Everyone who ever has traded very many stocks knows that insider trading and manipulated trading by large institutions goes on all the time. The following is a case that the SEC for whatever reason decided to prosecute. The case is from the SEC blog:
" Washington, D.C., April 6, 2011 – The Securities and Exchange Commission today charged a corporate attorney and a Wall Street trader with insider trading in advance of at least 11 merger and acquisition announcements involving clients of the law firm where the attorney worked.
The SEC alleges that Matthew H. Kluger, who formerly worked at Wilson Sonsini Goodrich & Rosati, and Garrett D. Bauer did not have a direct relationship with each other, but were linked only through a mutual friend who acted as a middleman to facilitate the illegal scheme. Kluger and Bauer communicated with the middleman using public telephones and prepaid disposable mobile phones in order to avoid detection. According to the SEC’s complaint, Kluger accessed information on 11 mergers and acquisitions involving the law firm’s clients and then tipped the middleman. In at least nine instances, the middleman passed the information on to Bauer, who illegally traded for illicit profits totaling nearly $32 million.
In a parallel criminal action, the U.S. Attorney’s Office for the District of New Jersey today announced the arrests of Kluger and Bauer.
“They plotted to fly under law enforcement radar by using disposable phones to hide their communications, cash withdrawals to obscure the flow of tainted money, and a middleman to conceal Kluger as the secret source of inside information,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Now, those same schemes and devices serve only to make it clear beyond any doubt that Kluger and Bauer were involved in an illegal scheme.”
Daniel M. Hawke, Chief of the SEC’s Market Abuse Unit and Director of its Philadelphia Regional Office, added “This was a brazen and deplorable scheme in which Kluger, a lawyer, repeatedly abused his access to confidential client information. As this and recent cases demonstrate, the Division of Enforcement is working aggressively to root out and identify hard-to-detect insider trading by connecting patterns of trading to sources of material non-public information - whether those sources are law firms or others who are under a duty to keep such information confidential.”
According to the SEC’s complaint filed in federal court in Newark, N.J., Kluger, Bauer and the middleman deliberately structured their communications and trading so that Kluger and the middleman could share in the insider trading proceeds while Bauer could illegally trade and profit without being connected to Kluger as a possible source of information. Bauer withdrew cash from his bank accounts and kicked back hundreds of thousands of dollars to the middleman, who in turn delivered at least $500,000 to Kluger for his role in the scheme.
According to the SEC’s complaint, over the past five years Kluger accessed and then tipped confidential information in advance of the following 11 mergers and acquisitions between April 2006 and March 2011:
The acquisition of Advanced Digital Information Corp. by Quantum Corp., announced May 2, 2006.
The acquisition of Acxiom Corp. by multiple entities, announced on May 17, 2007.
The strategic recapitalization of Palm Inc. with Elevation Partners LP, announced June 4, 2007.
The planned acquisition of 3Com Corp. by Bain Capital LLC, announced Sept. 28, 2007.
The acquisition of Visual Sciences Inc. by Omniture Inc., announced Oct. 25, 2007.
The acquisition of Ansoft Corp. by Ansys Inc., announced March 31, 2008.
The acquisition of Sun Microsystems Inc. by Oracle Corp., announced April 20, 2009.
The acquisition of Omniture Inc. by Adobe Systems Inc., announced Sept. 15, 2009.
The acquisition of 3Com Corp. by Hewlett-Packard Co., announced Nov. 11, 2009.
The acquisition of McAfee Inc. by Intel Corp., announced Aug. 19, 2010.
The acquisition of Zoran Corp. by CSR PLC, announced Feb. 20, 2011.
The middleman traded in two deals on the basis of information that he received from Kluger and profited at least $690,000.
The SEC alleges that Kluger and Bauer violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.”
This is a photo of the National Register of Historic Places listing with reference number 7000063
Tuesday, April 12, 2011
DODD-FRANK: RULES FOR SWAPS TO BE DISCUSSED IN MAY
The following excerpt is from the SEC web site and involves Dodd-Frank implementation of rules on Swaps under the Wall Street Reform and Protection Act:
" Washington, D.C. April 12, 2011 — The staffs of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) today announced that they intend to hold a two-day joint public roundtable on May 2-3, 2011, to discuss the schedule for implementing final rules for swaps and security-based swaps under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Dodd-Frank Act gives the CFTC and SEC certain flexibility to set effective dates and a schedule for compliance with rules implementing Title VII of the Act, which involves oversight of swaps and security-based swaps, so that market participants have time to develop the policies, procedures, systems and processes needed to comply with the new regulatory requirements.
