Category: Criminal Law

UK Financial Conduct Authority (FCA) Issues First Fine Under New Anti-Money Laundering Regime

Morgan Lewis logo

 

Financial Conduct Authority fines Standard Bank £7.6 million for failures in its anti-money laundering controls, underlining the importance of both having and implementing adequate policies in relation to money laundering.

On 22 January, the UK Financial Conduct Authority (FCA) published a decision notice[1] imposing a £7.6 million fine on Standard Bank PLC, the UK subsidiary of South Africa’s Standard Bank Group.[2] The fine was issued for failures relating to Standard Bank’s anti-money laundering (AML) policies and procedures for corporate customers connected to politically exposed persons (PEPs).[3] This is the first AML fine issued under the FCA’s new penalty regime and the first such fine by the FCA—or its predecessor, the Financial Services Authority—in relation to commercial banking activity.

Under Regulation 20(1) of the Money Laundering Regulations 2007, regulated institutions, such as banks, must establish and maintain “appropriate risk-sensitive policies and procedures” on customer due diligence measures and ongoing monitoring of business relationships, amongst others. The policies must be aimed at preventing money laundering and terrorist financing. Guidance issued by the Joint Money Laundering Steering Group states that enhanced due diligence (EDD) should be applied where a corporate customer is linked to a PEP, such as through a directorship or shareholding, as it is likely that this will put the customer at higher risk of being involved in bribery and corruption.

As part of its investigation into Standard Bank, the FCA reviewed a sample of 48 corporate customer files, which all had a connection with a PEP, and discovered “serious weaknesses” in the application of the bank’s AML policies and procedures. The FCA found that, from 15 December 2007 to 20 July 2011, Standard Bank breached the Money Laundering Regulations 2007 by failing to take reasonable care to ensure that all aspects of its AML policies were applied appropriately and consistently to its corporate customers connected to PEPs. In particular, the FCA found that Standard Bank did not consistently carry out adequate EDD measures before establishing business relationships with corporate customers linked to PEPs and did not conduct the appropriate level of ongoing monitoring for existing business relationships by updating its due diligence. The FCA noted the failings were particularly serious because the bank dealt with corporate customers from jurisdictions regarded as posing a higher risk of money laundering and because the FCA had previously stressed the importance of AML compliance to the industry.[4] The gravity of the failings was underlined by the FCA’s director of enforcement and financial crime, who stated that “[if banks] accept business from high risk customers they must have effective systems, controls and practices in place to manage that risk. Standard Bank clearly failed in this respect”.

This is the first AML case to use the FCA’s new penalty regime, which applies to breaches committed from 6 March 2010 and under which larger fines are expected. The FCA’s decision notice sets out how it determined the level of the fine, by reference to a five-step framework (as outlined in the Decision Procedure and Penalties Manual).[5] The FCA considered the fact that the bank and its senior management cooperated in the investigation and took significant steps to remediate the problems, including seeking advice from external consultants, to be a mitigating factor. In addition, Standard Bank’s decision to settle the matter at an early stage of the investigation resulted in a 30% discount on the fine. The original penalty was £10.9 million.

The FCA’s action against Standard Bank illustrates the increasingly tough approach taken by the UK authorities against financial crime and shows that the FCA is willing and able to enforce AML legislation. Banks and regulated firms are encouraged to ensure that they have effective policies and procedures against money laundering in place and that these are being adhered to.

[1]. View the FCA’s notice here.

[2]. The sale of Standard Bank to the Industrial and Commercial Bank of China has been agreed to and is likely to be completed during the fourth quarter of 2014.

[3]. A “PEP” is defined in the Money Laundering Regulations 2007 as “an individual who is, or has, at any time in the preceding year, been entrusted with a prominent public function”, or immediate family members and known close associates of such individuals.

[4]. The FSA published a Consultation Paper on 22 June 2011, availablehere, focusing on how banks manage money laundering risk in higher risk situations. It also published a Policy Statement on 9 December 2011, available here, providing guidance on the steps firms can take to reduce their financial crime risk.

[5]. View the manual here.

Article by:

Of:

Morgan, Lewis & Bockius LLP

Let the Light of Day Shine Re: SEC (Securities and Exchange Commission) Insider Trading Case

Barnes Burgandy Logo

We want to spend a moment talking about an old subject—the Securities and Exchange Commission’s insider trading case against Mark Cuban—and Cuban’s new business venture that has resulted from that case. The case, the SEC’s handling of the matter, and Cuban’s reactions (then and now) say a lot about how “the G” does business and may even be revelatory in the future.

