonesia already has extradition agreements with Australia, Thailand, Philippines, Malaysia and the Hong Kong Special Administrative Region.

Argentina looking to amend money laundering bill with help from United States. Argentinean Economy Minister, Roberto Lavagna, Senior US Treasury Official, Daniel Glaser, and six other US officials, met in Argentina to discuss revisions to a bill dealing with bank secrecy rules applying to financial institutions, the national tax and Argentina's Financial Information Unit. The amendments need to be passed by both of Argentina’s houses of Congress and may still meet opposition.

19 August

Macedonia to set up Government advisory agency on money laundering. The Macedonian Government has announced plans for a new advisory body for combating money laundering and terrorism financing and appointed Vladimir Naumovski, current Director of the Directorate for Money Laundering Prevention, as the new body’s Chairman. Ministers earlier adopted a draft agreement between the US and Macedonian Governments on technological cooperation on money laundering prevention.

21 August

Peru to restructure banking supervision on money laundering. Peru's banking and insurance regulator announced today that it will restructure its anti-money laundering financial intelligence unit (FIU) to strengthen supervision of the country's banks, insurers and pension fund managers in the near future. The proposed changes will allow it to monitor more transactions. Between 1998 and July 2005, the regulator investigated about 800 reports of possible money laundering.

23 August

Japan proposes to extend the scope of money laundering controls. The Japanese Government is to tighten its control over money laundering by requiring non-financial firms such as jewellers to identify their customers and report suspicious transactions. Although the proposals still need to be discussed by Ministers, the Government is hoping to extend the scope of businesses placed under the planned controls to including jewellers, precious metal dealers, real estate firms and leasing companies.

US concerned about money laundering in Venezuela. The US Government has expressed concern that Venezuela isn't doing enough to comply with international recommendations on money laundering control. "It's important for Venezuela to meet its obligations in the international community and be part of the solution to money laundering and terrorism financing in this region," said US Treasury Official, Daniel Glaser. Glaser, US representative to the Financial Action Task Force, was in Brazil to meet with authorities regarding the region's efforts to combat money laundering.

24 August

Asian Development Bank gives anti-money laundering grant to Philippines. The Asian Development Bank (ADB) is helping the Philippines combat money laundering with a technical assistance grant of US$400,000. The ADB will undertake an assessment of key ‘vulnerabilities’ to money laundering. The grant, from the ADB's Cooperation Fund for Regional Trade and Financial Security Initiative, is supported by the Governments of Australia, Japan, and the United States.

26 August

New Zealand to tighten its money laundering laws. The New Zealand Government is proposing tighter money laundering laws following advice from the Financial Action Task Force earlier this month. The recommendations include a comprehensive monitoring framework for institutions, a registration requirement for those dealing with money transfers or currency exchange services and evaluations for "fit and proper persons". Further changes would involve statutory requirements for firms to comply with customer due diligence, and a requirement to verify and retain the identities of senders of wire transfers.

28 August

US to aid Bangladesh in combating money laundering. Senior officials and bankers in Bangladesh are to receive training from the US FBI in relation to investigating money laundering activities. The training is a result of the Government’s initiative to ratify a new law against money laundering. An enforcement and prosecution agency is also to be established to implement the proposed act

Looking Forward

Hong Kong

Casinos will be required to track the identity of gamblers making cash transactions of more than HK$500,000 (US$65,000), according to a draft bill to be presented to the legislature after Hong Kong’s elections next month.

Egypt

The Egyptian city of Sharm al-Sheikh will host an economic forum on money laundering and terror finance, said Union of Arab Banks (UAB) Secretary General, Fuad Shakir. The two-day event will consider means to combat money laundering and trace terrorist funds without jeopardising the secrecy of bank accounts and transactions.

Financial Action Task Force

The Middle Eastern and North African Financial Action Task Force (MENAFATF) will hold its second Plenary Meeting in Beirut, Lebanon on 26 September 2005.

Labels: Department of Justice, General Re, money laundering

Crackdown on foreign bribery grows in US

September 21, 2005
By Kevin Drawbaugh
Reuters

Foreign bribery cases are gaining prominence on the U.S. regulatory docket due partly to a surge in corporate acquisitions and the dirty dealings they expose, lawyers and officials said on Wednesday. Amid growing concern with bribery overseas and a U.S. crackdown, corporate acquirers are voluntarily bringing more potential violations of America's Foreign Corrupt Practices Act, or FCPA, to the notice of authorities.

"We certainly have seen an increase in the number of companies coming forward to discuss issues with respect to the FCPA," said Paul Berger, associate director of the U.S. Securities and Exchange Commission's enforcement division. Berger said at the SEC "there are a fair number of investigations under way" dealing with FCPA. Any increase in FCPA cases means progress in a global war on official corruption. But there is still a long way to go in leveling the playing field for companies that prohibit using bribes to gain competitive advantage, lawyers said.

"It's often said that there are countries where bribery is a way of life, and that's still the case," said Laurence Urgenson, partner at the law firm of Kirkland & Ellis. Official corruption is a major problem for reconstruction efforts in places such as war-torn Iraq and post-tsunami Indonesia. Money and resources needed to help people in distressed areas are often wasted on official bribes.

Transparency International, a British anti-bribery group, recently said corruption was rampant in 60 countries, noting the worst are often the poorest, such as Bangladesh and Haiti. The United States adopted the FCPA in 1977 after hundreds of companies admitted paying bribes in the mid-1970s. The law bans U.S. citizens from bribing foreign officials for the purpose of keeping or obtaining business opportunities.

Only about 100 FCPA cases have been brought, but the tally is rising fast, due partly to recent international agreements to combat bribery and partly to renewed M&A activity, lawyers said. If the current M&A spurt continues, deal volumes in 2005 will come near levels not seen since the 1990s boom years, Wall Street investment bank J.P. Morgan Chase said last week.

Corporate buyers are increasingly keen to wash acquisitions clean before closing on deals to avoid future liability, lawyers said. As a result, some are bringing FCPA problems to the SEC and the Justice Department. Both have new powers and a new vigor for tackling white-collar crooks.

One recent high-profile case was Titan Corp., a U.S. defense communications and intelligence group that pleaded guilty earlier this year to making illegal payments to government officials in the West African nation of Benin. The payments came to light when defense contractor Lockheed Martin Corp. was reviewing Titan's books as part of a planned acquisition of the company. The deal later fell apart. Titan was acquired this summer by L-3 Communications, but not before agreeing to a record-setting $28.5 million settlement with the SEC and Justice Department.