Public comments on Title VII have helped inform the Commissions as to what requirements can be met sooner and which ones will take more time. The roundtable is intended to supplement the comments received to date and help inform the Commissions as they proceed with rulemaking. The order in which the Commissions finalize the rules need not determine the order in which the rules become effective or the applicable compliance dates.
The roundtable will provide the public with the opportunity to comment on whether to phase implementation of the new requirements based on factors such as: the type of swap or security-based swap, including by asset class; the type of market participants that engage in such trades; the speed with which market infrastructures can meet the new requirements; and whether registered market infrastructures or participants might be required to have policies and procedures in place ahead of compliance with such policies and procedures by non-registrants.
The roundtable is expected to include panel discussions of (1) compliance dates for new rules for existing trading platforms and clearinghouses and the registration and compliance with rules for new platforms, such as swap and security-based swap execution facilities, and data repositories for swaps and security-based swaps; (2) compliance dates for new requirements for dealers and major participants in swaps and security-based swaps; (3) implementation of clearing mandates; (4) compliance dates for financial entities such as hedge funds, asset managers, insurance companies and pension funds subject to a clearing mandate and other requirements; and (5) considerations with regard to non-financial end users.
The roundtable will be held from 9:30 am to 4:00 pm each day in the Conference Center at the CFTC’s Headquarters, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC. The discussion will be open to the public with seating on a first-come, first-served basis."
" Washington, D.C. April 12, 2011 — The staffs of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) today announced that they intend to hold a two-day joint public roundtable on May 2-3, 2011, to discuss the schedule for implementing final rules for swaps and security-based swaps under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Dodd-Frank Act gives the CFTC and SEC certain flexibility to set effective dates and a schedule for compliance with rules implementing Title VII of the Act, which involves oversight of swaps and security-based swaps, so that market participants have time to develop the policies, procedures, systems and processes needed to comply with the new regulatory requirements.
Public comments on Title VII have helped inform the Commissions as to what requirements can be met sooner and which ones will take more time. The roundtable is intended to supplement the comments received to date and help inform the Commissions as they proceed with rulemaking. The order in which the Commissions finalize the rules need not determine the order in which the rules become effective or the applicable compliance dates.
The roundtable will provide the public with the opportunity to comment on whether to phase implementation of the new requirements based on factors such as: the type of swap or security-based swap, including by asset class; the type of market participants that engage in such trades; the speed with which market infrastructures can meet the new requirements; and whether registered market infrastructures or participants might be required to have policies and procedures in place ahead of compliance with such policies and procedures by non-registrants.
The roundtable is expected to include panel discussions of (1) compliance dates for new rules for existing trading platforms and clearinghouses and the registration and compliance with rules for new platforms, such as swap and security-based swap execution facilities, and data repositories for swaps and security-based swaps; (2) compliance dates for new requirements for dealers and major participants in swaps and security-based swaps; (3) implementation of clearing mandates; (4) compliance dates for financial entities such as hedge funds, asset managers, insurance companies and pension funds subject to a clearing mandate and other requirements; and (5) considerations with regard to non-financial end users.
The roundtable will be held from 9:30 am to 4:00 pm each day in the Conference Center at the CFTC’s Headquarters, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC. The discussion will be open to the public with seating on a first-come, first-served basis."
5 AGENCIES ASK FOR COMMENTS ON SWAP MARGIN AND CAPITAL REQUIREMENTS
The following was found on the FDIC blog site:
"Five federal agencies are seeking comment on a proposed rule to establish margin and capital requirements for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The rule is proposed by the Federal Reserve Board, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and the Office of the Comptroller of the Currency. The proposed rule would require swap entities regulated by the five agencies to collect minimum amounts of initial margin and variation margin from counterparties to non-cleared swaps and non-cleared, security-based swaps
The amount of margin that would be required under the proposed rule would vary based on the relative risk of the counterparty and of the swap or security-based swap. A swap entity would not be required to collect margin from a commercial end user as long as its margin exposure is below an appropriate credit exposure limit established by the swap entity. A swap entity would also not be required to collect margin from low-risk financial end users as long as its margin exposure does not exceed a specific threshold. The proposed margin requirements would apply to new, non-cleared swaps or security-based swaps entered into after the proposed rule's effective date. The proposal also seeks comment on several alternative approaches to establishing margin requirements.