As you recall, the SEC charged Cuban with insider trading in 2008. The case was originally dismissed by the trial court. The Fifth Circuit Court of Appeals reinstated the case, concluding that the inquiry into whether Cuban had, in fact, traded on the basis of material, non-public information was simply too fact-intensive for the trial court to have decided without a full factual inquiry.

This, of course, is the problem with fraud-based government enforcement: the question of a person’s intent is difficult to determine without an expensive factual inquiry—and the costs of such an inquiry (combined with the potential consequences) are so high that many people settle with the G rather than seek to exonerate themselves. Historically, the SEC “extorted” settlements (not our view, necessarily, see Al’s Emporium Commentary in the Wall Street Journal Online Edition as of October 19, 2010) in reliance on this heavy burden. At the heart of the SEC’s effort was the “no admit or deny” settlement.

In these settlements, the SEC would recite each allegation of wrongdoing against a defendant as well as the terms under which the defendant had settled the charges. The defendant would neither admit nor deny the SEC’s allegations. Since Mary Jo White took over at the helm of the SEC in April 2013, she purportedly has set a new course, requiring that defendants must admit wrongdoing in more and more settlements—whether or not that changes the seemingly extortive nature of these cases remains to be seen.

But Cuban, with his seemingly unlimited resources and non-retiring personality, would not be extorted. He fought back, all the way through trial, and won. Ultimately, a jury of Cuban’s peers concluded (among other things) that the SEC had not proven that Cuban received confidential information, that he traded on such information, or that he had acted knowingly or recklessly (with “fraudulent intent”) when trading. (See the Associated Press’ “Big Story” on October 16, 2013, which has a digital recreation of the jury verdict form).

When he walked out of the courtroom, Cuban went ballistic on the SEC. See his comments on YouTube – his specific comments about the SEC are found beginning about the 50th second of the clip.

“When you put someone on the stand and accuse them of being a liar, it is personal,” he said, criticizing specific members of the SEC’s staff and, generally, the SEC’s enforcement practices. Since then, Cuban has reinforced his criticism, stating: “There’s such a revolving door, and [the SEC] was run by attorneys with an attorney’s mind-set looking for their next job. It’s a résumé builder,” [Cuban] said. “No wonder they say or do whatever they damn well please. I’m like, ‘OK, I’m going to start calling them out by name.” (WSJ’s Law Blog)

Cuban isn’t stopping with these castigatory remarks. He is putting his money where his mouth is. Cuban’s latest business venture is to publicize SEC trial transcripts (which are not generally publicly available). Cuban hopes that, by publicizing trial tactics and tactics he believes are problematic, he will change the way this agency of the G does business.

Article by:

Vincent P. (Trace) Schmeltz III

Of:

Barnes & Thornburg LLP

Will New Jersey Go “Ban the Box” and Beyond? New Jersey Takes Step to Prohibit Employers From Asking About a Job Applicant’s Criminal History

MintzLogo2010_Black

Recently, in a 6-3 vote, New Jersey’s Assembly Labor Committee advanced a bill (A-3837), known as the Opportunity to Compete Act, that would prohibit New Jersey employers with 15 or more employees from asking candidates about their criminal history on employment applications, and from conducting criminal background checks on applicants prior to a conditional job offer. If passed, this legislation would become one of the toughest “ban the box” measures in the nation (derived from the ubiquitous check box on employment applications inquiring whether an applicant has a criminal record), and would place several new administrative burdens on employers. New Jersey would join the 64 states, counties and cities (including Newark, New Jersey) that have already enacted laws aimed at benefiting job seekers with a criminal history. And many states (including New York) prohibit employers from disqualifying an applicant based on a conviction absent a clear nexus between the nature of the conviction and the job sought.

Under the proposed legislation, only after the employer determines the candidate is qualified and provides a conditional job offer, may it inquire about and consider the individual’s criminal history. Then, before the employer may look into the candidate’s criminal history, it must first provide the candidate with a written notice of the inquiry (along with a “Notice of Rights) and obtain the candidate’s consent.

The bill authorizes employers to consider in their employment decision making process convictions for certain serious crimes regardless of when the crime occurred. These crimes include murder or attempted murder, arson, a sex offense for which the offender served time in State prison and is required to register as a sex offender, robbery, kidnapping, human trafficking, possession of weapons, burglary, aggravated assault and terrorism. Separately, employers may only consider other crimes of the 1st through 4th degree if the crime was committed within the previous 10 years. Employers may also consider convictions for disorderly persons offenses that occurred within the last 5 years and pending criminal charges until the case is dismissed. The bill further provides that if any of the candidate’s criminal history is subject to consideration by employers due to the fact that it occurred within 10 years for crimes of the 1st through 4th degree, or 5 years for disorderly persons offenses, then the employer may also consider any prior criminal history, regardless of when it occurred.