Another recent case arising from an M&A context involved bomb detection gear maker InVision Technologies Inc.. It agreed to fines in a case in which the Justice Department decided not to prosecute under FCPA, clearing the way for General Electric Co. to acquire InVision.

Automaker DaimlerChrysler AG has said it is being investigated by the SEC over possible FCPA issues, as have several energy companies linked to scandals at Riggs Banks and in the United Nations' Oil for Food program in Iraq.

Labels: bribery, DaimlerChrysler, Department of Justice

Former KPMG officials indicted: Eight accused in questionable sales of tax shelters

By Jonanthan D. Glater
New York Times

Eight former partners of KPMG, the giant accounting firm under investigation for its role in creating and selling questionable tax shelters, were named by federal prosecutors in an indictment unsealed Monday in federal court in Manhattan. The indictment is the long-anticipated next step in prosecutors' broadening investigation into shelters that from 1996 through 2002 helped wealthy investors evade billions of dollars in taxes. It is also strong evidence that the government is prepared to pursue the accountants, financial advisers, lawyers and bankers who had a hand in the transactions.

KPMG was mindful of how criminal charges wrecked competitor Arthur Andersen in an Enron-related accounting scandal. Some 28,000 workers had to find other jobs after Andersen was convicted of destroying Enron-related documents, which forced it to surrender its accounting license and stop conducting public audits. Avoiding the loss of jobs that followed Andersen's conviction was a factor in the government's decision not to prosecute KPMG, authorities said.

"The conviction of an organization can affect ordinary workers," Attorney General Alberto Gonzales said. "Justice must serve offenders and victims as well as the economy and the general public." The Supreme Court reversed Arthur Andersen's conviction earlier this year. Monday's indictment refers to unnamed foreign banks and other entities, which suggests that the government may file other criminal charges at some later date. While the banks are not identified, a 2003 report by a Senate subcommittee said that Deutsche Bank, UBS of Switzerland and HVB of Germany among others had roles in the questionable KPMG shelters. And earlier this month, a former executive in the New York office of HVB pleaded guilty to conspiracy to commit tax fraud and is presumably assisting prosecutors in their investigation.

The indictment, which names an outside lawyer along with the former partners, accuses the nine of conspiring to defraud the government by concocting "tax-shelter transactions and false and fraudulent factual scenarios to support them"; by preparing "false and fraudulent documents to deceive" the Internal Revenue Service; by preparing "false and fraudulent" tax returns that included the false tax losses; and taking steps to conceal the shelters from the IRS.

The former KPMG partners named in the indictment are: Jeffrey Stein, John Lanning, Richard Smith, Jeffrey Eischeid, Philip Wiesner, John Larson, Robert Pfaff and Mark Watson. The lawyer is Raymond Ruble. The arraignment of the nine men is scheduled for Sept. 6. Nearly all the lawyers representing the defendants and who could be reached for comment Monday said their clients intended to fight the charges vigorously.

The indictment was unsealed as a federal judge approved a $456 million settlement between KPMG and the Justice Department that allows the firm to avoid a criminal indictment, which would have been a near-certain death knell for the firm. As part of a deferred prosecution agreement that remains in effect until Dec. 31, 2006, the firm admitted wrongdoing, accepted an outside monitor, and pledged to limit its tax practice.

"The message we want to send is that if you engage in fraud, if you participate in providing false statements, you're going to be prosecuted," Gonzales said. "We want to be very, very clear: There is no company that is too big or too important an industry that will escape prosecution if they in fact engage in wrongdoing."

The agreement allows KPMG to begin to put the criminal investigation, which has been under way for more than a year and a half, behind the firm, said Timothy Flynn, KPMG's chairman and chief executive. "We regret the past tax practices that were the subject of the investigation," Flynn said in a prepared statement. But for individual former partners, the ordeal begins now in earnest — and under the terms of the agreement with prosecutors, the firm is allied against them. What strategy the partners may pursue — and to what extent they will coordinate their joint defense — is not clear.

According to the indictment, one of the defendants, Eischeid, gave "false, misleading and evasive" testimony to the IRS in 2002 about certain tax shelters. The indictment cited an e-mail message from one KPMG partner who wrote that the firm's general counsel and outside lawyer "determined that the best strategy was 'the less said the better.' " As a result, the e-mail continued, "the record will reflect repeated 'I don't knows,' 'I don't recalls,' and 'I was out of the loops' — the rope-a-dope/Enron defense."

As part of its agreement with the government, KPMG issued a strongly worded acknowledgment of wrongdoing, which can be used by prosecutors in their criminal case against the individual partners, as well as against the firm in the event it violates the terms of the deferred prosecution agreement. Lawyers for the former partners criticized the firm's statement as meaningless. "The government held a gun to KPMG's head and said, 'Say what we want or we will put you out of business,' " said Robert Hotz Jr., who represents Lanning.

Labels: Department of Justice, Enron, KPMG, New York AG

U.S. Investigating Long Island School Districts

By Lisa W. Foderaro

August 31, 2005

In the wake of a string of school-spending scandals on Long Island, the federal government this week blanketed districts in both Nassau and Suffolk Counties with letters requesting financial records from the past five years.

As districts were preparing for the start of a new school year, the Office of Inspector General at the United States Department of Education asked superintendents in a letter dated Aug. 23 for information relating to contracts exceeding $10,000 and tax documents for all outside workers and consultants. The requests were first reported by Newsday yesterday.

A spokeswoman for the inspector general's office would not comment on the nature or scope of the investigation.

But one school official, Henry L. Grishman, who is superintendent of the Jericho schools and also chairman of a statewide committee on school accounting practices, said he believed that "most every district in Nassau County and probably in Suffolk had received the letter."

Since the eruption of a major financial scandal last year in Roslyn, school districts have been under close scrutiny from local prosecutors as well as the New York State comptroller, Alan G. Hevesi, whose office has completed 13 of 23 school audits on Long Island.

Criminal charges have been brought against school officials and employees in several districts.

But the entry of the federal government seemed to catch school officials off guard.

The letter, which included a disk containing a spreadsheet for districts to complete, said that the Education Department's Office of Inspector General had joined with the United States Department of Justice and "other federal agencies" to review school expenditures on Long Island.

"I can't believe this," said J. Philip Perna, the superintendent of the Montauk Union Free School District, as he opened and read the letter from the Department of Education while on the phone with a reporter.

