Archive for the ‘Financial Fraud’ Category

Acclaim Professional Services Settle $400,000 E-Rate Program False Claims Allegations

Acclaim Professional Services’ CEO and managing partner Larry Lehmann agreed to pay $400,000 to settle False Claims Act allegations related to the Federal Communications Commission’s E-rate program.  The E-rate program subsidizes eligible equipment and services to make Internet access and internal networking more affordable to public school and libraries.

Under Lehmann’s guidance Acclaim Professional Services partnered with other companies to provide E-rated funded equipment and services from 2004 t0 2006 to the Houston Independent School District (HISD).  The United States government alleged that Lehmann provided gifts and loans to to HISD employees, including two loans totalling $66,750 to an HISD employee involved in the procurement and administration of HISD’s E-rate projects.  The provisions of the gifts and loans violated the E-rate competitive bidding requirements and HISD procurement rules.

Additionally, the United States alleged that Lehmann devised a scheme that outsourced some of HISD employees to Acclaim Professional Services, which allowed the employees to continue to work while passing on the costs to the E-rate program.  Acclaim Professional Services hid the cost of these employees in its invoices to the E-rate program by including such costs into eligible goods and services categories.

This settlement is part of a larger United States government investigation of E-rate funding requests by the HISD and the Dallas Independent School District.  The United States previously settled similar allegations with Hewlett-Packard for $16.25 million, $850,000 with HISD and $750,000 with the Dallas Independent School District.

These allegations were first brought to the government’s attention with the filing of a qui tam lawsuit by whistleblowers Dave Richardson and Dave Gillis, who investigated the E-rate program based on Richardson’s experience with bidding for contracts with the two Texas school districts.  The United States intervened in the qui tam lawsuit and added Lehmann as a defendant.

Posted in Financial Fraud, Qui Tam CaseNo Comments

ArthroCare Corp.’s Former CEO and CFO Charged in $400 Million Securities Fraud Scheme

ArthroCare Corp.’s former CEO and director Michael Baker and Michael Gluck, former ArthroCare Corp. CFO were charged on July 17, 2013 in the U.S. District Court for the Western District of Texas for their alleged leading roles in a $400 million dollar scheme to defraud the company’s shareholders and public investors by falsely inflating ArthoCare Corp.’s earnings by tens of millions of dollars.

The criminal indictment returned on July 16, 2013 charged the former CEO and CFO with one count of conspiracy to commit wire and securities fraud, eleven counts of wire fraud and two counts of securities fraud.  Former CEO Baker also was charged with three counts of false statements.

ArthroCare Corp. (ArthroCare) is a publicly traded medical device company based in Austin, Texas.  From at least December 2005 through December 2008, CEO Baker, CFO Gluck, and other senior executives and employees were alleged to have falsely inflated ArthroCare’s sales and revenues through a series of end-of-quarter transactions involving several distributors.

One scheme involved Baker, Gluck and other employees determining the type and amount of product to be shipped to distributors based on meeting ArthroCare’s Wall Street analyst forecasts rather than the distributors’ actual orders.  Another scheme involved ArthroCare “parking” millions of dollars of product with distributors at the end of each fiscal quarter.  ArthroCare would report these shipments as sales in its quarterly and annual filings which would enbable the company to meet or exceed internal and external earnings forecasts.  ArthoCare provided substantial, upfront cash commissions, extended payment terms, the ability to return the products, as well as, other special conditions in exchange for the distributors’ cooperation and participation in the schemes.  The distributors’ participation allowed ArthroCare to falsely inflate its revenue.

Another scheme involved DiscoCare, a privately owned Delaware corporation that Baker and Gluck caused ArthroCare to acquire in order to conceal from its public investors the true nature of the two companies’ financial relationship.  That relationship involved using DiscoCare, ArthroCare’s large distributor, to cover short falls in ArthroCare’s revenue.  One way that was acheived was by shipping DiscoCare far more product that it needed.  The criminal indictament alleged that Gluck, Baker and others lied to investors and analysts about its relationship with DiscoCare and other distributors.  It also alleged that Baker lied on multiple occasions regarding the relationship with DiscoCare during his deposition to the U.S. Securities and Exchange Commission in November 2009.