Provisions in the Dodd-Frank Act also require the agencies to establish capital requirements for regulated swap entities. The proposed rule would implement these provisions by requiring swap entities to comply with the existing capital standards that apply to those entities as part of their prudential regulation, as those capital standards already address non-cleared swaps and non-cleared, security-based swaps.
Staff of the agencies consulted with staff of the Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission in developing the proposed rule.
The agencies request comments on the proposed rule by June 24, 2011."
"Five federal agencies are seeking comment on a proposed rule to establish margin and capital requirements for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The rule is proposed by the Federal Reserve Board, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and the Office of the Comptroller of the Currency. The proposed rule would require swap entities regulated by the five agencies to collect minimum amounts of initial margin and variation margin from counterparties to non-cleared swaps and non-cleared, security-based swaps
The amount of margin that would be required under the proposed rule would vary based on the relative risk of the counterparty and of the swap or security-based swap. A swap entity would not be required to collect margin from a commercial end user as long as its margin exposure is below an appropriate credit exposure limit established by the swap entity. A swap entity would also not be required to collect margin from low-risk financial end users as long as its margin exposure does not exceed a specific threshold. The proposed margin requirements would apply to new, non-cleared swaps or security-based swaps entered into after the proposed rule's effective date. The proposal also seeks comment on several alternative approaches to establishing margin requirements.
Provisions in the Dodd-Frank Act also require the agencies to establish capital requirements for regulated swap entities. The proposed rule would implement these provisions by requiring swap entities to comply with the existing capital standards that apply to those entities as part of their prudential regulation, as those capital standards already address non-cleared swaps and non-cleared, security-based swaps.
Staff of the agencies consulted with staff of the Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission in developing the proposed rule.
The agencies request comments on the proposed rule by June 24, 2011."
Sunday, April 10, 2011
BODY ARMOR COMPANY ACCUSED OF ACCOUNTING FRAUD
The following is an excerpt from the SEC website. In this case officials at a maker of body armor were accused of misleading investors:
“Washington, D.C., Feb. 28, 2011 – The Securities and Exchange Commission today charged a major supplier of body armor to the U.S. military and law enforcement agencies for engaging in a massive accounting fraud. The agency separately charged three of the company’s former outside directors and audit committee members for their complicity in the scheme.
The SEC alleges that Pompano Beach, Fla.-based DHB Industries (now known as Point Blank Solutions) engaged in pervasive accounting and disclosure fraud through its senior officers and misappropriated company assets to personally benefit the former CEO. This resulted in the filing of materially false and misleading periodic reports to investors. The SEC further alleges that outside directors Jerome Krantz, Cary Chasin, and Gary Nadelman were willfully blind to numerous red flags signaling the accounting fraud, reporting violations, and misappropriation at DHB.
The SEC previously charged former DHB CEO David Brooks as well as two other former DHB senior officers for their roles in the fraud.
"We will not second-guess the good-faith efforts of directors. But in stark contrast, Krantz, Chasin and Nadelman were directors and audit committee members who repeatedly turned a blind eye to warning signs of fraud and other misconduct by company officers," said Robert Khuzami, Director of the SEC's Division of Enforcement.
Eric I. Bustillo, Director of the SEC’s Miami Regional Office, added, “This massive accounting fraud permeated throughout an entire company and was facilitated by the egregious, wholesale failure of the company’s board to act in the face of mounting red flags. As the fraud swirled around them, Krantz, Chasin, and Nadelman ignored the obvious and submitted to the directives and decisions of DHB’s senior management while themselves profiting from sales of the company’s securities.”