"It's going to be a lot of work for everybody," he added. "We'll do what we have to do. We'll certainly comply with the request, if nothing else to prove that there are some honest people in the business, which is most of us."

Some law enforcement officials questioned the federal move. The Suffolk County district attorney, Thomas J. Spota, said neither he nor anyone in his office had been notified of the investigation. He said he was concerned that the new inquiry could be covering old ground.

"We have a very extensive, aggressive and growing probe of school districts on Long Island," he said. "We welcome their involvement, but it would really be a shame if they duplicated all of the hard work done by the our staff, the New York State comptroller's staff and the Suffolk County comptroller's staff. There's a lot to be done in this area, and the resources need to be used efficiently."

A spokesman for Mr. Hevesi declined to comment on the federal inquiry. Last week, the comptroller's office issued a blistering report on its audit of the Central Islip school district, saying it paid for "excessive, questionable and unsupported travel and other expenses for school board members."

Auditors found that the district had no policy for credit card use. The superintendent and board members had not attached any receipts to credit card claims totaling $82,873, according to a news release from the comptroller's office.

An additional $9,500 in credit card charges could not be traced to any legitimate business purposes. One board member charged $1,726 for trips to Rochester and Albany; the charges included $47 spent at a performing arts center. No explanation was given for the trips, and auditors found no indication that conferences were being held in the cities at the time the trips were made, the audit said.

In its request for records, the Departments of Education asked districts to identify all vendors, contractors, consultants or other business concerns receiving any single payment of $10,000 or more between January 2000 and this July. It also asked for all 1099 tax statements, federal tax forms issued to vendors receiving payment of $600 or more for services, for the same period.

Labels: Department of Justice, New York AG

KPMG Will Pay $456 Mln Fine to Avoid Prosecution, People Say

by Ryan J. Donmoyer
Bloomberg
August 27, 2005

KPMG LLP will pay $456 million in fines under an agreement with federal authorities to avoid prosecution by the U.S. government for selling abusive tax shelters, people familiar with the matter said.

The settlement, under negotiation since June, will be unveiled in Washington on Aug. 29, the people said. The announcement may also include indictments of as many as a dozen former partners of the accounting firm, they said.

The agreement is the government's biggest victory in its fight against tax shelters that proliferated in the 1990s. Avoiding criminal prosecution may enable KPMG International's U.S. arm avoid an exodus of clients, which led to the closing of Arthur Andersen LLP after its indictment for obstruction in 2002. The deal marks a surrender for KPMG, which fought the government after rivals Ernst & Young LLP and PricewaterhouseCoopers LLP paid fines of as much as $20 million.

``KPMG elected to fight to the bitter end, and then they discovered what the bitter end was and decided, `Hey, let's not do that,''' said former IRS Commissioner Donald C. Alexander, now a partner with Akin, Gump, Strauss, Hauer & Feld, a law firm in Washington.

Under the terms of the deferred-prosecution agreement, KPMG will pay the $456 million fine in three installments, the people familiar with the matter said. The first installment, due next week, will be about half the amount. The firm will pay $100 million in June 2006 and another $100 million in December 2006.

Retraining Advisers

Attorney General Alberto Gonzales, Internal Revenue Service Commissioner Mark Everson and U.S. Attorney David Kelley will announce the settlement, the people said. U.S. District Judge Loretta A. Preska, who must approve the agreement, will hold a hearing earlier in New York.

KPMG also agreed to not take on any new tax clients for 30 days while it retrains its advisers on new standards, the people said. Under the agreement, all tax opinions given to clients must be likely to survive an IRS audit, the people said. The previous standard required that the advice be ``more likely than not'' to win IRS approval.

The New York Times said earlier today that the amount of the fine, previously reported by Bloomberg News as more than $450 million, would be $456 million.

Former Securities and Exchange Commission Chairman Richard Breeden, 55, will monitor the firm's compliance with the agreement, the people said. If the firm meets the terms of the deal, the deferred criminal charges against it will be dismissed in December 2006, the people said.

Independent Monitor

Breeden, who was appointed to the SEC by President George H.W. Bush in 1989 and served until 1993, didn't return calls for comment. KPMG spokesman George Ledwith declined to comment. Herb Hadad, a spokesman for the U.S. Attorney's Office in Manhattan, also declined to comment.

Arthur Andersen lost most of its partners and clients after being accused by the Justice Department of obstructing an investigation into its audit client, Enron Corp., the now bankrupt energy trader. Andersen's conviction, overturned by the U.S. Supreme Court in May, came too late to resurrect it and reduced the number of large accounting firms to four.

Deferred prosecutions have been on the rise since the Enron bankruptcy in December 2001 kicked off a wave of investigations into corporate fraud. Computer Associates International Inc., Bristol-Myers Squibb Co., Time Warner Inc. and American International Group Inc. made similar arrangements to avoid criminal charges in the last two years.

KPMG has about 1,600 partners and reviews the books of more than 1,000 companies including General Electric Co. and Pfizer Inc.

`Full Responsibility'

In a June statement, KPMG said that the firm has stopped selling abusive tax shelters and that it took ``full responsibility for the unlawful conduct by former KPMG partners'' from 1996-2002.

The KPMG shelters were sold to wealthy individuals such as former Treasury Secretary William Simon Sr., the late stock car racing champion Dale Earnhardt and Thomas Frist III, the brother of Senate Majority Leader Bill Frist. None of the individuals has been accused of wrongdoing.

The U.S. Senate's Governmental Affairs Permanent Subcommittee on Investigations concluded in November 2003 that accounting firms sold illegal shelters because the penalties for doing so were minuscule compared with the fees they earned.

Labels: Department of Justice, Enron, KPMG, New York AG

U.S. Department of Justice Corporate Fraud Task Force Fact Sheet

8/29/2005 2:29:00 PM

To: National Desk

Contact: U.S. Department of Justice, 202-514-2007 or TDD 202-514-1888

WASHINGTON, Aug. 29 /U.S. Newswire/ -- The following is a fact sheet released today by the U.S. Department of Justice:

FACT SHEET: CORPORATE FRAUD TASK FORCE

Since its creation by Executive Order in July 2002, the Corporate Fraud Task Force (CFTF) has spearheaded the Administration's effort to prosecute corporate malfeasance, protect the jobs of hard-working Americans, and restore confidence to the marketplace. Through the coordinated efforts of several federal agencies, the CFTF is sending a clear message that criminal activities in the corporate world will be swiftly and decisively prosecuted. By acting to deter fraud, the Task Force is also helping to restore shareholder and employee trust, and demonstrating to the American people that the vast majority of corporate leaders are still honest and hardworking. With today's deferred prosecution agreement with KPMG LLP, and the indictment of nine former employees and individuals associated with KPMG-as well as one former partner of a prominent law firm-the Justice Department furthers its commitment to the American worker, investor, and honest taxpayers.

