Scherzer Blog

FCPA enforcement milestone: corporate conviction handed down by jury

The Department of Justice announced on May 11, 2011 that Lindsey Manufacturing Company, a privately-held Azusa, CA emergency systems manufacturer, its executives Keith Lindsey and Steve Lee, and a Mexican intermediary were convicted by a federal jury on all counts for their roles in a scheme to pay bribes to Mexican government officials at the Comisión Federal de Electricidad (CFE), a state-owned utility, to win $19 million in contracts.

According to court documents, between February 2002 and March 2009, Lindsey Manufacturing, Keith Lindsey, Steve Lee and others used the company’s Mexican agent, Enrique Aguilar, to funnel bribe payments to officials of the CFE. (See http://www.justice.gov/opa/pr/2011/May/11-crm-596.html for further details about the case.)

Although individuals have gone to trial and been convicted of violating the FCPA, this is a first such conviction for a company, as companies previously have opted to settle or plead guilty. The FCPA is expected to be an important enforcement tool under the new Dodd-Frank law as similar cases are likely to end up in court.

May 13th, 2011|Criminal Activity|

U.K. Bribery Act now slated to take effect July 1, 2011

After receiving widespread criticism for the lack of guidance and compliance clarification, the U.K. Bribery Act of 2010 (Bribery Act) originally scheduled for implementation in April 2011, is now set to take effect July 1, 2011. The act’s jurisdiction extends to commercial organizations incorporated or formed in the U.K. or “which carr

[y] on a business or a part of a business in the U.K. irrespective of the place of incorporation or formation.” Determination of such existence will be made by the U.K. courts and will require “a demonstrable business presence.” The official guide states that an organization will not be deemed to be carrying on a business in the U.K. merely by virtue of having its securities listed on the London Stock Exchange or by having a U.K. subsidiary.

Unlike the anti-bribery provisions of the U.S. Foreign Corrupt Practices Act (FCPA), which focus primarily on corruption involving non-U.S. government officials, the Bribery Act widens its scope to prohibit domestic and international bribery across both private and public sectors. And while the FCPA allows exceptions for facilitation payments (generally small payments to lower-level officials for “routine government actions,”) the Bribery Act does not. These payments were illegal under the previous legislation and the common law, but the difference under the Bribery Act is that non-U.K. organizations are broadly subjected to these restrictions for the first time.

The Bribery Act specifically criminalizes the offering, promising or giving a bribe (active bribery) and the requesting, agreeing to receive or accepting a bribe (passive bribery) to obtain or retain business or secure a financial or other advantage. It also contains a provision whereby an organization that fails to prevent bribery by anyone associated with the organization can be charged under the Bribery Act unless it can establish the defense of having implemented preventive “adequate procedures.” The official guide recommends the following six principles as foundation for developing “adequate procedures” to prevent bribery:

Proportionality – Actions should be proportionate to the risk, nature, size and complexity of the organization.
Top-level Commitment – Board of directors, owners, officers or equivalent top level- management should establish and promote a culture where bribery is never acceptable and be committed to preventing bribery, both within the organization and with anyone associated with the organization externally.
Risk Assessment – Various risk exposures, both internal and external, such as country of operation, business sector, types of transaction, new markets, and business partnerships should be evaluated and documented on an ongoing basis.
Due Diligence – Proportionate, risk-based approach to due diligence procedures assessing existing and proposed relationships should be taken to ensure trustworthy associations and mitigate identified bribery risks.
Communication – Appropriate channels of communication, awareness and training, both internal and external, on anti-bribery policies and procedures should be implemented and evaluated on a regular basis.
Monitoring and Review – Anti-bribery policies and procedures should be monitored on an ongoing basis and amended as quickly as possible when activities and risks change.

The penalties for violating the Bribery Act are severe, with individuals facing up to 10 years in prison and organizations facing unlimited fines. Violations also may result in damaging collateral consequences such as director disqualification, ineligibility for public contracts, and asset confiscation.