During the time period between 2005 and 2008 more than 25 million shares of ArthroCare stock was held by its shareholders.  On July 21, 2008 the price of the stock fell from $40.03 to $23.21 a share following the company’s announcement it was restating its previously reported financial results from the third quarter of 2006 to the first quarter 2008 to reflect the results of an internal investigation.  That prescipitous drop caused shareholders to lose more than $400 million in value.

An indictment is meraly a charge, and the defendants are presumed innocent until proven guilty.

Posted in Financial FraudNo Comments

Stock Manipulators Sentenced for $1Million Securities Fraud Scheme

Blake Williams, an employee of TBeck Capital Inc. (TBeck) and Derek Lopez, a security broker-dealer who provided services to TBeck were recently sentenced to prison by U.S. District Judge Ed Kinkeade in a Dallas, Texas federal court for their roles in a conspiracy to artificially pump up the stock prices of several publicly traded companies.  TBeck owned or controlled large portions of free-trading stocks in the companies implicated in this conspiracy.

According to the Department of Justice Williams, Lopez, and their co-conspirators engaged in the scheme between June 2006 through December 2008, netting the participants more than $1 million.  The co-conspirators manipulated the price and volume of stocks traded in the over-the-counter market.  The scheme involved the co-conspirators gaining large control of the free trading stock in the various publicly traded companies.  Then the participants to the scheme would coordinate trades with each other to create a false appearance of greater investor interest in the stock.  The co-conspirators would sell the stock at artificially created high prices.

Williams, who will serve thirty-two months in prison and forfeit $125,000 admitted to receiving cash for his participation in the scheme.  Lopez, who was sentenced to twenty-four months in prison and forfeited $72,442, received free trading stock and cash payments for his assistance in manipulating the stock prices in this scheme.

Posted in Financial FraudNo Comments

Standford Financial Group Executives Convicted for Roles in Fraud Scheme

The Department of Justice announced the conviction of Gilbert T. Lopez Jr. and Mark J. Kuhrt for their roles in helping Robert Allen Stanford perpetrate a fraud scheme involving Standford International Bank (SIB).

Evidence at the five week trial in a Houston, Texas federal court demonstrated that Lopez, the former chief accounting officer of Stanford Financial Group Company and Kuhrt, the former global controller of Standford Financial Group Global Management were aware of and tracked Mr. Standford’s misuse of SIB’s assets, kept the misuse hidden from the public and from almost all the other SIB employees, and worked to prevent the misuse from being discovered.  Standford was convicted in a separate trial for that misuse of SBI’s assets that included, among other improper uses, the illegal use of billions of dollars of assets for his personal business ventures, and to live a lavish lifestyle.

Lopez and Kuhrt each were convicted of one count of conspiracy to commit wire fraud and nine counts of wire fraud.  Sentencing is set for February 14, 2013.

Posted in Financial FraudNo Comments

Former IRS Official Charged with Revealing Whistleblower’s Name to the Target Bank

In a Department of Justice press release on September 27, 2012, the U.S. Attorney’s Office for the Southern District of New York (Manhattan) announced the unsealing of a four-count Complaint charging Dennis Lerner, a former IRS official, with violating conflict of interest laws while he was an IRS employee, and continuing to do so after leaving the IRS. The government has also charged Lerner with improperly disclosing confidential IRS information, including information regarding pending audits and the identity of an IRS whistleblower. After being arrested on September 27 at his home in New Jersey, Lerner appeared in Manhattan federal court before Magistrate Judge Gabriel W. Gorenstein.