Under the bill, when making an employment decision, employers may not consider or require a candidate to disclose or reveal any arrest or criminal accusation made against the candidate which is not then pending or which did not result in a conviction. Records which have been erased or expunged, records of an executive pardon or legally nullified records may not be considered by employers, nor may the employer consider an adjudication of delinquency of a juvenile, any violation of a municipal ordinance or any record which has been sealed.

The proposed legislation requires employers to make a good faith effort to discuss with the candidate any questions or concerns related to the candidate’s criminal history and provide the candidate with an opportunity to explain and contextualize any crime or offense, provide evidence of rehabilitation, and rebut any inaccuracies in the criminal history.

In deciding whether to hire a candidate, employers must consider the results of any criminal history inquiry in combination with factors such as: (1) information provided about the degree of the candidate’s rehabilitation and good conduct; (2) information provided about the accuracy of the criminal record; (3) the amount of time that has elapsed since the conviction or release from custody; (4) the nature and circumstances surrounding the crime(s); and (5) the duties and settings of the job. This last factor—job-relatedness—is critical, as employers may not disqualify a candidate if the nature of his or her conviction bears no relationship to the job sought. The reasonable consideration of these factors must be documented by employers on a “Criminal Record Consideration Form.”

If an employer makes an adverse employment decision, including rescinding a job offer, after a discussion of a candidate’s criminal history, the employer must provide the candidate in one package by registered mail: (1) written notification of the adverse employment decision; (2) a copy of the results of the criminal history inquiry; and (3) a completed copy of the Criminal Record Consideration Form.

A candidate who received an adverse employment decision has 10 business days after receipt of this written information to provide evidence to the employer related to the accuracy and relevance of the results of the criminal history inquiry. Employers may, but are not required to, hold the position open for the candidate. Employers who uphold an adverse employment decision after considering any additional information provided by the candidate are required to provide to the candidate a written notice of the final decision within 45 days of receipt of the additional information.

There is good news for employers here: the bill does not provide applicants with the ability to sue them in court for a violation of the law. Instead, the applicant would have to file a complaint with the New Jersey’s Division on Civil Rights (“DCR”) in the Department of Law and Public Safety, and the DCR may impose civil fines ranging from $500 to $7,500 depending on the number of employees the employer has and whether the employer has committed previous violations. Additionally, as noted above, the bill does not apply to smaller employers with under 15 employees. Moreover, employers can take solace in that the bill would give employers the highest protection against negligent hiring/retention suits of any state in the nation in the form of a “grossly negligent” standard, meaning that there must be a finding that the employer consciously acted with a reckless disregard for the safety of others in its hiring decision.

There is no certainty that the proposed Opportunity to Compete Act will be passed into law in its current form or any other form for that matter. Governor Chris Christie, who could very well exercise his veto power, has not indicated whether or not he supports the bill. Needless to say, we will closely monitor this legislation.

Article by:

David M. Katz

Of:

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Senior U.S. Officials Discuss Foreign Corrupt Practices Act (FCPA) Enforcement Trends and Activity

Morgan Lewis

On November 18–21, U.S. regulators attended the 30th International Conference on the Foreign Corrupt Practices Act (FCPA), where they discussed the near-record amount of FCPA penalties in 2013 and disclosed that there are more than 150 ongoing FCPA investigations. Regulators from the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) also explained new developments in cross-border cooperation as well as their efforts to prosecute individual FCPA defendants.

Combined FCPA Penalties

According to Charles E. Duross, Head of the DOJ’s FCPA Unit and Deputy Chief of the Fraud Section, the FCPA Unit is “busier today than [it] ever has been” investigating and prosecuting FCPA misconduct. Although the DOJ may not have initiated as many enforcement actions to date in 2013 as in years past, Duross characterized 2013 as “the fifth biggest year in [the FCPA’s] history in terms of overall penalties” and predicted “that the ranking will move up before the end of the year.” As explained by Duross, “We have a pretty substantial pipeline of matters, and I actually have every reason to expect that, in the coming weeks and months, you will see even more activity, [including] more standard cases as well as . . . ‘grand corruption’ cases.”