The SEC filed two separate complaints in U.S. District Court for the Southern District of Florida against DHB and the former outside directors. According to the SEC’s complaint against Krantz, Chasin, and Nadelman, their willful blindness to red flags allowed senior management to manipulate the company’s reported gross profit, net income, and other key figures in its earnings releases and public filings between 2003 and 2005. The company overstated inventory values, failed to include appropriate charges for obsolete inventory, and falsified journal entries. By ignoring red flags, the three outside directors also facilitated the misconduct by Brooks, who diverted at least $10 million out of the company through fraudulent transactions with a related entity that he controlled. Their willful blindness to red flags additionally facilitated DHB’s improper payment of millions of dollars in personal expenses for Brooks, including luxury cars, jewelry, art, real estate, extravagant vacations, and prostitution services. Despite being confronted with the red flags indicating fraud, Krantz, Chasin, and Nadelman approved or signed DHB’s false and misleading filings.
The SEC’s complaints against DHB, Krantz, Chasin, and Nadelman charge them with violating or aiding and abetting the antifraud, reporting, books and records, and other provisions of the federal securities laws. DHB has agreed to settle with the SEC and agreed to a permanent injunction from future violations. The proposed settlement took into account the remedial measures already taken by the company. The company is currently in bankruptcy and its settlement with the SEC is pending the approval of the bankruptcy court. The SEC seeks injunctive relief, disgorgement of ill-gotten gains, monetary penalties, and officer and director bars against Krantz, Chasin, and Nadelman.
The U.S. Attorney’s Office for the Eastern District of New York previously filed criminal charges against Brooks, Hatfield, and Schlegel based on the same misconduct. On Sept. 14, 2010, a jury convicted Brooks and Hatfield of, among other things, multiple counts of securities fraud, insider trading, and obstruction of justice, including obstructing the SEC’s investigation. Brooks and Hatfield are awaiting sentencing. Schlegel previously pled guilty to criminal charges pursuant to a plea agreement. The SEC’s civil actions against Brooks, Hatfield, and Schlegel are stayed pending the full resolution of the criminal actions.”
It is hopeful that if the above charges are true that, purchasers of body armor from this company were not also lied to regarding the usefulness of the body armor. In business if someone cheats one group of people they will cheat another group. If someone steals from their employees then they will also steal from their vendors and customers and cheat on their taxes. Criminal minds never stop thinking of ways to steal.
“Washington, D.C., Feb. 28, 2011 – The Securities and Exchange Commission today charged a major supplier of body armor to the U.S. military and law enforcement agencies for engaging in a massive accounting fraud. The agency separately charged three of the company’s former outside directors and audit committee members for their complicity in the scheme.
The SEC alleges that Pompano Beach, Fla.-based DHB Industries (now known as Point Blank Solutions) engaged in pervasive accounting and disclosure fraud through its senior officers and misappropriated company assets to personally benefit the former CEO. This resulted in the filing of materially false and misleading periodic reports to investors. The SEC further alleges that outside directors Jerome Krantz, Cary Chasin, and Gary Nadelman were willfully blind to numerous red flags signaling the accounting fraud, reporting violations, and misappropriation at DHB.
The SEC previously charged former DHB CEO David Brooks as well as two other former DHB senior officers for their roles in the fraud.
"We will not second-guess the good-faith efforts of directors. But in stark contrast, Krantz, Chasin and Nadelman were directors and audit committee members who repeatedly turned a blind eye to warning signs of fraud and other misconduct by company officers," said Robert Khuzami, Director of the SEC's Division of Enforcement.
Eric I. Bustillo, Director of the SEC’s Miami Regional Office, added, “This massive accounting fraud permeated throughout an entire company and was facilitated by the egregious, wholesale failure of the company’s board to act in the face of mounting red flags. As the fraud swirled around them, Krantz, Chasin, and Nadelman ignored the obvious and submitted to the directives and decisions of DHB’s senior management while themselves profiting from sales of the company’s securities.”
The SEC filed two separate complaints in U.S. District Court for the Southern District of Florida against DHB and the former outside directors. According to the SEC’s complaint against Krantz, Chasin, and Nadelman, their willful blindness to red flags allowed senior management to manipulate the company’s reported gross profit, net income, and other key figures in its earnings releases and public filings between 2003 and 2005. The company overstated inventory values, failed to include appropriate charges for obsolete inventory, and falsified journal entries. By ignoring red flags, the three outside directors also facilitated the misconduct by Brooks, who diverted at least $10 million out of the company through fraudulent transactions with a related entity that he controlled. Their willful blindness to red flags additionally facilitated DHB’s improper payment of millions of dollars in personal expenses for Brooks, including luxury cars, jewelry, art, real estate, extravagant vacations, and prostitution services. Despite being confronted with the red flags indicating fraud, Krantz, Chasin, and Nadelman approved or signed DHB’s false and misleading filings.
