Category: Fraud

Improvements Needed Within the SEC’s Division of Enforcement

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The SEC’s Inspector General, H. David Kotz, released his most recent report: Program Improvements Needed Within the SEC’s Division of Enforcement.pdf-icon

The report is sort of a follow-up to the Madoff Report. The Office of the Inspector General conducted a review “to identify systemic issues that would prevent Enforcement from accomplishing its mission to enforce the securities laws and protect investors and determine from discussions with staff and supervisors which programmatic improvements are needed.”

The Inspector General’s 21 recommendations are:

  1. Establish formal guidance for evaluating various types of complaints (e.g., Ponzi schemes) and train appropriate staff on the use of the guidance. The guidance should address the necessary steps and key information required to be collected when conducting preliminary inquiries of various types of complaints, specify what information should be documented, and list whom should be consulted in other offices within the SEC with relevant expertise in various subject matters and other pertinent data.
  2. Ensure the SEC’s tip and complaint handling system provides for data capture of relevant information relating to the vetting process to document why a complaint was or was not acted upon and who made that determination.
  3. Require tips and complaints to be reviewed by at least two individuals experienced in the subject matter prior to deciding not to take further action.
  4. Establish guidance to require that all complaints that appear on the surface to be credible and compelling be probed further by in-depth interviews with the sources to assess the complaints validity and to determine what issues need to be investigated. Such guidance should also require that staff obtain all relevant documentation related to such complaints.
  5. Provide training to staff to ensure they are aware of the guidelines contained in Section 3.2.5 of the Enforcement Manual and Title 17 of the Code of Federal Regulations, Section 202.10 for obtaining information from media sources.
  6. Annually review and test the effectiveness of its policies and procedures with regard to its new tip and complaint handling system. Enforcement should also modify these policies and procedures, where needed, to ensure adherence and adequacy.
  7. Put in place procedures to ensure that investigations are assigned to teams where at least one individual on the team has specific and sufficient knowledge of the subject matter (e.g. Ponzi schemes) and the team has access to at least one additional individual who also has such expertise or knowledge.
  8. Train staff on what resources and information is available from the national specialized units and when and how assistance from these units should be requested.
  9. Make it mandatory that planning memoranda be prepared during an investigation and that the plan includes a section identifying what type of expertise or assistance is needed from others within and outside the Commission. The plan should also be reviewed and approved by senior Enforcement personnel.
  10. Require that after the planning memorandum is drafted, it is circulated to all team members assigned to the investigation, and all team members then should meet to discuss the investigation approach, methodology and any concerns team members wish to raise.
  11. Establish procedures so that junior-level Enforcement attorneys who are having difficulty with obtaining timely assistance from outside offices are able to escalate their concerns to senior-level management within Enforcement.
  12. Conduct periodic internal reviews of any newly implemented policies and procedures related to information sharing with Divisions and Offices outside of Enforcement to ensure they are operating efficiently and effectively and necessary changes are made.
  13. Require that the planning memorandum and associated scope, methodology and timeframes be routinely reviewed by an investigator’s immediate supervisor to ensure investigations remain on track and determine whether adjustments in scope, etc. are necessary.
  14. Ensure that sufficient resources, both supervisory and support, are dedicated to investigations upfront to provide for adequate and thorough supervision of cases and effective handling of the investigations.
  15. Put in place policies and procedures or training mechanisms to ensure staff have an understanding of what types of information should be validated during investigations with independent parties such as the Financial Industry Regulatory Authority, Depository Trust Company, and Chicago Board Options Exchange.
  16. Include in its complaint handling guidance proper procedures for ensuring complaints received even if an investigation is pending closure, are properly vetted.
  17. Conduct periodic internal reviews to ensure that MUIs are opened in accordance with any newly developed Commission guidance and examine ways to streamline the case closing process. Enforcement should also ensure staff have adequate time in which to complete these types of administrative tasks.
  18. Put in place a process to periodically remind staff of their responsibilities regarding impartiality in the performance of official duties and instruct staff where they can find additional information regarding impartiality.
  19. Establish or utilize an existing working group to analyze the OIG survey information regarding staff concerns over communication of program priorities and make recommended improvements to the Director of Enforcement.
  20. Establish or utilize an existing working group to analyze the OIG survey information regarding staff concerns regarding case handling procedures within Enforcement and make recommended improvements to the Director of Enforcement.
  21. Establish or utilize an existing working group to analyze the OIG survey information regarding staff concerns over working relationships within Enforcement and make recommended improvements to the Director of Enforcement.

Robert Khuzami, Director of Enforcement, responded to the Inspector General’s report (The response is in Appendix IV of the report.) and concurred with all 21 recommendations.

References:

KPMG Fraud Survey 2009

kpmg-fraud

KPMG Forensic has released their Fraud Survey 2009pdf-icon.