Ongoing Investigations

Duross estimated that the DOJ is currently investigating “more than 150 cases” of potential FCPA violations and expects the DOJ to bring “very significant cases, top 10 quality type cases” in 2014. Duross stated that, while the number of investigations fluctuated due to the issuance of declinations, the DOJ has received a “constant inflow” of violations information, ranging from voluntary disclosures to whistleblower complaints. On November 15, the SEC’s Office of the Whistleblower reported that it logged 3,238 whistleblower tips and complaints in 2013, resulting in a combined total of 6,573 tips and complaints since the initiation of the whistleblower program in August 2011.[1] Approximately 150 of those 3,238 tips and complaints have involved FCPA issues, including “some very, very good whistleblower complaints,” according to according to Kara N. Brockmeyer, Chief of the SEC’s FCPA Unit. While the SEC has yet to announce any whistleblower awards for FCPA cases, the agency announced its largest award to date—more than $14 million—to an anonymous whistleblower last month.[2]

Enhanced International Cooperation and Cross-Border Enforcement

Nearly all of the U.S. regulators speaking at the conference trumpeted the increase in global cooperation and cross-border enforcement. In his November 19 speech, Andrew J. Ceresney, co-director of the SEC’s Division of Enforcement, stated that the SEC and DOJ have “capable and committed law enforcement partners worldwide, and their numbers are steadily growing.”[3] The rise in cross-border cooperation and enforcement appears to be attributable, in part, to the enactment of new anticorruption legislation in countries ranging from Brazil to Latvia. As explained by Ceresney:

Over the past five years, we have experienced a transformation in our ability to get meaningful and timely assistance from our international partners. And through our collaborative efforts, the world is becoming a smaller place for corrupt actors. In particular, many of our foreign counterparts have taken important steps this year to strengthen their own anticorruption laws and step up their enforcement efforts. For example, Brazil passed the Clean Company Law, an anticorruption law that, for the first time, imposes criminal liability on companies that pay bribes to foreign government officials. More expansive in its reach than the FCPA, this new law forbids all companies that operate in Brazil from paying bribes to any government official, whether domestic or foreign. In the U.K., the Serious Fraud Office announced its first prosecution case under the Bribery Act. In Canada, the government enacted amendments strengthening the Corruption of Foreign Public Officials Act and prevailed in its first litigated case against an individual for violating this law. And recently, Latvia became the newest country to join the [Organisation for Economic Co-operation and Development] Working Group on Bribery.

As other countries begin to step up their efforts to combat corruption, it makes our job easier. Countries with strong anti-corruption laws are often great partners to us in combating corruption. Scrutiny from the local government, in addition to us, will often be a strong deterrent to bribery. More and more, our investigations are conducted in parallel with a foreign government.

In remarks made on November 19 at the FCPA conference, Brockmeyer advised attendees that the SEC would start working with more of its foreign counterparts—including those that it has not “necessarily worked with before”—in the future. Ceresney made a similar observation, noting “I am encouraged by the close collaboration [with foreign agencies] and fully expect the pace and extent of our cooperation with foreign agencies to grow in the coming years. Indeed, only recently I have been involved in a case in which we are receiving cooperation from a country that has never before provided any meaningful assistance.”

Continued Focus on Individual Prosecutions

Individuals from both the DOJ and SEC also emphasized their enduring interest in bringing individual FCPA violators to justice. As explained by Ceresney, “A core principle of any strong enforcement program is to pursue culpable individuals wherever possible. . . . Cases against individuals have great deterrent value as they drive home to individuals the real consequences to them personally that their acts can have. In every case against a company, we ask ourselves whether an action against an individual is appropriate.”

Ceresney acknowledged that FCPA enforcement actions against individuals pose unique challenges. For instance, regulators may be unable to reach individuals in foreign jurisdictions, and remedies are often limited or unenforceable. Regulators must also confront difficulties in obtaining foreign documents, collecting evidence, and gaining access to overseas witnesses. According to Ceresney, the SEC is overcoming these challenges by “expanding the availability and use of Memoranda of Understanding with international financial regulators to obtain bank records, other documents, and testimony; using border watches and other methods of obtaining information from foreign nationals; subpoenaing U.S.-based affiliates of foreign companies; and more aggressively seeking videotaped depositions that [the SEC] can use at trial if [it] cannot secure live testimony.”

The SEC currently has pending FCPA actions against executives of three companies, Magyar Telekom, Siemens, and Noble. In April 2013, the SEC obtained its sec
ond-highest penalty ever assessed against an individual in an FCPA case when one of the Siemens executives agreed to pay a $275,000 fine.[4] According to Ceresney, “these cases have sent an unambiguous message that [the SEC] will vigorously pursue cases to hold individuals accountable for FCPA violations—including executives at the highest rungs of the corporate ladder.”