The SEC’s complaints against DHB, Krantz, Chasin, and Nadelman charge them with violating or aiding and abetting the antifraud, reporting, books and records, and other provisions of the federal securities laws. DHB has agreed to settle with the SEC and agreed to a permanent injunction from future violations. The proposed settlement took into account the remedial measures already taken by the company. The company is currently in bankruptcy and its settlement with the SEC is pending the approval of the bankruptcy court. The SEC seeks injunctive relief, disgorgement of ill-gotten gains, monetary penalties, and officer and director bars against Krantz, Chasin, and Nadelman.
The U.S. Attorney’s Office for the Eastern District of New York previously filed criminal charges against Brooks, Hatfield, and Schlegel based on the same misconduct. On Sept. 14, 2010, a jury convicted Brooks and Hatfield of, among other things, multiple counts of securities fraud, insider trading, and obstruction of justice, including obstructing the SEC’s investigation. Brooks and Hatfield are awaiting sentencing. Schlegel previously pled guilty to criminal charges pursuant to a plea agreement. The SEC’s civil actions against Brooks, Hatfield, and Schlegel are stayed pending the full resolution of the criminal actions.”
It is hopeful that if the above charges are true that, purchasers of body armor from this company were not also lied to regarding the usefulness of the body armor. In business if someone cheats one group of people they will cheat another group. If someone steals from their employees then they will also steal from their vendors and customers and cheat on their taxes. Criminal minds never stop thinking of ways to steal.
EXECUTIVES AT FAIR FINANCIAL COMPANY OF OHIO CHARGED WITH FRAUD
The following was obtained from the Department of Justice web site and involves charges of investment fraud against executives at Fair Financial Company:
“Wednesday, March 16, 2011
Three Former Executives Charged in $200 Million Fraud Scheme Involving Fair Financial Company Investors
WASHINGTON – Three former executives of Fair Financial Company, an Ohio financial services business, were arrested today and charged in an indictment filed in the Southern District of Indiana for their roles in a scheme to defraud approximately 5,000 investors of more than $200 million, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division; Timothy M. Morrison, First Assistant U.S. Attorney for the Southern District of Indiana; and Special Agent in Charge Michael E. Welch of the FBI in Indiana.
The indictment, returned by a federal grand jury on March 15, 2011, and unsealed today, charges Timothy S. Durham, 48; James F. Cochran, 55; and Rick D. Snow, 47, with one count of conspiracy to commit wire and securities fraud, 10 counts of wire fraud and one count of securities fraud. Durham was arrested in Los Angeles, and Cochran and Snow were arrested in Indianapolis.
According to the indictment, Durham and Cochran purchased Fair, whose headquarters were in Akron, Ohio, in 2002. Durham was the chief executive officer of Fair and a member of the board of directors, Cochran was the chairman of the board of Fair, and Snow, a certified public accountant, served as the chief financial officer of Fair.
The indictment alleges that between approximately February 2005 through the end of November 2009, Durham, Cochran and Snow executed a scheme to defraud Fair’s investors by making and causing others to make false and misleading statements about Fair’s financial condition and about the manner in which they were using Fair investor money. The indictment further alleges that Durham, Cochran and Snow executed the scheme to enrich themselves, to obtain millions of dollars of investors’ funds through false representations and promises, and to conceal from the investing public Fair’s true financial condition and the manner in which Fair was using investor money.
According to the indictment, when Durham and Cochran purchased Fair in 2002, Fair reported debts to investors from the sale of investment certificates of approximately $37 million and income producing assets in the form of finance receivables of approximately $48 million. The indictment alleges that in November 2009, after Durham and Cochran had owned the company for seven years, Fair’s debts to investors from the sale of investment certificates had grown to more than $200 million, while Fair’s income producing assets consisted only of the loans to Durham and Cochran, their associates and the businesses they owned or controlled, which they claimed were worth approximately $240 million, and finance receivables of approximately $24 million.