Since its inception, the Task Force has contributed to the following:

-- Securing over 700 corporate fraud convictions;

-- Convicting over 100 corporate CEOs and presidents with some type of corporate fraud crime in connection with close to 600 filed cases;

-- Convicting more than 80 vice-presidents;

-- Convicting more than 30 CFOs; and

-- Charging more than 1,300 defendants, including the indictment announced today.

-- From June 1, 2002 through June 30, 2005, more than $266 million has been collected in restitution, fines, and forfeitures from corporate fraud convictions.

-- Significant cases prosecuted criminally include, among others: Worldcom Chief Executive Officer Bernard Ebbers, convicted on fraud charges in the Southern District of New York; a deferred prosecution agreement with America Online in the Eastern District of Virginia; Adelphia Chief Executive Officer John Rigas, convicted on charges of securities fraud, bank fraud, and conspiracy in the Southern District of New York; a deferred prosecution agreement with Computer Associates, prosecuted in the Eastern District of New York.

-- The Justice Department's Enron Task Force has obtained charges against 33 Enron defendants, including 21 former Enron executives, obtained the convictions of 11 Enron defendants, including its former CFO and treasurer, and seized over $162 million for the benefit of victims of the frauds at Enron.

-- Federal prosecutors working with the CFTF have entered into a variety of agreements with corporations regarding allegations of fraudulent criminal activity, including guilty plea agreements, deferred prosecution agreements, and non-prosecution agreements. These agreements, such as the deferred prosecution agreement with KPMG today, ensure the company admits its conduct, agrees to real reforms-including full cooperation in ongoing investigations-and the establishment of internal controls to prevent criminal conduct from re-occurring. In cases where the company fails to agree to these conditions, or fails to abide by the terms of such an agreement, the Department of Justice will not hesitate to prosecute the company.

The work of the CFTF is ongoing. The Task Force will continue to successfully:

-- Restore confidence to the marketplace;

-- Provide fair and accurate information to the investing public;

-- Reward shareholder and employee trust; and

-- Protect jobs and savings of hard-working Americans.

Labels: Department of Justice, Enron, KPMG

“The vast majority of state and federal prosecutors don’t have the resources, staff, energy, perspective, know-how, legal authority, and – perhaps most importantly – political drive needed to bring major corporate crime prosecutions,” said Russell Mokhiber, editor of the Corporate Crime Reporter. “The overwhelming number of prosecutors in the country look at the obstacles and say – I’ll pass. But these ten prosecutors have what it takes to tackle the problem.”

“The prosecutors who enter this field need an added element – a finely tuned sense of political and prosecutorial discretion – knowing when to go and when to stop, so as not to offend the powers that be,” Mokhiber said. “If things go right, prosecutors use the publicity they gain from these prosecutions to fuel their ongoing quest for higher office. If things go wrong, as they can easily and often do, these prosecutors will be publically humiliated in the courtroom by high-priced white collar crime defense attorneys and in the court of public opinion by the business press and political rivals.”

The top prosecutors (in alphabetical order) are:

Christopher Christie, U.S. Attorney, New Jersey
James Comey, Deputy Attorney General, Justice Department, Washington, D.C.
Patrick Fitzgerald, U.S. Attorney, Chicago
David Kelley, U.S. Attorney, Manhattan
Alice Martin, U.S. Attorney, Birmingham, Alabama

Patrick Meehan, U.S. Attorney, Philadelphia, Pennsylvania
Robert Morgenthau, District Attorney, Manhattan
Eliot Spitzer, Attorney General, New York
Michael Sullivan, U.S. Attorney, Boston, Massachusetts
Debra Yang, U.S. Attorney, Los Angeles, California.

The prosecutors were chosen for their consistent emphasis on high profile corporate and white collar crime cases.

Labels: Department of Justice, Eliot Spitzer, New York AG, Quest

KPMG in talks

By Andrew Parker in New York
The Financial Times
August 22/23 2005

KPMG is in talks with a leading law firm that could result in compensation for former US clients who were sold two of its flagship tax avoidance schemes. But the accounting firm has also signalled it will aggressively defend itself, and highlight the conduct of others, if clients insist on going to court to seek damages after the US tax authorities objected to the schemes.

Since July last year, KPMG has held talks with Milberg Weiss Bershad & Schulman, a law firm that specialises in class action lawsuits, about a “global settlement” of claims arising from sales of avoidance schemes known as Bond Linked Issue Premium Structure (Blips) and Offshore Portfolio Investment Strategy (Opis).

The tax avoidance industry was highly lucrative until the Bush administration launched a crackdown in 2001. A report by staff on the Senate permanent subcommittee on investigations, published in 2003, found that KPMG generated fees of $124m from four avoidance schemes sold to hundreds of people between 1996 and 2001, including Blips and Opis.

Blips and Opis were classified as “potentially abusive tax shelters” by the Internal Revenue Service in 2000 and 2001, after which KPMG stopped marketing them. The IRS probed people's use of the avoidance schemes, and some face demands for tax payments worth millions of dollars, as well as fines. Meanwhile, David Kelley, the US attorney for the southern district of New York, has been leading a criminal investigation into KPMG's tax work.

The talks between KPMG and Milberg Weiss also involve Sidley Austin Brown & Wood, a law firm. Brown & Wood, a predecessor law firm to Sidley, earned fees of $23m by providing letters to KPMG clients that said its avoidance schemes could withstand scrutiny by the IRS, according to an updated version of the Senate report published in February.

Milberg Weiss alleged in a lawsuit filed in June that KPMG and Sidley “fraudulently misrepresented” Blips and Opis as legitimate investment strategies because they knew the avoidance schemes were “abusive tax shelters that would not pass IRS scrutiny”. Melvyn Weiss, senior partner at Milberg Weiss, said most of the terms of a settlement with KPMG and Sidley were in place although no agreement had been signed. Milberg Weiss is seeking more than $200m from KPMG and Sidley. The intensive nature of the settlement talks has been underlined by the use of two retired judges to act as mediators.