The DOJ similarly has pending FCPA actions against individuals and, according to Duross, is firmly committed to holding individuals accountable for FCPA misconduct. In support of this commitment, Duross cited recent actions against executives from BizJet, Maxwell Technology, and Direct Access Partners. It is worth noting, however, that the DOJ also brought actions against individuals associated with BSG Resources Ltd. and Willbros in 2013. Duross warned that resolutions for corporations—which occasionally precede actions initiated against individuals—do not immunize individual bad actors from subsequent criminal prosecution.

Increased Personnel Resources

According to Duross, the DOJ’s FCPA Unit “has more resources today than at any time before” and is working with “every major U.S. Attorneys’ Office in the United States” on FCPA matters. Duross explained that U.S. Attorneys’ Offices “serve as a force multiplier” for the FCPA Unit and provide a “deep bench of talent” and knowledge about the local jurisdictions. The addition of human resources—including trial attorneys, paralegal assistance, and translators—has improved the DOJ’s ability to investigate and prosecute FCPA misconduct.

[1]. U.S. Sec. & Exch. Comm’n, 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program at 1, 20 (Nov. 15, 2013), availablehere.

[2]. Press Release, U.S. Sec. & Exch. Comm’n, SEC Awards More Than $14 Million to Whistleblower (Oct. 1, 2013), available here.

[3]. Andrew Ceresney, Co-Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Keynote Address at the International Conference on the Foreign Corrupt Practices Act (Nov. 19, 2013), available here.

[4]. U.S. Sec. & Exch. Comm’n, Litigation Release No. 22676, Former Siemens Executive Uriel Sharef Settles Bribery Charges (Apr. 16, 2013),available here.

 

Article by:

Of:

Morgan, Lewis & Bockius LLP

Swiss National and Former Energy Executive Criminally Charged Under Foreign Corrupt Practices Act (FCPA)

Katten Muchin

In an illustration of the extraterritorial reach of the Foreign Corrupt Practices Act (FCPA), Alain Riedo, a Swiss citizen and the general manager of Maxwell Technologies S.A. (Maxwell), a Swiss subsidiary of a US public company, was criminally charged with violating anti-bribery, book and records, and internal control provisions of the FCPA. According to the indictment filed in the Southern District of California, Riedo, along with unidentified co-conspirators and agents, allegedly conspired to, and made, corrupt payments to Chinese government officials and falsely recorded those payments on Maxwell books and records in an effort to retain business, prestige and increased compensation. Riedo worked for Maxwell, which manufactured and sold high-voltage/high-tension capacitors (HV/HT) in several countries, including China. From October 2002 through May 2009, Riedo allegedly conspired with a senior officer of the US parent company, a manager of the Swiss subsidiary and a Chinese national acting as Maxwell’s agent, and caused up to $2 million in bribes to be paid to Chinese government officials in order to obtain HV/HT sales contracts. According to the indictment, the bribery scheme entailed giving prospective customers quotes for HV/HT sales at prices that included a “secret mark-up” of approximately 20 percent. Invoices were prepared reflecting the marked-up prices and the agent in China kicked back the marked-up portion to employees at Chinese state-owned electric utility manufacturers. The indictment alleges that Riedo falsely recorded the inflated payments in Maxwell books, records and accounts as “commissions, sales expenses, or consulting fees.” Thereafter, Riedo allegedly electronically transmitted this erroneous financial information to Maxwell’s parent company in California, which resulted in errors in the parent’s publicly filed consolidated financial statements and other Securities and Exchange Commission filings, including false sub-certifications of the financials.

Riedo—who, according to the indictment, was separated from the company shortly after the alleged conspiracy ended—faces nine counts. No charges were filed against the companies. In fact, the indictment alleges that Riedo and the Chinese agent subverted the corporate compliance program by falsely representing in an internal FCPA questionnaire that they were not aware of any FCPA violations.

United States v. Alain Riedo, No. 13-cr-3789 JM (S.D. Cal. October 15, 2013).

Article By:

 of

SEC Scores in Accounting Fraud Suit Against BankAtlantic Corp. and Former CEO

Katten Muchin

On October 10, a Florida federal judge granted the Securities and Exchange Commission’s motions for partial summary judgment against BankAtlantic (now BBX Capital Corp.) and its former CEO and chairman Alan Levan, finding that the defendants’ public disclosures about their commercial real estate portfolio and their accounting treatment of certain portfolio loans violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The accounting fraud claim stems from BankAtlantic’s October 2007 attempt to sell many of the troubled loans. The company improperly recorded the loans on its books as “held-for-investment” instead of held-for-sale,” and failed to write them down. Management’s concern about the credit quality of the company’s commercial real estate land acquisition and development portfolio had been memorialized in a March 2007 email sent by the CEO in response to a cascade of borrowers requesting extensions, in which he stated, “[i]t’s pretty obvious that the music has stopped…I believe we are in for a long sustained problem in this sector.” The court found that the CEO made false statements in July 2007 during a second quarter earnings call, in which he acknowledged concerns about a subset of the portfolio but stated that, “there are no asset classes that we are concerned about in the portfolio as an asset class” and “the portfolio has always performed extremely well, continues to perform extremely well.” The company’s Forms 10-Q for the first and second quarters of 2007 did not acknowledge the trend of extensions granted and loans downgraded to non-passing status. The court also struck defendant’s affirmative defense that it relied on the professional advice of accountants, agreeing with the SEC’s assertion that the company did not completely disclose the problem to its accountants.