“These former executives are charged with engaging in fraudulent and deceptive business practices to hide from investors and regulators Fair’s true financial condition and their misuse of the company’s funds,” said Assistant Attorney General Breuer. “As alleged in the indictment, by using investors’ money to fund their failing business ventures and personal lifestyles, they perpetrated a $200 million fraud. Today’s charges and arrests reflect that investigating and prosecuting financial fraud is a Justice Department priority.”
“This has been an arduous journey, as are most large white collar cases,” said First Assistant U.S. Attorney Morrison. “But we now welcome the opportunity to prove the indictment’s allegations against these three men beyond a reasonable doubt.”
“These arrests follow the largest corporate fraud investigation in the history of the FBI in Indiana which resulted in over 5,000 victims and an estimated loss of $200 million dollars,” said Special Agent in Charge Welch.
According to the indictment, when Durham and Cochran bought Fair in 2002 its primary business was purchasing and collecting finance receivables. Fair financed its purchase of finance receivables by selling investment certificates to investors. Investors who purchased investment certificates were promised regular interest payments for a set period of time, at the end of which they were entitled to the return of their principal investment.
In order to sell its investment certificates, Fair was required to register the investment certificates with the State of Ohio Division of Securities. Fair did so by submitting registration documents and a proposed “offering circular” to the Division of Securities that was required to contain truthful and accurate disclosures about Fair’s business.
The indictment alleges that after Durham and Cochran acquired Fair, they changed the manner in which the company operated and used its funds. Rather than using the funds Fair raised from investors primarily for the purpose of purchasing finance receivables, Durham and Cochran caused Fair to extend loans to themselves, their associates and businesses they owned or controlled, which caused a steady and substantial deterioration in Fair’s financial condition.
According to the indictment, companies owned or controlled by Durham and Cochran, including DC Investments LLC (DCI) and Obsidian Enterprises Inc., as well as other businesses controlled through Obsidian and DCI, were among the primary beneficiaries of the loans Durham and Cochran made with Fair investor money. Durham and Cochran allegedly loaned money through Obsidian and DCI to a variety of struggling businesses and start-up ventures, including a car magazine, restaurants, a surgery center, trailer manufacturers, internet companies, a race car team, a replica vintage car manufacturer, a rubber reclaiming plant and a luxury bus leasing business. The indictment further alleges that after receiving loans from Fair, many of these businesses failed and were never able to repay the money they borrowed, while others, with the benefit of continued loans from Fair, struggled as unprofitable entities for years. In addition, Durham and Cochran allegedly took loans of Fair investor money for themselves, and used a significant portion of the proceeds of the loans to maintain their lifestyles and to pay for personal expenses.
According to the indictment, Durham, Cochran and Snow terminated Fair’s independent accountants who, at various points during 2005 and 2006, told the defendants that many of Fair’s loans were impaired or did not have sufficient collateral. The indictment alleges that after firing the accountants, the defendants never released audited financial statements for 2005, and never obtained or released audited financial statements for 2006 through September 2009. The indictment further alleges that with independent accountants no longer auditing Fair’s financial statements, the defendants were able to conceal from investors Fair’s true financial condition.
The indictment also alleges that Durham, Cochran and Snow falsely represented, in registration documents and offering circulars submitted to the Division of Securities and in offering circulars distributed to investors, that the loans on Fair’s books were assets that could support Fair’s sale of investment certificates. According to the indictment, the defendants knew that in reality, the loans were worthless or grossly overvalued; producing little or no cash proceeds; supported by insufficient or non-existent collateral to assure repayment; and in part advances, salaries, bonuses and lines of credit for Durham and Cochran’s personal expenses.
The indictment alleges that the defendants engaged in a variety of other fraudulent activities to conceal from the Division of Securities and from investors Fair’s true financial health and cash flow problems, including making false and misleading statements to concerned investors who either had not received principal or interest payments on their certificates from Fair or who were worried about Fair’s financial health, and directing employees of Fair not to pay investors who were owed interest or principal payments on their certificates. According to the indictment, even though Fair’s financial condition had deteriorated and Fair was experiencing severe cash flow problems, Durham and Cochran continued to funnel Fair investor money to themselves for their personal expenses, to their family, friends and acquaintances, and to the struggling businesses that they owned or controlled.