Efforts by former clients of KPMG who bought its tax avoidance products to secure compensation may have been assisted by a statement made by the firm on June 16. KPMG's US business, after outlining the justice department's investigation of its tax services offered between 1996 and 2002, said: “KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred.”

However, KPMG, as well as holding talks with Milberg Weiss about a “global settlement”, has signalled it will strongly defend itself if clients insist on going to court. For example, KPMG last month raised the stakes in a lawsuit brought by former clients in Texas who used the Blips avoidance product.

The 2003 Senate report said Blips was designed to generate artificial losses to offset against other income on tax returns. KPMG alleged in court documents that the Texas clients, Cal and Cary McNair, claimed losses resulting from Blips in their 1999 tax returns, which were filed after the IRS had objected to the avoidance product. It also said that a KPMG partner, after the IRS ruling on Blips, had advised the clients to consult lawyers about whether to include losses resulting from the product on their 1999 returns.

To limit the potential impact of the lawsuit, KPMG said if it is found liable to pay damages to the Texas clients then law firms that allegedly advised them on Blips should also contribute. The firms, Andrews Kurth, and Holland, Johns, Schwartz & Penny, were not available for comment.

Paul Dobrowski, a partner at Dobrowski, the law firm representing the McNair brothers in their lawsuit against KPMG, said his clients had acted appropriately. “KPMG assured my clients that the positions they adopted in their 1999 tax returns were appropriate, both before and after they filed them,” he said.

KPMG's US business said: “We look forward to resclving the civil litigation expeditiously and with full and fair accountability.”

Labels: Department of Justice, KPMG

Chicago Bridge gets SEC subpoena over Halliburton probe

August 23, 2005
KGBT News

Chicago Bridge and Iron has been subpoenaed in a Securities and Exchange Commission investigation of a Halliburton construction project. The Dutch-based engineering and construction company was a subcontractor of Houston-based Halliburton on the Nigerian project. Chicago Bridge and Iron said in its Friday SEC filing that it's cooperating with the request, but it didn't provide further details about the subpoena.

Halliburton's foreign operations have been the focus of investigations by various regulatory agencies. The Justice Department and the SEC have been investigating alleged bribery of Nigerian officials relating to the construction of a natural-gas liquefaction plant at Bonny Island.

Halliburton said it was under formal SEC investigation in June 2004.

Labels: bribery, Department of Justice

The GAO gathers information to help Congress determine how well executive branch agencies are doing their jobs. GAO’s work routinely answers such basic questions as whether government programs are meeting their objectives or providing good service to the public. Ultimately, GAO ensures that government is accountable to the American people. To that end, GAO provides Senators and Representatives with the best information available to help them arrive at informed policy decisions--information that is accurate, timely, and balanced...

...With virtually the entire federal government subject to its review, GAO issues a steady stream of products--more than 1,000 reports and hundreds of testimonies by GAO officials each year. GAO's familiar "blue book" reports meet short-term immediate needs for information on a wide range of government operations. These reports also help Congress better understand issues that are newly emerging, long-term in nature, and with more far-reaching impacts. GAO's work translates into a wide variety of legislative actions, improvements in government operations, and billions of dollars in financial benefits for the American people.

GAO blasts Superfund enforcement

Les Blumenthal
The News Tribune
August 17, 2005

A week after Asarco filed for bankruptcy, congressional investigators are warning that other companies might take similar action to shed environmental responsibilities and leave taxpayers liable for billions in cleanup costs. In a report highly critical of the federal Environmental Protection Agency, Congress’ Government Accountability Office said the agency has failed to ensure that financially ailing companies meet their obligations under the Superfund program.

The report, due for release today, also said some companies have transferred their most lucrative assets to parent corporations or subsidiaries to limit their exposure in bankruptcy proceedings. While such transfers are generally legal, it is unlawful to transfer assets with the intent to hinder or defraud creditors. Such cases, however, are difficult to prove, especially when foreign ownership is involved, according to a draft copy of the report obtained by The News Tribune.

Sen. Maria Cantwell (D-Edmonds) plans to discuss the GAO report during a news conference today in a Ruston yard that was abandoned by an Asarco contractor after last week’s bankruptcy filing. “This report confirmed what I feared – corporate polluters are using bankruptcy and other corporate gimmicks to get out of their environmental cleanup obligations,” Cantwell, one of three senators who requested the study, said in a statement issued Tuesday. “Corporate polluters are contaminating our backyards and water, and then sticking us with the mess and the cleanup bill. I’m tired of this abuse. EPA officials had no immediate comment.

Asarco could be liable for more than $1 billion in cleanup costs at more than 30 sites nationwide, including the former copper smelter on the border between Ruston and Tacoma. Grupo Mexico bought Asarco in 1999. Four years later, Grupo Mexico took control of Asarco’s most lucrative assets – two Peruvian mines in the foothills of the Andes and a smelter along the Peruvian coast.

The EPA initially sought to block the deal, but after weeks of negotiations allowed it to proceed. Asarco received an infusion of $765 million at a time it was teetering on the edge of bankruptcy. The company also agreed to set up a $100 million trust fund that would be used to pay some environmental cleanup costs over three years.

The GAO report does not mention Asarco or Grupo Mexico by name. But the report said the complicated financial relationships between a parent company and a subsidiary can be difficult to unravel. “Those who seek to pierce the corporate veil, such as the Department of Justice on behalf of EPA, face a task that has been likened to peeling back the layers of an onion,” the report said.

In addition, parent companies are often stockholders in their subsidiaries, and stockholders can’t be held accountable for environmental liabilities, the report said. Grupo Mexico owns Asarco’s stock. “Federal bankruptcy law, like corporate law, presents a number of significant challenges to EPA’s efforts to hold bankrupt and other financially distressed businesses responsible for their cleanup obligations,” the report said.

Asarco filed a petition for Chapter 11 reorganization in a Texas bankruptcy court. Asarco officials said the company was overwhelmed with financial problems, including cleanup and asbestos liabilities, pension and health costs, downgraded credit ratings and a strike by production workers in Arizona and Texas.

EPA officials have said privately that they were not surprised by Asarco’s decision to file for bankruptcy, but they thought the company would hold on until next year before taking the step. The agency’s lawyers are trying to determine the company’s liabilities site by site and are expected to pursue EPA’s claims in federal bankruptcy court. Cantwell said it shouldn’t stop there.