May 9th, 2011|Educational Series, International, Legislation|

Investment advisers miss deadline for filing new “plain English” ADV Part 2

For most investment advisers, the deadline for preparing and submitting the new Form ADV Part 2 was March 31, 2011, and many missed it, according to industry sources. All investment advisers registered with the SEC are mandated to file the new Form ADV Part 2 or disclosure brochure within 90 days of their fiscal year end. For the majority, the fiscal year ends on December 31, which means that the new form should have been filed by March 31, 2011. Most state securities regulators have ratified similar requirements.

Securities lawyers indicate that investment advisers who missed the filing deadline are likely in violation of several investment advisory rules, and may be subjected to possible actions by the regulators, ranging from warnings and fines to revocation of registration. At a minimum, a failure to submit the new form may flag the adviser as lacking strong compliance controls and requiring heightened scrutiny.

The new form rulings, adopted by the SEC in October 2010, required 18 sections on fees, soft-dollar pay arrangements, investment strategies and disciplinary histories, along with a supplement detailing each adviser’s background. An SEC spokesperson said that the changes “will allow clients access to information about advisers of a wholly different character and quality than was available under the previous regime. It will enable investors to better evaluate their current advisers, or comparison-shop for an adviser that best serves a particular need. Most significantly, this disclosure may result in advisers modifying their business practices and compensation policies which may pose conflicts, in ways that better serve the interests of the clients.” For more information, see http://www.sec.gov/answers/formadv.htm.

April 28th, 2011|Educational Series, Legislation|

FTC and CFTC will share information on energy investigations

The Federal Trade Commission (FTC) and the Commodity Futures Trading Commission (CFTC) announced yesterday that they entered into a Memorandum of Understanding (MOU) to share non-public information on investigations being conducted by the agencies, including investigations into the oil and gasoline markets. The agreement will help the FTC enforce its petroleum market manipulation rule, which prohibits fraudulent manipulation of U.S. petroleum markets. The information sharing also will assist the CFTC in exercising its authority in the oil markets.

Both the FTC and CFTC can take legal actions in connection with fraud-based manipulation of the petroleum markets, but the CFTC has exclusive jurisdiction to regulate exchanges, clearing organizations and intermediaries in the U.S. futures industry. This MOU will further facilitate information sharing on regulatory issues of common interest.

The MOU also directs the FTC and CFTC to ensure that the confidentiality of the non-public information is maintained, and provides that the agreement does not modify the agencies’ current abilities, responsibilities, or obligations to comply with existing laws or regulations, including the FTC’s confidentiality mandates under the pre-merger laws.

April 13th, 2011|Criminal Activity, Educational Series|

China’s bribery law amendment resembles a version of the FCPA

In February 2011, the People’s Republic of China (PRC) legislature, among 49 amendments, passed Amendment No. 8 to Article 164, which criminalizes the payment of bribes to non-PRC government officials and to international public organizations. Legal experts say that that the passing of this amendment is the PRC’s effort to comply with the United Nations Convention Against Corruption to which the PRC is a signatory. Although no interpretive guidance has been issued, the amendment resembles an early version of the Foreign Corrupt Practices Act (FCPA).

Before the amendment was passed, the PRC prohibited bribery of PRC officials and provided for civil and criminal liability for making commercial bribes to private parties for the purpose of obtaining illegitimate benefits, but had no specific law that criminalized the payment of bribes to non-PRC officials. Effective May 1, 2011, the amendment adds the following clause to Article 164 of the PRC Criminal Law:

“Whoever, for the purpose of seeking illegitimate commercial benefit, gives property to any foreign public official or official of an international public organization, shall be punished in accordance with the provisions of (Article 164.)”

Article 164 states that “if the payer is an individual, depending on the value of the bribes, he/she is subject to imprisonment for up to 10 years. If the payer is an entity, criminal penalties will be imposed against the violating entity and the supervisor chiefly responsible; other directly responsible personnel also may face imprisonment of up to 10 years. Penalties may be reduced or waived if the violating individual or entity discloses the crime before being charged.”