An indictment is only a charge and is not evidence of guilt. A defendant is presumed innocent and is entitled to a fair trial at which the government must prove guilt beyond a reasonable doubt.
Also today, the U.S. Securities and Exchange Commission filed civil securities charges against Durham, Cochran and Snow.
This case is being prosecuted by Assistant U.S. Attorneys Winfield D. Ong and Joe H. Vaughn of the Southern District of Indiana and Assistant Chief Robertson Park and Trial Attorney Henry P. Van Dyck of the Fraud Section of the Criminal Division. The investigation was led by the FBI in Indianapolis.
Durham, Cochran and Snow each face a maximum of five years in prison for the conspiracy count, 20 years in prison for each wire fraud count and 20 years in prison for the securities fraud count. Additionally, each defendant could be fined $250,000 for each count of conviction. An initial hearing was held today in Indianapolis before a U.S. Magistrate Judge Kennard Foster for Cochran and Snow, and an initial hearing for Durham will be held in Los Angeles.
This prosecution is part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.”
“Wednesday, March 16, 2011
Three Former Executives Charged in $200 Million Fraud Scheme Involving Fair Financial Company Investors
WASHINGTON – Three former executives of Fair Financial Company, an Ohio financial services business, were arrested today and charged in an indictment filed in the Southern District of Indiana for their roles in a scheme to defraud approximately 5,000 investors of more than $200 million, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division; Timothy M. Morrison, First Assistant U.S. Attorney for the Southern District of Indiana; and Special Agent in Charge Michael E. Welch of the FBI in Indiana.
The indictment, returned by a federal grand jury on March 15, 2011, and unsealed today, charges Timothy S. Durham, 48; James F. Cochran, 55; and Rick D. Snow, 47, with one count of conspiracy to commit wire and securities fraud, 10 counts of wire fraud and one count of securities fraud. Durham was arrested in Los Angeles, and Cochran and Snow were arrested in Indianapolis.
According to the indictment, Durham and Cochran purchased Fair, whose headquarters were in Akron, Ohio, in 2002. Durham was the chief executive officer of Fair and a member of the board of directors, Cochran was the chairman of the board of Fair, and Snow, a certified public accountant, served as the chief financial officer of Fair.
The indictment alleges that between approximately February 2005 through the end of November 2009, Durham, Cochran and Snow executed a scheme to defraud Fair’s investors by making and causing others to make false and misleading statements about Fair’s financial condition and about the manner in which they were using Fair investor money. The indictment further alleges that Durham, Cochran and Snow executed the scheme to enrich themselves, to obtain millions of dollars of investors’ funds through false representations and promises, and to conceal from the investing public Fair’s true financial condition and the manner in which Fair was using investor money.
According to the indictment, when Durham and Cochran purchased Fair in 2002, Fair reported debts to investors from the sale of investment certificates of approximately $37 million and income producing assets in the form of finance receivables of approximately $48 million. The indictment alleges that in November 2009, after Durham and Cochran had owned the company for seven years, Fair’s debts to investors from the sale of investment certificates had grown to more than $200 million, while Fair’s income producing assets consisted only of the loans to Durham and Cochran, their associates and the businesses they owned or controlled, which they claimed were worth approximately $240 million, and finance receivables of approximately $24 million.
“These former executives are charged with engaging in fraudulent and deceptive business practices to hide from investors and regulators Fair’s true financial condition and their misuse of the company’s funds,” said Assistant Attorney General Breuer. “As alleged in the indictment, by using investors’ money to fund their failing business ventures and personal lifestyles, they perpetrated a $200 million fraud. Today’s charges and arrests reflect that investigating and prosecuting financial fraud is a Justice Department priority.”
“This has been an arduous journey, as are most large white collar cases,” said First Assistant U.S. Attorney Morrison. “But we now welcome the opportunity to prove the indictment’s allegations against these three men beyond a reasonable doubt.”
“These arrests follow the largest corporate fraud investigation in the history of the FBI in Indiana which resulted in over 5,000 victims and an estimated loss of $200 million dollars,” said Special Agent in Charge Welch.
According to the indictment, when Durham and Cochran bought Fair in 2002 its primary business was purchasing and collecting finance receivables. Fair financed its purchase of finance receivables by selling investment certificates to investors. Investors who purchased investment certificates were promised regular interest payments for a set period of time, at the end of which they were entitled to the return of their principal investment.