“Corporate polluters who try to pull this kind of disappearing act after they’ve contaminated our neighborhoods and put our health at risk need to be held accountable. There’s more this administration could be doing to hold Asarco and other companies like it responsible for the harm they’ve done,” she said.

The Superfund, created in 1980, is the nation’s top federal program to clean up dangerously polluted sites. When a “responsible party” for a cleanup could not be found, money from the Superfund was used. The cash came from a special tax on oil and chemical producers and an environmental tax on corporations.

But the tax was allowed to lapse in 1995 and the trust fund used to pay for the cleanup is almost empty. Every year, Congress has provided about $1 billion in general tax funds to continue the work. There are now more than 1,230 sites listed for cleanup under the Superfund program. It is estimated that the 142 largest toxic sites could cost $20 billion to clean. The EPA is already wholly or partially funding cleanup of 60 of these large sites, the GAO report said.

Sen. Maria Cantwell and others will discuss the GAO report during a news conference at 11 a.m. today at a home in Ruston.

Labels: Department of Justice, GAO

Labels: data breech, database, Department of Justice, identity theft

Brokers Charded With Accepting Bribes

By Eric Dash
The New York Times
August 17, 2005

Four former stockbrokers at major U.S. securities firms have been accused of accepting bribes from day traders who wanted to eavesdrop on customer order information to make easy profits. In separate actions on Monday, the U.S. Justice Department and the Securities and Exchange Commission contended that day traders had paid thousands of dollars to the four brokers - who worked at Citigroup, Lehman Brothers and Merrill Lynch - for access to their so-called squawk box intercoms, which broadcast their biggest customers' stock orders. The traders, in turn, used that information to buy those same stocks before the large orders bid up the price, then quickly sold them for hundreds of thousands of dollars in gains.

This type of stock-selling scheme is known as front running. The Justice Department unsealed a criminal indictment, and the SEC filed a separate civil complaint in U.S. District Court in New York. Regulators have been investigating whether customer order information is being used improperly by Wall Street brokerage houses, either to generate business from outside investors or to enhance their own proprietary trading. The actions suggest that the investigation may be expanded to include criminal indictments of at least two day traders.

On Monday, the spotlight was on the four brokers, who appeared with their lawyers at the federal court: Ralph Casbarro, 43, a former Citigroup broker; David Ghysels, 47, a former Lehman broker; Kenneth Mahaffy Jr., 50, a former Citigroup and Merrill Lynch broker; and Timothy O'Connell, 40, a Merrill Lynch broker.

All four entered pleas of not guilty to charges of securities fraud and conspiracy cited in the criminal indictment; if convicted, they could face as much as 25 years in prison and $250,000 in fines on each count. They must return for a hearing before Judge I. Leo Glasser on Sept. 12. Absent from the arraignment was John Amore, the former chief executive of the day-trading firm A.B. Watley, who the SEC alleges orchestrated the scheme. The complaint also alleged that at least one other executive from another day-trading firm was involved with O'Connell in a similar scheme.

Amore was not named in the criminal indictment. Sean Casey, an assistant U.S. attorney, declined to say whether Amore was being investigated, nor would he discuss any potential links between the unnamed day trader and Millennium Brokerage, a day-trading firm that was named in both actions. The hearing on Monday was the latest development in a case that the Justice Department, the SEC and the U.S. Postal Inspection Service have been examining since at least May 2004. So far, at least two people have pleaded guilty to charges related to the investigation: Benjamin Grimaldi, a former Merrill Lynch compliance officer who was charged with witness tampering; and Irene Santiago, O'Connell's assistant, who was charged with conspiracy to obstruct justice by lying to investigators.

According to the SEC's complaint, the A.B. Watley investors traded ahead more than 400 times after hearing live orders from telephone receivers placed next to the Citigroup, Merrill and Lehman squawk boxes. After learning that institutional investors planned to buy thousands of shares in companies like Commerce Bancorp and EMC, they made similar decisions and landed a windfall, the complaint said. The day traders made at least $650,000 in profits, the SEC charged. Lawyers for O'Connell, Casbarro and Mahaffy declined to comment. But Jeffrey Hoffman, the lawyer for Ghysels, said his client would be vindicated because the information was not confidential.

Labels: Department of Justice

Paradise Lost (Along With More Than $200 Million) in Florida

By Julie Creswell
The New York Times
August 15, 2005

On Feb. 24, Ronald Kochman hurried out of the elevator onto the 17th floor of an office tower in Florida that KL Group, a hedge fund advisory firm, called home. Normally bustling with activity, the place was eerily quiet that morning as Kochman strode past the elegant conference rooms toward his destination, the corner office of Won Sok Lee, one of the principals. Two days earlier, officials of the U.S. Securities and Exchange Commission had unexpectedly visited KL's offices, demanding to see documents. Now some employees were reporting that Lee was missing, along with nearly all the money in the firm's accounts.

Kochman, a prominent local trust and estate lawyer, had much to lose. Not only had he sunk his savings, about $4 million, into the funds; he also had put his reputation on the line by urging his own clients to invest with KL, where he had become a principal in early 2004. So when someone with keys to Lee's office asked him why he wanted to go in that morning, a tearful Kochman collapsed on his knees and said, "It's gone, it's all gone," according to a person who witnessed the event. "The money is missing, and Won has jumped ship."

Investigators now say they believe that more than $200 million of investors' money has vanished, possibly making this one of the largest hedge fund frauds ever. In March, the SEC sued Lee and two brothers, John and Yung Bae Kim, accusing them of securities fraud. Lee and Yung Kim have disappeared, and John Kim, who is cooperating with the investigation, denies any knowledge of wrongdoing.

The SEC, the Justice Department and a court-appointed receiver are still trying to unravel what happened. While the funds' managers blinded investors with records showing supposedly eye-popping returns, the money was actually being frittered away in bad trades or simply stolen, according to the court-appointed receiver, the law firm Lewis Tein. "These guys were slick," said Guy Lewis, a partner at Lewis Tein who was a federal prosecutor in southern Florida until 2002. "This wasn't just a straight fraud. It was hocus-pocus, smoke and mirrors."

This much is known: Three years ago, Lee and the Kim brothers opened a hedge fund advisory business in Palm Beach, Florida, one of the wealthiest enclaves in the United States. The three principals, all Americans in their mid-30s who were born in South Korea, befriended people who provided them with access to society functions and introductions to the wealthy.