The survey shows that many managers remain concerned about fraud. There are plenty of investigations of fraud that may have helped fuel the financial markets meltdown. Record levels of government spending may usher in record levels of fraud, waste, and abuse. In these difficult economic times, managers may face pressure to do whatever it takes to “make the numbers.” For those companies operating outside the United States, increased investigation and prosecution of anti-bribery and corruption laws mean foreign operations have increased penalties associated with their risks.

Here are some of the key findings:

Nearly 1/3 of executives expect some form of fraud or misconduct to rise in their organizations.

The majority of executives cite fraud and misconduct as posing significant risks to their industry today.  If such wrongdoing were to be experienced, the greatest concern for over two-thirds of executives is the potential for a loss of public trust when market confidence is at a premium.

Executives expect the threat of fraud to remain steady or rise in the coming year. About three out of four executives believed that fraud and misconduct risks, such as misappropriation of assets and fraudulent financial reporting, will either stay the same or increase over the next 12 months.

Inadequate internal controls or compliance programs heighten the risks of fraud and misconduct. Twothirds of executives reported that inadequate internal controls or compliance programs at their organizations enable fraud and misconduct to go unchecked.

Roughly a quarter of respondents lack effective protocols on how investigations should be conducted and at what point the board of directors should be alerted to potential concerns.

Those areas where respondents cited the most amount of improvement needed include employee communication and training, technology-driven continuous auditing and monitoring techniques, and fraud and misconduct risk assessment.

150 Years or the Firing Squad

The Third of May by Francisco Goya
The Third of May by Francisco Goya

What is the right punishment for financial fraud?

Bernie Madoff received the maximum sentence for his charges. 150 years. His lieutenant, DiPascali, was denied bail by the judge at his hearing last week, despite an agreement between his lawyer and the prosecutors. He has a maximum sentence of 120 years. They stole billions.

Marc Dreier committed securities fraud, stealing $380 million. He got 20 years.

Du Yimin, conned more than $100 million from investors. She promised them monthly returns of up to 10 percent from investments in beauty parlors, real estate and mining businesses owned by her company. She was put in front of the firing squad.

Si Chaxian conned people out of $24 million. He said they could receive interest of up to 108%.  He got the firing squad.

You can probably guess which two fraudsters are from China. The Chinese government puts to death more people than any other country. (Although Iran and Singapore have a higher per capita rate of execution.)

Though usually reserved for violent crimes, death sentences are also applied for nonviolent offenses that involve large sums of money or are seen to threaten social order.  China’s highest court said the two frauds had “seriously damaged the country’s financial regulatory order and social stability.”

I guess this is China’s way of  instituting reform in the financial markets and preventing fraud. But is it effective? Will be talented people just avoid the financial sector for fear of death?

References:

Ex-Madoff Finance Chief Frank DiPascali Pleads Guilty

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Frank DiPascali, the finance chief at Bernard Madoff’s investment advisory business, pleaded guilty to helping his boss carry out a $65 billion Ponzi scheme. DiPascali pleaded guilty to 10 counts, including conspiracy, fraud and money laundering. DiPascali has been cooperating with prosecutors, explaining how he and others helped Madoff defraud investors by using money from new clients to pay earlier ones at Bernard L. Madoff Investment Securities LLC.

Maybe we will get some insight into how the fraud began and what sent Madoff and DiPascali over to the dark side. The crime is done and the victims have lost. I am hoping to get some insight into the fraud so we can apply those lessons going forward.

In addition to the criminal proceedings, the Securities and Exchange Commission also filed a complaint against DiPascali. He has consented to a proposed partial judgment, which would impose a permanent injunction against him. The part DiPascali did not consent to were the issues of disgorgement and a financial penalty which will be decided at a later time.

The judge denied a bail request by prosecutors and DiPascali’s lawyer, who argued that sending him to jail would hamper his cooperation in the investigation. He is expected to provide prosecutors with a road map of those in the Madoff inner circle who were involved in the scheme that swindled investors out of an estimated $64.8 billion.

References:

DiPascali to Plead Guilty as Madoff’s Accomplice

Frank-DiPascali

Frank DiPascali, the finance chief at Bernard Madoff’s investment advisory business, is being charged with 10 crimes related to his boss’s $65 billion Ponzi scheme.

Nobody thinks Madoff was acting alone in his scheme. They already arrested Madoff’s auditor, David G. Friehling.

U.S. Attorney Lev Dassin posted the charges today in a one- page filing on his Web site. DiPascali faces up to 125 years in prison on all the counts. Prosecutors will detail the charges DiPascali will admit before U.S. District Judge Richard Sullivan later today. In a letter to the judge on Aug. 7, Dassin said DiPascali is expected to waive his right to an indictment and plead guilty to charges contained in the information.

