TWO FORMER EXECUTIVES IN CALIFORNIA CHARGED WITH FRAUD BY SEC

The following is an excerpt from the SEC website:

June 27, 2011
The Securities and Exchange Commission today announced charges against two former Basin Water, Inc. executives with fraudulently inflating its revenues, beginning with the company’s first financial report after it went public.
The SEC alleges that former Basin Water chief executive officer Peter L. Jensen and former chief financial officer Thomas C. Tekulve, Jr. improperly recognized revenue to disguise the company’s true financial performance in its 2006 and 2007 quarterly and annual reports. The SEC also alleges that Jensen sold and donated his own Basin Water shares before the company’s true financial condition was revealed, reaping millions of dollars in trading profits and tax benefits. Basin Water built, sold, and leased water treatment systems that cleaned contaminated groundwater.
The SEC’s complaint, filed June 24, 2011, alleges that Jensen and Tekulve improperly included revenue from six sales transactions in Basin Water’s financial reports filed with the Commission. The SEC alleges that, depending upon the transaction, the sale was not final; did not have the customer’s required acceptance of the system; allowed the customer to pay nothing until the customer resold the system, even though there was no resale; did not provide enough assurance that the customer would pay for the system; or where the company had not shipped the system. The SEC alleges that as a result Basin Water overstated its 2006 revenues by 13% and its 2007 revenues by 74% and overstated its quarterly 2006 and 2007 revenues by 10% to 161%. The SEC further alleges that, before the company’s true financial condition was revealed, Jensen sold or donated approximately 1.9 million Basin Water shares for over $9.1 million in trading profits and tax deductions.
In February 2009, Basin Water restated its financial results. In July 2009, the Rancho Cucamonga, Calif.-based company declared Chapter 11 bankruptcy and is now defunct.
The SEC’s complaint charges Jensen and Tekulve with violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Securities Exchange Act 1934 (“Exchange Act”) and Rules 10b-5, 13a-14, 13b2-1, and against Tekulve only, 13b2-2 thereunder. The complaint also alleges control person liability, pursuant to Section 20(a) of the Exchange Act, against Jensen and Tekulve for violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder. The complaint further charges Jensen and Tekulve with aiding and abetting violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The complaint also alleges that Jensen and Tekulve failed to comply with Section 304 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”). The complaint seeks against each defendant permanent injunctive relief, an officer and director bar, disgorgement of ill-gotten gains plus prejudgment interest, a financial penalty, and Sarbanes-Oxley Act reimbursement.”

JOHNSON AND JOHNSON CHARGED WITH BRIBERY BY THE SEC

The Securities and Exchange Commission has charged the giant pharmaceutical company with bribing doctors in Europe and paying kickbacks to Iraq. The following excerpt of the case is from the SEC web site:

“Washington, D.C., April 7, 2011 – The Securities and Exchange Commission today charged Johnson and Johnson (J&J) with violating the Foreign Corrupt Practices Act (FCPA) by bribing public doctors in several European countries and paying kickbacks to Iraq to illegally obtain business.
The SEC alleges that since at least 1998, subsidiaries of the New Brunswick, N.J.-based pharmaceutical, consumer product, and medical device company paid bribes to public doctors in Greece who selected J&J surgical implants, public doctors and hospital administrators in Poland who awarded contracts to J&J, and public doctors in Romania to prescribe J&J pharmaceutical products. J&J subsidiaries also paid kickbacks to Iraq to obtain 19 contracts under the United Nations Oil for Food Program.