The three drove flashy cars and led lavish lives. The aura of success and exclusivity around the firm was so strong that investors often begged to be let into its funds, some of which were said to have had astounding annualized returns of 125 percent for several years. Among the funds' 225 investors, according to people who have seen the lists, were some of Palm Beach's elite, including Jerome Fisher, founder of Nine West, a chain of shoe stores; Carlos Morrison, an heir to the Fisher Body automotive fortune; and the golf pros Nick Price and Raymond Floyd.

While Palm Beach is still abuzz about the collapse of KL, few investors want to acknowledge that they were caught up in the frenzy. The entrepreneur Donald Trump, who owns several properties in the area, said in an interview that he had been contacted about investing in the fund but had not, because he thought the returns were too good to be true. "These guys duped a lot of people down in Palm Beach, smart people with lots of money," Trump said. "These people feel they were conned, and they're embarrassed. They just don't want to talk about it."

A web of bank accounts has muddied the inquiry. What is clear, though, is that scores of well-heeled investors missed signs that things were not quite right at KL. It turns out, for example, that the fund's principals had little experience in the securities industry, and there was never a formal independent audit to verify whether the remarkable returns reported by the funds were real.

"Even if the guy running the hedge fund has a sterling 20-year reputation on Wall Street, a sophisticated investor who's going to put $20 million in that fund wants to see those safeguards in place," said Lewis Brown, counsel to a Palm Beach accounting firm that performed some services for one of the smaller KL hedge funds. "That didn't happen here."

Labels: Department of Justice

SEC ponders Big Four minus one: report

August 11, 2005: 9:07 AM EDT

NEW YORK - Securities and Exchange Commission officials are discussing possible steps in the event of a collapse of one of the Big Four accounting firms, The Wall Street Journal reported Wednesday.

The talks, which began after the demise of Arthur Andersen three years ago, have taken on greater importance in the wake of news that the Justice Department may indict KPMG LLP for allegedly peddling illegal tax shelters.

The SEC is considering making it easier for companies to switch auditors in the event KPMG or another Big Four firm is indicted or collapses, the Journal said, but no formal plan has been approved. According to the newspaper, the SEC is trying to put a contingency plan in place to aid companies that would need to move quickly to find a replacement auditor.

Any plan would have to be approved by SEC Chairman Christopher Cox, the newspaper said. "We have scenarios in place for any eventuality that could come out of this, and we're prepared to deal with it," an SEC official said, according to the newspaper.

The Big Four -- KPMG, Deloitte & Touche LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP -- audited more than 78 percent of public companies in the U.S., according to a report cited by the newspaper.

Labels: Department of Justice, Enron, KPMG

Labels: Department of Justice, KPMG

Daimler faces SEC probe over Iraq trucks

by Allan Hall
The Evening Standard
August 10, 2005

[The SEC]...is probing the sale of DaimlerChrysler Actros trucks in connection with the UN's oilforfood scandal, it was claimed today. According to Stern magazine, in 2002 Iraq had ordered 150 of the vehicles, 50 of which were delivered via Moscow. The Daimler branch in Russia sold them to the Russian Engineering Company, which in turn sold them to the Iraqi state-controlled GAMCO....

...Under investigation is whether DaimlerChrysler deliveries to Iraq under Saddam Hussein violated US anti-corruption laws. The SEC has demanded files and bank documents from the carmaker. The UN's oil-for-food programme, designedto allow Iraqis access to food despite strict UN sanctions, was in operation from 1996 to 2003. It has since come under heavy fire for widespread corruption in its ranks. The accusations range from money-laundering to kickbacks and conspiracy.

Yesterday, a leading figure in the programme, Alexander Yakovlev, admitted to money-laundering and other charges. An independent panel led by Paul Volcker, former US Federal Reserve Bank chair, has also accused the former head of the programme, Benon Sevan, of receiving kickbacks.

All sales within the framework of the oil-for-food programme were first approved by the UN. Then Geneva-based company Cotecna arranged shipment and payment. A German businessman told Stern that Cotecna was a 'bottleneck' in the transactions and companies often had to stand in line waiting for execution of their contracts. Reportedly, companies could 'buy' their way to the front of the line.

The SEC wants to know if DaimlerChrysler might have also paid a bribe to move up to the head of the queue. Since DaimlerChrysler is listed on the New York Stock Exchange, the SEC can investigate the carmaker even though it is a German company...

Labels: bribery, DaimlerChrysler, Department of Justice, money laundering, UN

...access to personal identifying information benefits our society in many ways. Before legislation is passed that severely restricts such access, we should first consider the negative impacts that such laws could have. As a professional investigator, I use this data in many different ways: to track down important witnesses and uncover critical information in complex litigation; to conduct criminal background checks; to find stolen assets; and to investigate white collar crime, fraud, and other forms of criminal activity--including identity theft; and in many other investigations.

One of the most important uses of this information is conducting criminal record searches, an important component in many investigations. Since there is no publicly available national criminal record database (the Justice Department maintains such a database known as NCIC, but provides access only to law enforcement agencies), investigators must first gather an address history for the subject, then conduct searches of each jurisdiction identified.

We need access to Social Security numbers or another form of identifying information. This is typically drawn from the top portion of a credit report (called the credit header)--which contains someone's name, Social Security number, and current and prior addresses--without that, such searches become close to impossible to thoroughly conduct, thereby exposing people to serious potential risks.

For instance, in a recent investigation of a client's household employee, I found a criminal record involving a minor. The offense occurred nearly 10 years earlier in a different state. Without the ability to construct an address history for the employee. I never would have found it, and the client and his family would be in jeopardy.

In another case that occurred some years ago. I was investigating an individual who was being considered for a senior-level position within a Fortune 500 company. Using similar techniques, I not only found a criminal record for assault and battery but discovered that this person attempted to expunge his criminal record within a few days of his interview with our client.

I was also retained to investigate a potential business partner and discovered a multimillion-dollar fraud that he had committed. The complaint listed a number of fraudulent claims that the subject person had made about his background; he had also given my client the same fraudulent claims practically verbatim. Armed with this knowledge, my client decided not to pursue a $ 7 million investment that most surely would have been lost. There are many more examples like these.

If I have learned anything from my 15 years of investigative experience, it is that people lie, especially when they are trying to hide past bad acts. Far too often, potential employers or partners do not ask the right questions (or any questions, for that matter) or check information supplied by business partners and others until it is too late and the damage has been done. Reagan's axiom "trust but verify" applies here as much as it does in arms control.