According to the allegations in the four-count Criminal Complaint:

From June 2010 until August 2011, LERNER worked as an International Examiner in the New York office of the IRS. For several months leading up to his resignation from the IRS, one of LERNER’s chief responsibilities involved conducting an audit of an international bank (“Bank 1”) related to approximately $1 billion in allegedly unreported income. This audit was triggered by confidential whistleblower information LERNER reviewed during the course of his IRS employment. Shortly before his resignation, LERNER led negotiations on behalf of the IRS which resulted in a proposed $210 million settlement between Bank 1 and the IRS. The settlement was still pending final approval at the time of his departure. Unbeknownst to his colleagues and supervisors, LERNER applied and interviewed for the position of Tax Director at Bank 1 during the time period in which he was representing the IRS in the Bank 1 settlement discussions. He also sent multiple emails to an individual in which he expressed both his dissatisfaction with his job at the IRS and his hope that he would secure the Bank 1 job. At no time did he notify the IRS of his efforts to obtain employment with Bank 1.

After LERNER announced his resignation from the IRS, he received written notification of certain restrictions imposed on former IRS employees regarding improper contacts with current IRS officials. However, when the IRS sent Bank 1 additional inquiries regarding the audit after he began working as Tax Director in September 2011, LERNER subsequently placed numerous phone calls to IRS employees and initiated meetings with them regarding the continuing audit. LERNER persisted with attempts to encourage IRS employees to provide information regarding the audit, and to approve the settlement between the IRS and Bank 1, despite warnings that he should not be participating in the audit or settlement discussions.

LERNER also engaged in improper disclosure of IRS tax return information during the time period that he worked as an IRS International Examiner. Specifically, LERNER divulged the identity of a whistleblower who had provided the IRS with confidential information regarding Bank 1 that had triggered the audit to someone not employed by the IRS, and provided details regarding pending IRS audits of other companies to individuals who were not employed by the IRS.

Posted in Dodd Frank, Tax Credits, Tax FraudNo Comments

SEC Adopts Dodd-Frank Net Worth Standard for Accredited Investors and Mine Safety Disclosure Requirements

On December 21, 2011, the SEC adopted the Dodd-Frank net worth standard for accredited investors and also adopted the Dodd-Frank mine safety disclosure requirements.

With respect to the net worth standard, the SEC amended its rules to exclude the value of a person’s home from net worth calculations used to determine whether an individual may invest in certain unregistered securities offerings.  SEC rules permit certain private and limited offering to be made without registration, and without requiring specified disclosures, if sales are made only to “accredited investors.”  Under the amended rule, which takes effect 60 days after publication in the Federal Register, the value of an individual’s primary residence cannot be included as an asset when calculating the investor’s net worth for purposes of determining “accredited investor” status.

With respect to mine safety disclosure requirements, the SEC adopted new rules outlining how mining companies must disclose the mine safety information required by Dodd-Frank.  Dodd-Frank’s disclosure requirements are based on the safety and health requirements applicable to mines under the Federal Mine Safety and Health Act of 1977, which is administered by the Mine Safety and Health Administration (MSHA).  The new SEC rules, which take effect 30 days after publication in the Federal Register, require mines to provide mine-by-mine totals for the following:

  • Significant and substantial violations or mandatory health or safety standards under section 104 of the Mine Act for which the operator received a citation from MSHA;
  • Orders under section 105(b) of the Mine Act;
  • Citations and orders for unwarrantable failure of the mine operator to comply with section 104(d) of the Mine Act;
  • Flagrant violations under section 110(b)(2) of the Mine Act;
  • Imminent danger orders issued under section 107(a) of the Mine Act;
  • The dollar value of proposed assessments from MSHA;
  • Notices from MSHA of a pattern of violations or potential to have a pattern of violations under section 104(e) of the Mine Act;
  • Pending legal actions before the Federal Mine Safety and Health Review Commission; and
  • Mining related fatalities.