J&J agreed to settle the SEC’s charges by paying more than $48.6 million in disgorgement and prejudgment interest. J&J also agreed to pay a $21.4 million fine to settle parallel criminal charges announced by the U.S. Department of Justice (DOJ) today. A resolution of a related investigation by the United Kingdom Serious Fraud Office is anticipated.
“The message in this and the SEC’s other FCPA cases is plain – any competitive advantage gained through corruption is a mirage,” said Robert Khuzami, Director of the SEC's Division of Enforcement. “J&J chose profit margins over compliance with the law by acquiring a private company for the purpose of paying bribes, and using sham contracts, off-shore companies, and slush funds to cover its tracks.”
Cheryl J. Scarboro, Chief of the SEC Enforcement Division’s Foreign Corrupt Practices Act Unit, added, “Bribes to public doctors can have a detrimental effect on the public health care systems that potentially pay more for products procured through greed and corruption.”
According to the SEC’s complaint filed in federal court in the District of Columbia, public doctors and administrators in Greece, Poland, and Romania who ordered or prescribed J&J products were rewarded in a variety of ways, including with cash and inappropriate travel. J&J subsidiaries, employees and agents used slush funds, sham civil contracts with doctors, and off-shore companies in the Isle of Man to carry out the bribery.
Without admitting or denying the SEC’s allegations, J&J has consented to the entry of a court order permanently enjoining it from future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934; ordering it to pay $38,227,826 in disgorgement and $10,438,490 in prejudgment interest; and ordering it to comply with certain undertakings regarding its FCPA compliance program. J&J voluntarily disclosed some of the violations by its employees and conducted a thorough internal investigation to determine the scope of the bribery and other violations, including proactive investigations in more than a dozen countries by both its internal auditors and outside counsel. J&J’s internal investigation and its ongoing compliance programs were essential in gathering facts regarding the full extent of J&J’s FCPA violations.
. The SEC acknowledges the assistance of the U.S. Department of Justice, Fraud Section; Federal Bureau of Investigation; Serious Fraud Office in the United Kingdom; and 5th Investigation Department of the Regional Prosecutor’s Office in Radom, Poland. The SEC's investigation is continuing.”

Perhaps the question should be asked is that if Johnson and Johnson are bribing doctors overseas and paying kickbacks then perhaps they might think to do the same thing in the United States. It seems like everyone that sees a doctor gets signed up for more tests and/or more drugs.

SEC CHARGES CHARLES SCHWAB & CO. WITH MAKING MISLEADING STATEMENTS

The following case brought by the SEC is against one of the largest low cost brokerage firms in the United States. The case in general alleges that Charles Schwab & Co. and others invested investor money inappropriately. It has been alleged that the company invested in riskier investments then they led investors to believe. The following is an excerpt from the SEC web page and outlines in detail the case against Charles Schwab & Co. and others:

“Washington, D.C., Jan. 11, 2011 — The Securities and Exchange Commission today charged Charles Schwab Investment Management (CSIM) and Charles Schwab & Co., Inc. (CS&Co.) with making misleading statements regarding the Schwab YieldPlus Fund and failing to establish, maintain and enforce policies and procedures to prevent the misuse of material, nonpublic information. The SEC also charged CSIM and Schwab Investments with deviating from the YieldPlus fund's concentration policy without obtaining the required shareholder approval.
The SEC also filed a complaint in federal court against CSIM's former chief investment officer for fixed income Kimon Daifotis as well as Schwab official Randall Merk, who is an executive vice president at CS&Co. and was president of CSIM and a trustee of the YieldPlus and other Schwab funds. The SEC alleges that Daifotis and Merk committed fraud and other securities law violations in connection with the offer, sale and management of the YieldPlus Fund.