In order to sell its investment certificates, Fair was required to register the investment certificates with the State of Ohio Division of Securities. Fair did so by submitting registration documents and a proposed “offering circular” to the Division of Securities that was required to contain truthful and accurate disclosures about Fair’s business.
The indictment alleges that after Durham and Cochran acquired Fair, they changed the manner in which the company operated and used its funds. Rather than using the funds Fair raised from investors primarily for the purpose of purchasing finance receivables, Durham and Cochran caused Fair to extend loans to themselves, their associates and businesses they owned or controlled, which caused a steady and substantial deterioration in Fair’s financial condition.
According to the indictment, companies owned or controlled by Durham and Cochran, including DC Investments LLC (DCI) and Obsidian Enterprises Inc., as well as other businesses controlled through Obsidian and DCI, were among the primary beneficiaries of the loans Durham and Cochran made with Fair investor money. Durham and Cochran allegedly loaned money through Obsidian and DCI to a variety of struggling businesses and start-up ventures, including a car magazine, restaurants, a surgery center, trailer manufacturers, internet companies, a race car team, a replica vintage car manufacturer, a rubber reclaiming plant and a luxury bus leasing business. The indictment further alleges that after receiving loans from Fair, many of these businesses failed and were never able to repay the money they borrowed, while others, with the benefit of continued loans from Fair, struggled as unprofitable entities for years. In addition, Durham and Cochran allegedly took loans of Fair investor money for themselves, and used a significant portion of the proceeds of the loans to maintain their lifestyles and to pay for personal expenses.
According to the indictment, Durham, Cochran and Snow terminated Fair’s independent accountants who, at various points during 2005 and 2006, told the defendants that many of Fair’s loans were impaired or did not have sufficient collateral. The indictment alleges that after firing the accountants, the defendants never released audited financial statements for 2005, and never obtained or released audited financial statements for 2006 through September 2009. The indictment further alleges that with independent accountants no longer auditing Fair’s financial statements, the defendants were able to conceal from investors Fair’s true financial condition.
The indictment also alleges that Durham, Cochran and Snow falsely represented, in registration documents and offering circulars submitted to the Division of Securities and in offering circulars distributed to investors, that the loans on Fair’s books were assets that could support Fair’s sale of investment certificates. According to the indictment, the defendants knew that in reality, the loans were worthless or grossly overvalued; producing little or no cash proceeds; supported by insufficient or non-existent collateral to assure repayment; and in part advances, salaries, bonuses and lines of credit for Durham and Cochran’s personal expenses.
The indictment alleges that the defendants engaged in a variety of other fraudulent activities to conceal from the Division of Securities and from investors Fair’s true financial health and cash flow problems, including making false and misleading statements to concerned investors who either had not received principal or interest payments on their certificates from Fair or who were worried about Fair’s financial health, and directing employees of Fair not to pay investors who were owed interest or principal payments on their certificates. According to the indictment, even though Fair’s financial condition had deteriorated and Fair was experiencing severe cash flow problems, Durham and Cochran continued to funnel Fair investor money to themselves for their personal expenses, to their family, friends and acquaintances, and to the struggling businesses that they owned or controlled.
An indictment is only a charge and is not evidence of guilt. A defendant is presumed innocent and is entitled to a fair trial at which the government must prove guilt beyond a reasonable doubt.
Also today, the U.S. Securities and Exchange Commission filed civil securities charges against Durham, Cochran and Snow.
This case is being prosecuted by Assistant U.S. Attorneys Winfield D. Ong and Joe H. Vaughn of the Southern District of Indiana and Assistant Chief Robertson Park and Trial Attorney Henry P. Van Dyck of the Fraud Section of the Criminal Division. The investigation was led by the FBI in Indianapolis.
Durham, Cochran and Snow each face a maximum of five years in prison for the conspiracy count, 20 years in prison for each wire fraud count and 20 years in prison for the securities fraud count. Additionally, each defendant could be fined $250,000 for each count of conviction. An initial hearing was held today in Indianapolis before a U.S. Magistrate Judge Kennard Foster for Cochran and Snow, and an initial hearing for Durham will be held in Los Angeles.
This prosecution is part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.”
Friday, April 8, 2011
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.
“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.
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