According to legal experts, the PRC Criminal Law applies to all PRC citizens (wherever located); all natural persons in the PRC regardless of nationality; and all companies, enterprises, and institutions organized under PRC law. Thus, in addition to PRC domestic companies, any joint venture or other business entity formed under PRC law, including ones involving non-PRC companies, may be criminally liable under the amendment. Non-PRC companies with representative offices in the PRC may also be subject to the provisions of the amendment.

April 4th, 2011|Educational Series, Legislation|

Tips from the SEC on how fraudsters try to look legit

Since their inception, the Securities and Exchange Commission (SEC) and securities regulators around the globe have been telling investors to investigate before investing and to ask tough questions about the people who sell and manage the investments.

The SEC reports that a frequent ruse that fraudsters use involves assurances that an investment has been registered with the appropriate agency. The fraudsters will purport to provide the agency’s telephone number to verify the “authenticity” of their claims. But even if the agency does exist, the contact information almost certainly will be false, and instead of speaking with an actual government official, the call is answered by the fraudsters or their associates, who will give the company, the promoter and the transaction high marks.

Another trick involves the misuse of a regulator’s seal. The fraudsters copy the official seal or logo from the regulator’s Web site, or create a bogus seal for a fictitious entity and then use it on documents or Web pages to make the deal look legitimate. The SEC and other state and federal regulators do not allow private entities to use their seals. Moreover, the SEC does not “approve” or “endorse” any particular securities, issuers, products, services, professional credentials, firms, or individuals.

Here is some advice from the SEC on how to protect yourself against these and other deceptive tactics:

	Deal only with “real” regulators. Check the list of international securities regulators on the Web site of the International Organization of Securities Commissions (IOSCO); for a directory of state and provincial regulators in Canada, Mexico, and the U.S.; look on the Web site of the North American Securities Administrators Association (NASAA). If someone encourages you to verify information about a deal with an entity that does not appear on these lists — such as the “Federal Regulatory & Compliance Department,” the “Securities and Registration Compliance” agency or the “U.S. Securities Registration Bureau” — you’re probably dealing with fraudsters. Legitimate contact information for the SEC is in the (SEC) Contact Us section and on the SEC Division Homepages.
	Be skeptical of government “approval.” The SEC does not evaluate the merits of any securities offering or determine whether a particular security is a “good” investment. Instead, the SEC’s staff reviews registration statements for securities offerings and declares those statements “effective” if the companies have satisfied the disclosure rules. In general, all securities offered in the U.S. must be registered with the SEC or must qualify for an exemption from the registration requirements. You can check whether a company has registered with the SEC and download disclosure documents using the EDGAR database of company filings.
	Look past fancy seals and impressive letterheads. Most people who use computers know how easy it is to copy images. As a result, today’s technology allows fraudsters to create impressive, legitimate-looking Web sites and stationery at little cost. Don’t be fooled by a glossy brochure, a glitzy Web site, or the presence of a regulator’s official seal. Again, the SEC does not authorize private companies to use its seal, even as a legitimate link to the SEC Web site.
	Check out the broker and the firm. Always verify whether any broker offering to buy or sell securities is properly licensed to do business in your state, province, or country. If the person claims to work with a U.S. brokerage firm, call FINRA’s Public Disclosure Program hotline at (800) 289-9999 or visit FINRA’s website to check out the background of the individual broker and the firm. Be sure to confirm whether the firm actually exists and is current in its registration, and ask whether the broker or the firm has a history of complaints. You can often get even more information from your state securities regulator.
	Be wary of “advance fee” or “recovery room” schemes. An increasing number of investment-related frauds target investors worldwide who purchase “microcap” stocks, the low-priced and thinly traded stocks issued by the smallest of U.S. companies. If the stock price falls or the company goes out of business, the fraudsters swoop in, falsely claiming that they can help investors recover their losses for a substantial fee, disguised as some type of tax, deposit, or refundable insurance bond. As soon as an unwary investor pays the “advance fee,” the fraudsters disappear leaving the investor with even higher losses. For more information about these types of frauds, read The Fleecing of Foreign Investors.