Here are the charges against DiPascali:

Count Charge Maximum Penalties
ONE Conspiracy 5 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $250,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
TWO Securities Fraud 20 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $5,000,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
THREE Investment Adviser Fraud 5 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $10,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
FOUR Falsifying Books and Records of a Broker Dealer 20 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $5,000,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
FIVE Falsifying Books and Records of an Investment Adviser 5 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $10,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
SIX Mail Fraud 20 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $250,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
SEVEN Wire Fraud 20 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $250,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
EIGHT International Money Laundering To Promote Specified Unlawful Activity 20 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $500,000, or twice the value of the monetary instruments or funds involved, or twice the gross gain or loss; mandatory $100 special assessment; restitution.
NINE Perjury 5 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $250,000, or twice the gross gain or loss; mandatory $100 special assessment; restitution.
TEN Federal Income Tax Evasion 5 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $250,000 or twice the gross gain or loss; costs of prosecution; $100 special assessment.

References:

The Rise in Financial Crime in America

The Economist is reporting that there were over 730,000 counts of suspected financial wrongoing recorded in America last year. Financial institutions filed nearly 13% more reports of fraud compared with 2007. The number of mortgage frauds rose by 23% to almost 65,000.

This poses the classic compliance conundrum: Is there more fraud occurring, or is more fraud being detected/reported?

US-financial-Fraud

Corporate Compliance Scam Comes to North Carolina

corporate compliance services

A vigilant reader in North Carolina received an “Annual Minutes Requirement Statement” from Corporate Compliance Services. We have seen a similar scam in California, Colorado, Florida, Georgia, Indiana, Illinois, Massachusetts, Montana, New York, Ohio, and Texas.

The very official document cites North Carolina General Statute §55-16-01(a) with the requirement that a corporation must keep a permanent record of all meetings of its incorporators, shareholders and board of directors, and all actions taken.

This form does not act as a record of the meetings, but is merely a list of the directors, officers, and shareholders. It does not even meet the requirement of the statute it cites.

North Carolina General Statute §55-16-01(c) requires a corporation to maintain a record of its shareholders in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each.

The form provides a list of shareholders and the number of shares, but does not record the class of shares. That appears to make the form defective and would not meet the requirements of the statute.

In fairness to the Compliance Services,  the form and the company’s website both state that they not connected with any government agency.  Throw their form in the garbage and check with your attorney to make sure the proper corporate procedures and record-keeping are in place.

According to a source at the North Carolina Department of Justice, anyone who has lost money to this Raleigh, NC version of the scam is invited to contact Jennifer Pulley of the NC Attorney General’s Consumer Protection Division, tel. 919-716-6000.

See a larger image of the form.

Stanford Arrested

stanford

We saw it coming. It was like OJ in the Bronco. Last night, Sir R. Allen Stanford stepped out of his girlfriend’s house in Virginia, walked over the the FBI car parked out front and asked if they had an arrest warrant. They did. The grand jury had released its indictment.

The surprise was who else is included in the charges. I expected Laura Pendergest-Holt, chief investment officer of Stanford Financial. We knew about her problems as part of her Lawyer’s Noisy Withdrawal from Stanford Case. (He wasn’t her lawyer, which led to all kinds of trouble.)

Prosecutors also alleged that the fraud was aided by Leroy King, administrator of the Financial Services Regulatory Commission in the island nation of Antigua and Barbuda, where the Stanford firms were headquartered. Mr. King is charged with accepting $100,000 in bribes. They claim Leroy King facilitated the Ponzi scheme by ensuring that the FSRC “looked the other way” and conducted sham audits and examinations of Stanford’s books. Mr. King also provided Stanford with access to the FSRC’s confidential regulatory files, including requests by the SEC for assistance in investigating a possible Ponzi scheme.

The complaints also targeted Gilberto Lopez and Mark Kuhrt, accountants for Stanford-affiliated companies. It claims that they fabricated financial statements. Using a pre-determined return on investment number, Lopez and Kuhrt reverse-engineered the bank’s financial statements to report investment income that the bank did not actually earn. Information in Stanford’s financial statements and annual reports to investors about the bank’s investment portfolio bore no relationship to the actual performance of the bank investments.

We also learned that James Davis, chief financial officer of Stanford Financial, is cooperating with the investigation. He was named as a co-conspirator, but was not charged.

Vijay-Singh-StanfordIn other Stanford news, Vijay Singh walked out on the ninth green this morning sporting his sponsor’s logo and attire. The sponsor? Stanford Financial Group. I guess they are still sending him endorsement checks.

References:

Corporate Compliance Scam Continues. . .

. . But some of the perpetrators may have been caught.

California

California businesses have recent reports.  The scam seems to have been operating in California for years.