CSIM and CS&Co. agreed to pay more than $118 million to settle the SEC's charges. The SEC's case continues against the executives.
Robert Khuzami, Director of the SEC's Division of Enforcement said, "All financial firms and professionals — including large mutual fund providers — must be vigilant in accurately describing the risks of the products they sell to the public, especially the widely-held mutual funds that are the bread-and-butter investments of retail investors."
Antonia Chion, Associate Director of the SEC's Division of Enforcement, said, "Schwab marketed the fund as a cash alternative with only slightly more risk than a money market fund even though, at one point, half of the fund's assets were invested in private-issuer, mortgage-backed and other securities with maturities and credit quality that were significantly different than investments made by money market funds."
The YieldPlus Fund is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and more than 200,000 accounts, making it the largest ultra-short bond fund in the category. The fund suffered a significant decline during the credit crisis of 2007 and 2008. Its assets fell from $13.5 billion to $1.8 billion during an eight-month period due to redemptions and declining asset values.
According to an administrative order issued by the SEC against the Schwab entities and the SEC's related complaints against the entities and the two executives filed in federal court in San Francisco, they failed to inform investors adequately about the risks of investing in the YieldPlus Fund. For example, they described the fund as a cash alternative that had only slightly higher risk than a money market fund. The statements were misleading because the fund was more than slightly riskier than money market funds, and the Schwab entities and Merk and Daifotis did not adequately inform investors about the differences between YieldPlus and money market funds.
The SEC found that the YieldPlus Fund deviated from its concentration policy when it invested more than 25 percent of fund assets in private-issuer mortgage-backed securities (MBS). Mutual funds and other registered investment companies are required to state certain investment policies in their SEC filings, including a policy regarding concentration of investments. Once established, a fund may not deviate from its concentration policy without shareholder approval. Schwab's bond funds, including the YieldPlus Fund and the Total Bond Market Fund, had a policy of not concentrating more than 25 percent of assets in any one industry, including private-issuer MBS. The funds violated this policy, and the Investment Company Act, by investing approximately 50 percent of the assets of the YieldPlus Fund and more than 25 percent of the Total Bond Fund's assets in private-issuer MBS without obtaining shareholder approval.
According to the SEC's order and complaints, the YieldPlus Fund's NAV began to decline and many investors redeemed their holdings as the credit crisis unfolded in mid-2007. Unlike a money market fund, few of the fund's assets were scheduled to mature within the next several months. As a result, the fund had to sell assets in a depressed market to raise cash. While the YieldPlus Fund's NAV declined, CSIM, CS&Co., Merk, and Daifotis held conference calls, issued written materials, and had other communications with investors that contained a number of material misstatements and omissions concerning the fund. For example, in two conference calls, Daifotis made false and misleading statements that the fund was experiencing "very, very, very slight" and "minimal" investor redemptions. In fact, Daifotis knew that YieldPlus had experienced more than $1.2 billion in redemptions during the two weeks prior to the calls, which caused YieldPlus to sell more than $2.1 billion of its securities. Similarly, Merk authored, reviewed and approved misleading statements about the fund, such as a false claim that the fund had a "short maturity structure" that "mitigated much of the price erosion" experienced by its peers.
The SEC also found that CSIM and CS&Co. did not have policies and procedures reasonably designed — given the nature of their businesses — to prevent the misuse of material, nonpublic information about the fund. For example, they did not have specific policies and procedures governing redemptions by portfolio managers who advised Schwab funds of funds, and did not have appropriate information barriers concerning nonpublic and potentially material information about the fund. As a result, several Schwab-related funds and individuals were free to redeem their own investments in YieldPlus during the fund's decline.
Without admitting or denying the findings in the SEC's order or the allegations in the SEC's complaint, CSIM and CS&Co. agreed to pay a total of $118,944,996, including $52,327,149 in disgorgement of fees by CSIM, a $52,327,149 penalty against CSIM, a $5 million penalty against CS&Co., and pre-judgment interest of $9,290,698. Some of CSIM's disgorgement may be deemed satisfied up to a maximum of $26,944,996 for payments made within the next 60 days to settle related investigations by FINRA or state securities regulators.
The SEC seeks to have payments placed in a Fair Fund for distribution to harmed investors, and the related recoveries by other regulators, such as FINRA, may be contributed to the Fair Fund. The payments and any Fair Fund are subject to approval by the U.S. District Court for the Northern District of California.
CSIM, CS&Co. and Schwab Investments also consented to an SEC order requiring them to cease and desist from committing or causing future violations of the federal securities laws. The SEC order also requires them to comply with certain undertakings, including correction of all disclosures regarding the funds' concentration policy. In addition, the Commission censured CSIM and CS&Co., and required them to retain an independent consultant to review and make recommendations about their policies and procedures to prevent the misuse of material, nonpublic information.
In its order, the Commission found that:
CSIM and CS&Co. willfully violated anti-fraud provisions of the Securities Act of 1933, Sections 17(a)(2) and (3).
CSIM willfully violated anti-fraud provisions of the Investment Advisers Act of 1940, Section 206(4) and Rule 206(4)-8.
Schwab Investments willfully violated Section 13(a) of the Investment Company Act of 1940 by deviating from its concentration policy, and CSIM willfully aided and abetted and caused the violation.
CSIM and CS&Co. willfully aided and abetted and caused violations of the false filings provision of the Investment Company Act, Section 34(b).
CS&Co. violated Section 15(g) (formerly Section 15(f)) of the Securities Exchange Act of 1934, and CSIM violated Section 204A of the Advisers Act, both of which require policies and procedures that are reasonably designed, taking into consideration the nature of the entities' businesses, to prevent the misuse of material, nonpublic information.
The SEC's complaint against Daifotis and Merk alleges violations and aiding and abetting violations of the anti-fraud provisions of the Securities Act, Exchange Act, and Investment Advisers Act, including Section 10(b) and Rule 10b-5 of the Exchange Act, and other violations, including Sections 13(a) and 34(b) of the Investment Company Act.”