Posted in Dodd FrankNo Comments

FDA Chemist Pleads Guilty to Using Insider Information in Connection with Trade of Pharmaceutical Stocks

Cheng Yi Liang, a chemist who has worked for the Food and Drug Administration (FDA) since 1996, has pleaded guilty to one count of securities fraud and one count of making false statements in connection with a $3.7 million insider trading scheme.  Liang, by virtue of his employment as a chemist at the FDA’s Office of New Drug Quality Assessment, had access to the FDA’s internal tracking system for new drug applications, which is used to manage, track, receive, and report on new drug applications.  Much of the information contained on the tracking system constitutes material, non-public information concerning pharmaceutical companies that submit their experimental drugs to the FDA for review.

Liang admitted during his guilty plea that from approximately June 2006 through March 2011, he used the inside information he learned from the FDA’s internal tracking system to trade on pharmaceutical stocks.  Using accounts of relatives and friends to execute the trades, Liang purchased and traded pharmaceutical company securities based on positive or negative information he learned about the company’s product.  According to the DOJ, Liang’s insider trading scheme resulted in total profits and losses avoided of more than $3.7 million.

Sentencing is currently scheduled for January 9, 2012.  The maximum penalty for the securities fraud count is twenty (20) years in prison and a fine of $5 million, or twice the gross gain from the offense.  The maximum penalty for the false statement count is five years in prison and a fine of $250,000.

Pursuant to his plea agreement, Liang has agreed to forfeit $3,776,152, including a home and condominium, as well as funds held in ten (10) different bank or investment accounts.

According to the DOJ, the U.S. Securities and Exchange Commission is currently pursing civil charges against Liang and several accounts he controlled.

Posted in Financial FraudNo Comments

Houston-based Hedge Fund Owners Sentenced for $100 Million Fraud Scheme

The Department of Justice (DOJ) recently announced that two Houston-based principals of A&O Resource Management Ltd. (“A&O”) were sentenced in Virginia for their roles in a $100 million life settlement fraud scheme, which included more than 800 victims across the United States and Canada.  Christian Allmendinger, A&O’s co-founder and vice president, was sentenced on September 29, 2011 to 45 years in prison.  A&O’s hedge fund manager and co-owner, Adley H. Abdulwahab, was sentenced on September 30, 2011 to 60 years in prison.

According to the evidence presented at trial, Allmendinger and Abdulwahab engaged in a scheme to defraud investors (most of whom were elderly and invested all of the money they had saved for their retirement) by misrepresenting A&O’s prior success, its size and office locations, its number of employees, the risks of its investment offerings, and its safekeeping and use of investor funds.  Abdulwahab also misrepresented to investors that he had a college degree in economics, and failed to disclose to investors that he previously pleaded guilty to a felony charge of forgery of a commercial instrument in Texas state court.

The evidence at trial demonstrated that Allmendinger and Abdulwahab caused more than 800 investors to lose more than $100 million, and that they used investors funds for personal enrichment, including purchasing multi-million dollar homes, luxury cars, and a 15-carat diamond ring.

Earlier this year, five other individuals connected with the A&O fraud scheme were also sentenced: Russell E. Mackert, A&O’s general counsel, was sentenced to 188 months in prison; Brent Oncale, A&O’s former owner and founder, was sentenced to 120 months in prison; David White, A&O’s former president, was sentenced to 60 months in prison; Eric M. Kurz, a wholesaler of A&O investment products, was sentenced to 60 months in prison; and Tomme Bromseth, an A&O sales agent, was sentenced to 36 months in prison.

According to the DOJ, the A&O investigation was conducted by the U.S. Postal Inspection Service, Internal Revenue Service, and the FBI, with significant assistance from the Texas State Securities Board, the Virginia Corporation Commission, and the SEC.  The investigation was coordinated by the Virginia Financial and Securities Fraud Task Force, an unprecedented partnership between criminal investigators and civil regulators to investigate and prosecute complex financial fraud cases.  The task force is an investigative arm of President Obama’s Financial Fraud Enforcement Task Force, an interagency national task force that was established to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes.