Securities and Exchange Commission v. BankAtlantic Bancorp Inc. et al., No. 0:12-cv-60082 (S.D.Fla. October 10, 2013).

 

The False Claims Act During Times of War: Is There Any Time Limit For Bringing Suit

tz logo 2

A federal appellate court recently ruled that, at least for the moment, claims under the False Claims Act (“FCA”) are not subject to any statute of limitations. The United States Circuit Court for the Fourth Circuit, in U.S. ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013), relied on an obscure federal statute, the Wartime Suspension of Limitations Act (“WSLA”), to hold that the FCA’s general six-year statute of limitations, 31 U.S.C. §3287, was tolled due to the ongoing conflict in Iraq. The Fourth Circuit’s decision is ground-breaking, as it is the first federal appellate court to weigh in on this issue and takes a broad view of the tolling question, effectively removing any limitations bar to FCA violations committed during times of war.

The WSLA, originally enacted in 1942 and amended as recently as 2008, generally suspends statutes of limitations in actions related to fraud against the United States until 5 years after the termination of a war. 18 U.S.C. §3287. In Carter, the qui tam whistleblower alleged that his employer, well-known government contractor Kellogg Brown Root Services, Inc. (“KBR”), was defrauding the government by inflating its employees’ work hours on a water purification contract as well as misrepresenting to the United States that it was actually purifying water for servicemen and servicewomen deployed in Iraq. The trial court dismissed Carter’s complaint on the grounds that, among other things, Carter’s case was not tolled by the WSLA because the government did not intervene in the action. Carter, 710 F.3d at 176. The Fourth Circuit reversed, holding that the armed conflict in Iraq suspended the statute of limitations in Carter’s case, regardless of whether the case was being prosecuted by Carter, as the FCA relator, or by the United States. According to the court, “whether the suit is brought by the United States or a relator is irrelevant . . . because the suspension of limitations in the WSLA depends on whether the country is at war and not who brings the case.” Id. at 180.

In addition to explicitly extending the scope of the WSLA to non-intervened cases, the Fourth Circuit made two other important WSLA-related holdings. First, the court ruled that the phrase “at war” in the WSLA is not limited to formally declared wars but, instead, applies to modern military engagements such as the United States’ involvement in Vietnam, Korea, Afghanistan and Iraq. Id. at 179. Although none of these conflicts were formally declared wars, they occupied much of the government’s attention and resources such that the purpose of the WSLA-allowing the government more time to act during the fog of war-would not be served if an unnecessarily formalistic approach were required.

Second, the Fourth Circuit-consistent with several district courts before it-ruled that the WSLA applies to both criminal and civil cases. Id. at 179-180. The question of WSLA’s application to civil matters arose out of the use of the word “offense” in the statute. The original version of the WSLA applied to “offenses involving the defrauding or attempts to defraud the United States . . . and now indictable under any existing statutes.” In 1944, however, the Act was amended, deleting the “now indictable” language. With that change, the court concluded, the “WSLA was then applicable to all actions involving fraud against the United States,” including civil actions. Id.

In light of the Fourth Circuit’s decision in Carter, the limitations period for FCA actions may be indefinitely extended. Indeed, in Carter, the court indicated that it is not clear that the war in Iraq is over for purposes of the WSLA. Tolling under the WSLA ends 5 years after the termination of hostilities “as proclaimed by a Presidential proclamation, with notice to Congress, or by a concurrent resolution of Congress.” Wartime Enforcement of Fraud Act, Pub. L. No. 110-417 §855, codified at 18 U.S.C. §3287. According to the Fourth Circuit, because “it is not clear” that President Obama has proclaimed the war in Iraq as over and provided notice of the same to Congress, as required by the WSLA, the limitations period may still be tolled.