March 28th, 2011|Educational Series, Fraud|

Maryland resident charged with making false statements on federal job applications

The Department of Justice reported yesterday that Karen M. Lancaster, of Upper Marlboro, MD, has been charged with four counts of making false statements, three counts of submitting false documents and one count of engaging in a concealment scheme in connection with her multiple job applications to U.S. federal government agencies.

According to the indictment, Lancaster was employed in various positions with the U.S. Department of Defense (DoD) from 1991 until March 2005. She subsequently was notified by DoD that she was being fired due to performance failures. In October 2006, according to the indictment, Lancaster reached a settlement with DoD whereby she was allowed to resign, retroactive to March 2005.

Between 2006 and 2008, Lancaster applied for jobs at the U.S. Departments of State, Commerce and Defense, as well as with the SEC. The indictment states that as part of the application processes, Lancaster allegedly submitted documents that falsified and concealed information about her criminal history, employment history and suitability for employment with the federal government. Specifically, Lancaster allegedly concealed and falsified informatabout her prior arrests, charges, convictions and prison terms, the unfavorable circumstances under which she had resigned from prior federal employment, the roles and responsibilities she had at previous federal jobs; and her salary history.Lancaster will be arraigned on March 25, 2011, in U.S. District Court in Alexandria. The maximum penalty for each count of making a false statement, submitting a false document and engaging in a concealment scheme is five years in prison. Lancaster also faces a maximum fine of $250,000 per count.

The Department of Justice notes that an indictment is merely an accusation, and a defendant is presumed innocent unless proven guilty in a court of law.

March 17th, 2011|Employment Decisions, Fraud|

“Operation Empty Promises” yields more than 90 FTC enforcement actions

The Federal Trade Commission announced that it stepped up its ongoing campaign against scammers who falsely promise guaranteed jobs and opportunities to be “your own boss.” “Operation Empty Promises,” a multi-agency law enforcement initiative, resulted in more than 90 enforcement actions, including three new FTC cases and developments in seven other matters, 48 criminal actions by the Department of Justice (many involved the assistance of the U.S. Postal Inspection Service), seven additional civil actions by the Postal Inspection Service, and 28 actions by state law enforcement agencies in Alaska, California, Indiana, Kansas, Maryland, Montana, New Jersey, North Carolina, Oregon, Washington, and the District of Columbia.

In addition to making false claims about employment opportunities, one of the actions also alleged that the defendants overcharged for background checks. In its complaint against National Sales Group, Anthony J. Newton, Jeremy S. Cooley, and I Life Marketing LLC, also doing business as Executive Sales Network and Certified Sales Jobs, filed in the U.S. District Court for the Northern District of Illinois, Eastern Division on February 22, 2011, the FTC charged that the defendants advertised nonexistent sales jobs with “good pay” and benefits on CareerBuilder.com and other online job boards, that their telemarketers falsely told consumers that the company recruited for Fortune 1000 employers and that they had a unique ability to get the consumers interviewed and hired. The FTC also alleged that the defendants charged fees they said covered background checks and other services, and often overcharged, taking $97 from consumers who had agreed to pay $29 or $38. Further, the defendants allegedly charged some consumers recurring fees of $13.71 or more per month without their consent.

According to other documents filed in the court, the defendants’ actions generated more than 17,000 complaints to law enforcement agencies, online forums, and job boards, and defrauded consumers of at least $8 million. (CareerBuilder.com dropped the company from its website due to complaints.) The court temporarily halted the defendants’ deceptive practices, froze their assets, and put the company into receivership.

See http://www.ftc.gov/opa/2011/03/emptypromises.shtm for information about other enforcement actions brought through “Operation Empty Promises.”

March 12th, 2011|Educational Series, Fraud|

Uncovering hidden assets

Exactly what is a hidden asset? Several business reference books define it a valued asset that is not listed on the balance sheet of its owner or beneficiary, and/or is moved or transferred with the intention to defraud, hinder or delay discovery by anyone classified as a creditor. Just about any type of asset can be hidden, including real property, jewelry, stocks, bonds, vehicles, aircraft, watercraft, and the most liquid of all assets – money.