Posted in Financial FraudNo Comments

“Whistleblower Improvement Act of 2011” Takes Aim at SEC Whistleblower Provisions

Representative Michael Grimm (R-NY) recently proposed a bill to amend the Securities Exchange Act of 1934 and the Commodity Exchange Act to modify certain provisions relating to whistleblower incentives and protection.  The “Whistleblower Improvement Act of 2011” (H.R. 2483) primarily takes aim at the SEC’s decision not to require internal compliance reporting as a prerequisite to whistleblower eligibility, which was premised on the SEC’s concern that such a requirement would deter many potential whistleblowers.

The bill would amend Section 21F of the Securities Exchange Act (and Section 23 of the Commodity Exchange Act) to provide that, “[i]n the case of a whistleblower who is an employee providing information relating to misconduct giving rise to the violation of the securities laws that was committed by his or her employer or another employee of the employer, to be eligible for an award …the whistleblower, or any person obtaining reportable information from the whistleblower, shall – (A) first report the information … to his or her employer before reporting such information to the Commission; and (B) report such information to the Commission not later than 180 days after reporting the information to the employer.”

Under the bill, however, whistleblowers who do not comply with these internal reporting requirements may still be eligible for an award if the SEC determines (1) that the employer lacks either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting, or (2) that internal reporting as not a viable option for the whistleblower based on (i) evidence that the alleged misconduct was committed by or involved the complicity of the highest level of management, or (ii) other evidence of bad faith on the part of the employer.

The bill would also expand Section 21F’s current exclusion of eligible whistleblowers (which currently excludes from eligibility any whistleblower convicted of a criminal violation related to the matter at issue). Under the bill, a person would be ineligible as a whistleblower if such person “has legal, compliance, or similar responsibilities for or on behalf of an entity and has a fiduciary or contractual obligation to investigate or respond to internal reports of misconduct or violations or to cause such entity to investigate or respond to the misconduct of violations, if the information learned by the whistleblower during the course of his or her duties was communicated to such a person with the reasonable expectation that such person would take appropriate steps to so respond.”  The bill would also exclude whistleblowers who the SEC determines committed, facilitated, participated in, or were otherwise complicit in the misconduct at issue.

Further, under the bill, the SEC would be required to notify an entity prior to commencing any whistleblower-related enforcement action in order to allow the entity the opportunity to investigate and remedy the alleged misconduct—unless, based on evidence of bad faith or complicity at the highest level of management, the SEC determines that notification would jeopardize its investigation.  If a notified entity responds in good faith, the SEC would be required to treat the entity as having self-reported the information.

With respect to Section 21F’s anti-retaliation provisions, the bill provides that “[n]othing … shall be construed as prohibiting or restricting any employer from enforcing any established employment agreements, workplace policies, or codes of conduct against a whistleblower, and any adverse action taken against a whistleblower for any violation of such agreements, policies, or codes shall not constitute retaliation . . . provided such agreements, policies, or codes are enforced consistently with respect to other employees who are not whistleblowers.”

H.R. 2483 is co-sponsored by Reps. John Campbell (R-CA), Bill Flores (R-TX), Scott Garrett (R-NJ), and Steve Stivers (R-OH).

Read the proposed legislation here.

Posted in Dodd Frank, Financial FraudNo Comments

SEC Launches New Website for Whistleblowers

With the new whistleblower program officially becoming effective on August 12, 2011, the SEC launched a new website for people to report violations of the federal securities laws and apply for a financial reward.  The new website, http://www.sec.gov/whistleblower, provides information on eligibility requirements, directions on how to submit a complaint or a tip, instructions on how to apply for a reward, and answers to frequently asked questions.

Visit the SEC’s new Office of the Whistleblower website

Posted in Dodd Frank, Financial FraudNo Comments

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