Some commentators have argued that the FCA statute of repose, which sets the outside deadline for bringing claims at either “3 years after the date when facts material to the right of action are known or reasonably should have been known” by the government, “but in no event more than 10 years after the date on which the violation is committed, whichever occurs last.” This mandates that the statute of limitations for FCA cases cannot be tolled for more than 10 years. Although Carter did not reach that specific issue, it seems unlikely-based on the Fourth Circuit’s language and analysis-that it would endorse such a position. Indeed, the Fourth Circuit noted, in a footnote, that “tolling will indeed extend indefinitely” absent a formal Presidential proclamation with notice to Congress. Carter, 710 F.3d at n.5.

If the Fourth Circuit’s analysis is adopted by its sister circuits, there will be profound benefits for whistleblowers seeking to expose fraud against the Government. For instance, defendants may be discouraged from proffering hyper-technical, confused or convoluted statute of limitations defenses in order to avoid responsibility for their fraud. It would also open up the possibility of bringing qui tam claims under the FCA for conduct dating farther back in the past.

Alleged STOLI Producers Found Guilty of Fraud and Other Criminal Charges

DrinkerBiddle

Earlier today, a jury in the United States District Court for the Southern District of New York found independent insurance producers Michael Binday, James Kergil, and Mark Resnick guilty of mail and wire fraud, and conspiracy to commit those offenses.  The jury also convicted Kergil and Resnick of conspiracy to obstruct justice.  Sentencing has been scheduled for January 15, 2014.  The convicted defendants may face up to 80 years in prison.

During the 12 day trial, federal prosecutors argued that Binday, Kergil, and Resnick lied to insurers to perpetrate the scheme and then lied again to cover it up.  Based on the testimony of insiders and insureds, along with the defendants’ own emails and other documents, prosecutors specifically argued that the defendants:

  • recruited brokers to solicit elderly clients to serve as straw-buyers for the policies, with promises of large commissions to the brokers and payments to the clients upon the sale of the policies;
  • submitted applications to insurers for more than $100 million in life insurance, which grossly misrepresented the insureds’ income and net worth and lied about the intent to sell the policies, the fact that the premium would be financed by third-parties, and that multiple policies were being applied for or had been issued in the name of the insured;
  • recruited accountants and other professionals to submit bogus inspection reports and other documents purporting to verify the insureds’ financials;
  • conspired to thwart insurers’ attempts to investigate the representations made in the policy applications and to disguise the source of premiums paid for the policies by wiring funds into insureds’ accounts; and
  • earned millions of dollars through commissions and in some cases by arranging to cash in themselves on the death benefits upon an insured’s death.

Insurance industry leaders Jim Avery, the former Vice Chairman and President of Individual Life Insurance for Prudential, and Mike Burns, a Senior Vice President at Lincoln Financial Group, also testified during the government’s case in chief.  Both testified about their companies’ anti-STOLI policies, the harm to insurers that STOLI caused, and the measures the companies took to try to screen it out.

The evidence relating to the conspiracy to obstruct justice charges against Kergil and Resnick included alleged recorded calls that a scheme insider, who testified under a plea agreement, had with Kergil and Resnick, and testimony from an employee of the Apple computer store where Resnick allegedly had taken his computer to have the hard drive wiped clean.  The alleged calls, which were recorded in cooperation with the FBI, involved discussions about Kergil’s instruction to Resnick and the insider to destroy all records with Binday’s name on them and to wipe their computer hard drives clean.

Each of the defendants was separately represented by his own counsel, and none of the defendants took the stand in his defense.  Instead, the defendants presented excerpts from approximately a dozen files for policies that the defendants submitted to the insurers and that supposedly contained STOLI red flags.  Based on these documents, the defendants argued that the insurers were not deceived by the defendants’ lies and that the scheme was profitable for all involved and not criminal activity.  On rebuttal, the prosecutors introduced additional evidence from the insurer files showing that the insurers’ attempts to investigate the STOLI red flags were met with more lies on the part of the defendants and their associates.

This criminal prosecution has already spawned at least one civil action by an insurer seeking to have a STOLI policy allegedly involving Resnick and Binday declared null and void.

Diagnostic Laboratories Settles for $17.5 Million After Healthcare Whistleblowers’ Allegations of Medicare Fraud

tz logo 2

The Department of Justice announced yesterday that Diagnostic Laboratories and Radiology, the West Coast’s largest supplier of laboratory and X-ray services to nursing homes, will pay $17.5 million to settle whistleblower allegations that the California-based company violated the False Claims Act by giving kickbacks for referral of mobile lab and radiology services, which were subsequently billed to Medicare and Medi-Cal (California’s Medicaid program).  Diagnostic Labs allegedly took advantage of Medicare’s and Medi-Cal’s reimbursement systems by billing them at standard rates while secretly giving discounted fees to the participating nursing homes. According to the lawsuit, those fees were as much as 80 percent below the lab’s normal rates.