Another important use of personal identification information is to differentiate between people with common names. Imagine the difficulty in searching for criminal records for someone named John Smith absent any other information unique to this person, such as his Social Security number and date of birth. This is the daunting scenario we would face were current proposals to restrict access to such information enacted.

Identity theft is a real concern and needs to be dealt with in a serious manner. However, limiting access to such information in as draconian a manner as is now under consideration would limit the ability of private citizens to protect themselves against a variety of equally dangerous threats. It may also embolden those who commit crimes, because they will know that investigating them will be more difficult and expensive.

Professional investigators play an important role because law enforcement agencies are not in the business of checking out a person's background to assess the potential risk of hiring them or doing business with them. Thus, people hire professional investigators. In certain circumstances, the information they gather may eventually convince law enforcement to become involved.

For all of these reasons, investigators are needed, and they need access to information to do their jobs. They should not be hampered by the actions of information brokers who failed to check the credentials of new customers and allowed themselves to be victimized in the process.

Labels: background checks, database, Department of Justice, identity theft

Justice Department joins SEC in investigating bribery allegations at DaimlerChrysler

August 5, 2005

WASHINGTON (AP) -- The Justice Department is investigating whether DaimlerChrysler AG paid bribes to foreign officials with the knowledge of its senior executives, according to the company's latest financial disclosure. The criminal investigation is in addition to one begun last year by the Securities and Exchange Commission after an employee fired by the automaker said he was dismissed for complaining that the company was using secret bank accounts to bribe government officials.

DaimlerChrysler said it is cooperating with the investigations by "voluntarily sharing ... information from its own internal investigation of payments from certain accounts" and complying with subpoenas from both federal agencies. A DaimlerChrysler spokesman, Toni Melfi, confirmed that the investigation was linked to the SEC inquiry. The company said its own investigation has identified questionable payments but that it has not reached "any definitive conclusions" about whether they violate the U.S. Foreign Corrupt Practices Act, DaimlerChrysler said in its interim report to the SEC on its financial performance in the second quarter of 2005. The law prohibits the payment of bribes to foreign officials.

Justice Department spokesman Bryan Sierra declined to comment Friday. The Wall Street Journal first reported on the Justice Department investigation on Friday. David Bazzetta, a former employee in the automaker's corporate auditing department, claimed in a lawsuit filed in U.S. District Court in Detroit last year that he learned during a corporate audit executive meeting in Stuttgart, Germany, that payment of bribes was a common practice dating to before Daimler-Benz's 1998 merger with Chrysler Corp. The suit was settled last month. Terms of the settlement have not been disclosed.

The original article appears here.

-- MDT

Labels: bribery, DaimlerChrysler, Department of Justice

Bribery probe for DaimlerChrysler

August 5, 2005
BBC News

The US Justice Department has begun an inquiry into allegations of bribery at DamilerChrysler's Mercedes unit, the German-US carmaker has confirmed.
DaimlerChrysler said it was co-operating fully, and has made all its accounts available. The criminal probe escalates a civil one by the US market watchdog, the Wall Street Journal reported on Friday. At issue is whether Mercedes staff paid bribes, and whether senior DaimlerChrysler executives knew.

DaimlerChrysler revealed last year it was being investigated by the US Securities and Exchange Commission. There are now two investigations. "We are working with the SEC and the Justice Department on the investigation. We have made all our accounts available," said a DaimlerChrysler spokesman following the Wall Street Journal on Friday.

In July, DaimlerChrysler said in its interim financial results statement that it had identified "accounts, transactions and related payments that are subject to special scrutiny". It said it was "voluntarily sharing....information from its own investigation" after subpoenas from US federal agencies. DaimlerChrysler said in July that it had not yet reached "any definitive conclusions" about whether the payments it had identified breached the US Foreign Corrupt Practices Act.

The latest embarrassment to hit the carmaker comes one day after the German financial market watchdog launched a probe into possible insider trading in the firm's shares. DaimlerChrysler's share price surged up 10% last week ahead of chief executive Juergen Schrempp's announcement that he was planning to step down two years early. Mr Schrempp will step down at the end of 2005. He had become a target of investor criticism, drawing fire over the firm's global expansion plans and problems at its flagship Mercedes division.

DaimlerChrysler has seen its earnings come under pressure as steel prices have increased and competitors have offered cut-price deals to lure customers.

Labels: bribery, DaimlerChrysler, Department of Justice, insider trading

Cases Referred in KPMG Case

August 05, 2005
AccountingWEB.com

The investigation and possible prosecution of KPMG has been the focus of a larger investigation by the Department of Justice (DOJ) into abusive tax shelters sold to corporate taxpayers and wealthy individuals by accounting firms, banks, and law firms. There are now signs that DOJ is working toward a decision.

DOJ found that KPMG sold four types of overly aggressive tax shelters to over 350 people between 1997 and 2001 that brought in $214 million in fees according to the Senate Subcommittee on Investigations. These shelters cost the Government around $1.4 billion in unpaid taxes.

The firm has been cooperating with the government and issued a statement in June implicating their “wrongful conduct” and “full responsibility” by their former partners. They also pledged further cooperation in the case. They have initiated corporate reforms to ensure this situation will not occur again.

The Washington Post has reported that up to 20 ex-KPMG partners may be facing prosecution for their roles in selling the shelters. Other firms implicated in government documents include a law firm now called Sidley Austin Brown & Wood and Deutsche Bank according to the New York Times.

DOJ officials have authorized David Kelley, the U.S. attorney for the Southern District of New York, to negotiate a deal with KPMG that will not drive the firm out of business. The DOJ does not want to repeat the collapse of Arthur Anderson that destablized the industry in 2002. Arthur Anderson employed some 85,000 people worldwide.

If the firm were to negotiate a settlement instead of receiving an indictment to resolve the case as well as prosecution of the ex-KPMG executives, concerns over their clients abandoning the firm might be avoided. Significant legal exposure from civil suits by investors and shareholders might also be avoided.

“The Justice Department’s issue is do we really want to take this down to the Big Three or is there some way short of destroying this company that we can get some comfort that this going to be recurring in the future?” said David Gourevitch, a former prosecutor and now in private practice in New York.

The outcome of this case may come down to a large fine, changes in their corporate culture, and oversight. The firm continues to negotiate with the Government to resolve this case. If these negotiations fail, the Government may go for an corporate indictment. The prosecution of this case is still out except for the referral of potential cases against several former KPMG partners and other individuals to the DOJ. No indictments have been passed down.

Labels: Department of Justice, KPMG