Colorado

There are reports of the scam in Colorado: State Corporate Compliance fraud. The Secretary of State is also getting complaints about the Colorado Compliance Recorder: Updated Notice Regarding “Annual Minutes” Solicitations

Indiana

Indiana issued a warning that several businesses have reported receiving a deceptive letter that would appear to come from an official government source. The letter solicits an annual fee of $125 or $150 and claims it will be used for record keeping and processing of a company’s annual minutes. It gives the appearance of coming from a legitimate government agency and cites fictitious state law. Scam Alert for Businesses in Indiana. But the Secretary of State has filed a complaint to try to stop the scam.

Montana

Montana has issued a warning, although the Secretary of State has not received any complaints and is not aware of any Montana businesses being affected: Business Scam Alert (.pdf) (I am not sure that I agree that the scam is “potentially dangerous.”)

New York

In the Empire State, it looks like the scam has spread to condominiums and cooperatives: Scam or Useful Service? The Corporate Records Compliance Office Speaks

Texas

It looks like the scam has been operating in Texas for a few years, masquerading as a state agency.  They may have caught the person behind some of it: Californian Charged With Unlawfully Profiting From Fake State Document Scheme.

Others

Previously, I noted that the scam was found in Florida, Georgia, Illinois,  Massachusetts, and Ohio.

Catching the Bad Guys

Its not clear if the scams in each state are perpetrated by the same group. The Indiana Secretary of State filed a complaint against Aaron V. Williams of Las Vegas, Lisa Diane Brown of California and several companies affiliated with them. (Of course these people have merely charged and are not necessarily guilty.)

UPDATE:

The Texas Attorney General filed suit against other parties, but the suit was dismissed.

References:

New Frontier: Best Practices in Fraud Investigations and EmergingTrends in SEC and DOJ Enforcement

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Securities Docket sponsored a webinar addressing critical questions about recent changes in the economic and political climates, emerging trends in SEC and DOJ enforcement, and the potential impact on lawyers, accountants, investigators, and other consultants who perform fraud investigations. It also outlined best practices when conducting investigations for the DOJ and SEC.

Panelists:

  • Gary Kleinrichert, Senior Managing Director in FTI Consulting’s Forensic and Litigation Consulting Practice
  • Pravin Rao, formerly an Assistant U.S. Attorney in the Northern District of Illinois and currently a partner in the Litigation group of Perkins Coie
  • Jose A. Lopez, formerly a Senior Attorney at the United States Securities and Exchange Commission’s Division of Enforcement and currently a partner at Schopf & Weiss LLP

The webcast is available for replay. But if you want to browse, these are my notes:

Gary started the presentation by noting there is a change in regulatory focus and likely to be a new regulatory framework. He also pointed out that the SEC has become aggressive in bringing securities cases.

He noted that the hedge funds and other pooled investments will be regulated although the scope is still uncertain.

After a lengthy run through some other potential and recent regulatory changes, Gary pointed out a few things that you can do right now:

  • Be preventative
  • Review Sarbanes-Oxley, financial reporting, and securities compliance
  • Whistleblowers – Speak with lawyers to ensure internal policies are effective

Jose took over and highlighted President Obama’s impact on the SEC. Again, they are getting more aggressive. How can you survive in this hostile environment:

  • Master the SEC’s Enforcement Manual (.pdf)
  • Conduct an Effective Investigation
  • If Charges Are Filed, Aggressively Seek Information and Documents

Jose advocated requesting a Termination Notice from the SEC. The SEC’s Enforcement Manual (.pdf) provides that the Division should notify individuals and entities at the earliest opportunity when the staff has determined not to recommend an enforcement action against them to the Commission.

There was discussion about witness assurance letters, providing civil immunity for witnesses. In limited circumstances and with specific authorization of the Commission, SEC staff may provide a witness with a letter assuring him or her that the SEC does not intend to bring an enforcement action. There seems to have been little use of this procedure. In practice its use has not materialized.

Pravin focused on the Department of Justice enforcement activities. The DOJ had a focus on terrorism. He has seen a shift back to financial crimes. There is also more white collar crime legislation coming out of Washington.

he offered up two guiding principles for internal investigations:

  • “One size does not fit all“
  • “What you don’t know can hurt you”

You want to conduct an internal investigation:

  • Identify and limit harm to the company
  • Obligations under laws, regulations to self-disclose
  • Assist in criminal defense of company
  • Puts company in better light with government regulators
  • Puts company in better light with shareholders, public

He stressed the need for an developing a game plan for the investigation. You need to define the scope and decided who should be interviewed.

The materials are available on the Securities Docket website: Today’s Webcast (June 15): Materials Available Here for “A New Frontier: Best Practices in Fraud Investigations and Emerging Trends in SEC and DOJ Enforcement”