For inpatients, Medicare pays a fixed rate based on the patient’s diagnosis, regardless of specific services provided.  For outpatients, Medicare pays for each service separately.  Diagnostic Labs’ scheme supposedly enabled the nursing homes to maximize their profits for providing inpatient services by decreasing the cost of them.  It also allegedly allowed Diagnostic Labs to obtain a steady stream of lucrative, outpatient referrals that it could directly bill to Medicare and Medi-Cal.  This provision of inducements, including giving discounted rates to generate referrals, is prohibited by both federal and state law. By law, the discounts should have been passed along to the government programs.

The Medicare whistleblowers in this case were two former Diagnostic Lab employees, Jon Pasqua and Jeff Hauser, who said they were fired after reporting the secret discounts and kickbacks to the authorities. Hauser and Pasqua worked in the company’s sales office and said they tried to report the questionable discount practices to supervisors first, but were ignored. They then provided information to state and federal officials, and were subsequently fired from their jobs shortly before filing the healthcare fraud case in February 2010, according to their lawyers.

This settlement will resolve Hauser and Pasqua’s lawsuit, which was filed under the qui tam, or whistleblower, provisions of the federal and state False Claims Act. This act allows private citizens with knowledge of fraud to bring qui tam lawsuits on behalf of the US government. The individual filing the lawsuit is known as the relator, or whistleblower.  Healthcare whistleblowers, such as Hauser and Pasqua, serve an important role in exposing and eliminating healthcare fraud.

While it is true that whistleblowers take on a personal risk in these cases, it is still worthwhile for them to come forward with their information. Because qui tam whistleblowers help to eliminate government fraud, they receive a significant proportion of the lawsuit’s settlement for their efforts.

Together, Pasqua and Hauser will receive a total $3,755,500 as their share of the federal government’s recovery.

 of

The Foreign Corrupt Practices Act (FCPA) in the News: Big Scoops, Real Fallout

Sheppard Mullin 2012

In early August, the New York Times reported that the U.S. Securities and Exchange Commission (SEC) is investigating JPMorgan Chase related to alleged violations of the Foreign Corrupt Practices Act (FCPA) in China.  According to the article, the press had not previously reported on the investigation, and the Times knowledge of it was based on a “confidential United States government document.”  The article generated a number of similar news reports.

This is not the first time the media has hopped on the FCPA bandwagon following a juicy story about alleged bribery.  For example, in 2012 and again this year, the New Yorker ran feature articles on alleged corruption in the Macau gambling industry and the Guinean mining industry.  And reports by the Wall Street Journal and other sources, both inside and outside the United States, brought into focus the alleged bribery payments arising from the News Corp phone hacking scandal in the United Kingdom.

The increase in feature reporting on the FCPA makes some sense: stories typically involve racy factual underpinnings, exotic locations, multi-national companies and crooked governments.   Nonetheless, the FCPA may have been underreported in the mainstream press, even as it was being vigorously enforced by the SEC and Department of Justice.

As the press catches up to enforcement, it appears that the stories themselves may in turn have ramifications for the enforcement environment.  One result of more prominent news coverage may be increased pressure on the U.S. government to prosecute alleged FCPA violations.  While it is possible that a news story could trigger a new investigation, coverage of an ongoing investigation would seem to increase scrutiny on it, thereby inciting the government to investigate more thoroughly than might otherwise be the case, or to push harder against potential procedural hurdles like jurisdiction or the statute of limitations.  Given the high cost that has come to be associated with defending against enforcement actions, this type of pressure could lead to major expenditures by companies.  Indeed, some FCPA investigations have reportedly led to $100 million or more in attorneys’ fees.

The FCPA’s heightened visibility in the mainstream press thus brings into relief an issue with which companies need to be particularly aware: bad press.  In fact, the more negative press that accumulates with respect to a particular company and/or allegation, the worse the ramifications for the company.  Investors may start to abandon the company, management changes or other dramatic action may be taken to demonstrate the company’s commitment to addressing perceived problems, and the company may ultimately be more willing to settle the matter on the government’s terms to make the issue go away.

Companies can help protect against violations – and the adverse PR that may come with violations or even allegations of violations – by implementing comprehensive anti-corruption programs.  In addition, companies must foster a “tone from the top” that stresses compliance with anti-corruption laws and open communication about suspected violations.  Potential whistleblowers must feel secure and appreciated for coming forward to report allegations internally, so they are less inclined to report the allegations externally.  In other words, companies that do not want to air their dirty laundry had better keep a clean house.