It is hopeful that companies on Wall Street will soon realize that misrepresentations are not acceptable in a real capitalist society. If everyone lies and no one can be trusted then, business grinds to a halt. If business grinds to a halt then all the people are affected.

ALCATEL PAYS $137 MILLION IN FINES TO SETTLE BRIBERY CHARGES

Paying bribes is the antithesis of capitalism. It allows very large established and often wasteful companies with incompetent management to out-bid smaller streamlined organizations that will get a job done faster, more economically and with better quality than their larger counterparts.

The following case excerpt was published on the SEC web site. It alleges that a major U.S. corporation violated the Foreign Corrupt Practices Act by paying off foreign officials. Please take a look at the details of this case:

"The Securities and Exchange Commission filed a settled enforcement action on December 27, 2010, in the U.S. District Court for the Southern District of Florida to resolve charges that Alcatel-Lucent, S.A. (Alcatel) violated the anti-bribery, books and records, and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) by paying bribes to foreign government officials to obtain or retain business in Latin America and Asia.

Alcatel, the provider of telecommunications equipment and services, has offered to pay a total of $137.372 million in disgorgement and fines, including $45.372 million in disgorgement to the SEC. In a related action, Alcatel will pay a $92 million criminal fine to the U.S. Department of Justice.

The SEC’s complaint, filed in the Southern District of Florida, alleges that Alcatel’s bribes went to government officials in Costa Rica, Honduras, Malaysia, and Taiwan between December 2001 and June 2006. An Alcatel subsidiary provided at least $14.5 million to consulting firms through sham consulting agreements for use in the bribery scheme in Costa Rica. Various high-level government officials in Costa Rica received at least $7 million of the $14.5 million to ensure Alcatel obtained or retained three contracts to provide telephone services in Costa Rica.

The SEC alleges that the same Alcatel subsidiary bribed officials in the government of Honduras to obtain or retain five telecommunications contracts. Another Alcatel subsidiary made bribery payments to Malaysian government officials in order to procure a telecommunications contract. An Alcatel subsidiary also made illegal payments to various officials in the government of Taiwan to win a contract to supply railway axle counters to the Taiwan Railway Administration.

According to the SEC’s complaint, all of the bribery payments were undocumented or improperly recorded as consulting fees in the books of Alcatel’s subsidiaries and then consolidated into Alcatel’s financial statements. The leaders of several Alcatel subsidiaries and geographical regions, including some who reported directly to Alcatel’s executive committee, either knew or were severely reckless in not knowing about the misconduct.

The SEC’s complaint charges that Alcatel violated Section 30A of the Securities Exchange Act of 1934 by making illicit payments to foreign government officials, through its subsidiaries and agents, in order to obtain or retain business. Alcatel violated Section 13(b)(2)(B) of the Exchange Act by failing to have adequate internal controls to detect and prevent the payments. Alcatel violated Section 13(b)(2)(A) of the Exchange Act by improperly recording the payments in its books and records. Alcatel violated Section 13(b)(5) of the Exchange Act when its subsidiaries knowingly failed to implement a system of internal controls and knowingly falsified their books and records to camouflage bribes as consulting payments. Without admitting or denying the SEC’s allegations, Alcatel has consented to a court order permanently enjoining it from future violations of these statutory provisions; ordering the company to pay $45.372 million in disgorgement of wrongfully obtained profits, and ordering it to comply with certain undertakings, including an independent monitor for a three year term.

The SEC acknowledges the assistance of the U.S. Department of Justice, Fraud Section; the Federal Bureau of Investigation; the Office of the Attorney General in Costa Rica; the Fiscalía de Delitos Económicos, Corrupción y Tributarios in Costa Rica; and the Service Central de Prévention de la Corruption in France."

The current SEC seems to have done well in recovering monies in this case. Alleged crimes like this seldom see the light of day and it is good the SEC published it on their web page.

SEC CHARGED BANC OF AMERICA SECUITIES WITH SECURITIES FRAUD

The following is a breaking story which alleged that Banc of America Securities committed fraud in it’s dealings with municipal bonds. BAS was part of Bank of America and was merged with Merril Lynch when Bank of America took over that firm. The following excerpt from the SEC web page shows in detail the case which the SEC laid out against BAS:

"Washington, D.C., Dec. 7, 2010 — The Securities and Exchange Commission today charged Banc of America Securities, LLC (BAS) with securities fraud for its part in an effort to rig bids in connection with the investment of proceeds of municipal securities.