Many hidden assets, such as those existing in corporate holdings, various trusts, family-limited partnerships, limited liability companies, charitable foundations, real estate, lawsuit payouts, judgment awards, and vehicle, aircraft and watercraft ownership, can be found through searches of public records. Comprehensive searches of media sources can provide further details about these assets and also supply clues to funds from royalties, contracts, patents, inheritances and other distributions.

The hardest of all hidden assets to reach — and those not reported in public records — are held outside of the United States. Various Caribbean and other island nations, and certain European enclaves are laden with “wealth preservation strategies” that offer secrecy-ruled offshore accounts and asset protection trusts (OAPTs) that keep the creditors away. Financial experts and fraud examiners say that OAPTs are especially popular hideouts because the “hider” can make himself or herself the beneficiary of these trusts, and thus protect the money from third-party claims, consistent with foreign laws which do not recognize the American “fraudulent transfer” concept. OAPTs are nearly impossible to collect against, even with a valid judgment from the U.S. While information for such assets is not publicly available, media reports about mode of living and certain activities can provide indications of possible concealed assets abroad.

March 10th, 2011|Educational Series, Fraud|

Wall Street firms slow in reporting infractions to FINRA

The Financial Industry Regulatory Authority (FINRA), Wall Street’s self-reporting system that allows investors to vet stockbrokers and other financial professionals, says that it has a persistent problem with financial firms not reporting infractions properly or in a timely manner.

FINRA, which shares oversight of Wall Street with federal agencies such as the Securities and Exchange Commission (SEC), requires financial firms to disclose employee infractions within 30 days. Those records, ranging from serious criminal offenses to minor customer complaints, are then entered into a database known as the Central Registration Depository. Individual investors use the 30-year-old system to check out a stockbroker’s history, including employment, criminal records and client lawsuits. Institutions use the database to investigate job candidates.

FINRA depends on Wall Street, which finances its operations, to update the records. But dozens of new cases show that critical information is missing, out of date or erroneous. And Wall Street has a checkered history of reporting infractions by brokers. When regulators last cracked down on disclosure violations in 2004, the sweep ensnared nearly 30 securities firms. At the time, the National Association of Securities Dealers, FINRA’s predecessor, fined brokerage firms a collective $9.2 million for failing to report customer complaints and criminal convictions properly. That same year, Morgan Stanley was hit with a $2.2 million penalty, the largest ever levied against a firm for disclosure issues, for failing to appropriately report 1,800 incidents of customer complaints and other problems. In 2010, the regulator suspended 56 brokers for failing to report previous infractions, up from 34 in 2006. Annual fines rose to $2 million from $1.6 million over the same period.

In one of the most prominent cases in 2010, FINRA fined Goldman Sachs $650,000 for failing to disclose that a trader, Fabrice P. Tourre, and another employee had received an SEC “Wells” warning that the agency was considering an enforcement action against them. Tourre was the only individual named in the SEC fraud case against Goldman Sachs last year, which accused the investment bank of misleading investors about subprime mortgages. Tourre purportedly was ”principally responsible” for marketing the bonds. Goldman, without admitting or denying any wrongdoing, settled the SEC’s charges in July 2010 for $550 million – one of the largest fines ever paid by a Wall Street firm. The charges against Tourre are pending.

Also in 2010, FINRA fined Citigroup $150,000 for filing inaccurate disclosures regarding about 120 brokers who had been fired or resigned after being accused of theft or fraud. In its disciplinary action, FINRA said that Citigroup ”hindered the investing public’s ability to access pertinent background information.” It fined JPMorgan Chase $150,000 for similar violations in 2009.

FINRA soon will face another test. Policy makers are considering whether to expand its responsibilities, giving the regulator oversight of tens of thousands of investment advisers, on top of the 600,000-plus brokers it already under its purview.

March 2nd, 2011|Educational Series|

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