To settle the SEC's charges, BAS has agreed to pay more than $36 million in disgorgement and interest. In addition, BAS and its affiliates have agreed to pay another $101 million to other federal and state authorities for its conduct.
"This ongoing investigation has helped to expose wide-spread corruption in the municipal reinvestment industry," said Robert Khuzami, Director of the SEC's Division of Enforcement. "The conduct was egregious — in return for business, the company repeatedly paid undisclosed gratuitous payments and kickbacks and affirmatively misrepresented that the bidding process was proper."
When investors purchase municipal securities, the municipalities generally invest the proceeds temporarily in reinvestment products before the money is used for the intended purposes. Under relevant IRS regulations, the proceeds of tax-exempt municipal securities must generally be invested at fair market value. The most common way of establishing fair market value is through a competitive bidding process, whereby bidding agents search for the appropriate investment vehicle for a municipality.
In its Order, the SEC found that the bidding process was not competitive because it was tainted by undisclosed consultations, agreements, or payments and, therefore, could not be used to establish the fair market value of the reinvestment instruments. As a result, these improper bidding practices affected the prices of the reinvestment products and jeopardized the tax-exempt status of the underlying municipal securities, the principal amounts of which totaled billions of dollars.
According to the Commission's Order, certain bidding agents steered business from municipalities to BAS through a variety of mechanisms. In some cases, the agents gave BAS information on competing bids (last looks), and deliberately obtained off-market "courtesy" bids or purposefully non-winning bids so that BAS could win the transaction (set-ups). As a result, BAS won the bids for 88 affected reinvestment instruments, such as guaranteed investment contracts (GICs), repurchase agreements (Repos) and forward purchase agreements (FPAs).
In return, BAS steered business to those bidding agents and submitted courtesy and purposefully non-winning bids upon request. In addition, those bidding agents were at times rewarded with, among other things, undisclosed gratuitous payments and kickbacks. The Commission also found that former officers of BAS participated in, and condoned, these improper bidding practices.
BAS is now known as Merrill Lynch, Pierce, Fenner & Smith Incorporated following a merger.
Elaine C. Greenberg, Chief of the SEC's Municipal Securities and Public Pensions Unit, added "This conduct threatened the integrity of the municipal marketplace, affecting not only the municipal issuers who were directly defrauded, but also the thousands of investors nationwide who purchased their tax-exempt municipal securities."
Without admitting or denying the SEC's findings, BAS consented to the entry of a Commission Order which censures BAS, requires it to cease-and-desist from committing or causing any violations and any future violations of Section 15(c)(1)(A) of the Exchange Act of 1934, and to pay disgorgement plus prejudgment interest totaling $36,096,442 directly to the affected entities.
In determining to accept BAS' offer, which does not include the imposition of a civil penalty, the Commission considered the cooperation of and remedial actions undertaken by BAS in connection with the Commission's investigation as well as investigations conducted by other law enforcement agencies. Among other things, BAS self-reported the bidding practices to the Antitrust Division of the Department of Justice.
In a related action, the Commission barred Douglas Lee Campbell, a former officer of BAS, from association with any broker, dealer or investment adviser, based upon his guilty plea to a criminal information on Sept. 9, 2010, in United States v. Douglas Lee Campbell (Criminal Action No. 10-cr-803) charging him with two counts of conspiracy and one count of wire fraud. The criminal information charged, among other things, that Campbell engaged in fraudulent misconduct in connection with the competitive bidding process involving the investment of proceeds of tax-exempt municipal bonds. The Commission is not imposing a civil penalty against Campbell based on his cooperation in the Commission's investigation.

Deputy Chief Mark R. Zehner and Assistant Municipal Securities Counsel Denise D. Colliers of the SEC's Municipal Securities and Public Pensions Unit conducted the investigation out of the agency's Philadelphia Regional Office under the leadership of Unit Chief Elaine C. Greenberg, Regional Director Daniel M. Hawke and Assistant Regional Director Mary P. Hansen.
The SEC thanks the Antitrust Division of the Department of Justice and the Federal Bureau of Investigation for their cooperation and assistance in this matter. The SEC is bringing this action in coordination with the Internal Revenue Service, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and 20 State Attorney Generals.
The SEC's investigation is continuing."

The above is an ongoing story and it may be possible that several other
institutions might be involved in similar schemes. Maybe other institutions should be feeling nervous with the SEC's current dedication to giving the corpses of financial institutions very detailed autopsies.