Criminal Activity Archives

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.

|Criminal Activity|

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.

|Criminal Activity, Educational Series|

Seven individuals charged by SEC in global warming scheme

The Securities and Exchange Commission (SEC) today charged seven individuals with perpetrating a fraudulent pump-and-dump scheme in the stock of a sham company that purported to provide products and services to fight global warming. The scheme resulted in more than $7 million in illicit profits from the sales of stock in CO2 Tech Ltd. at artificially inflated prices. The company, based in London, touted impressive business relationships and anti-global warming technology innovations, but was found to have no significant assets or operations.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, the scheme was enacted through Red Sea Management Ltd., a Costa Rican asset protection company that laundered millions of dollars in illicit trading proceeds out of the United States on behalf of its clients. Charged in the in the fraudulent pump-and-dump scheme were: Jonathan R. Curshen, a Florida resident who founded and led Red Sea, David C. Ricci and Ronny Morales Salazar of Costa Rica, who were Red Sea stock traders, Ariav “Eric” Weinbaum and Yitzchak Zigdon of Israel, who were Red Sea clients, Robert L. Weidenbaum, of Florida, who was a stock promoter and operator of CLX & Associates, and Michael S. Krome, a New York lawyer who allegedly wrote a fraudulent opinion letter. Without admitting or denying the allegations in the complaint, Ricci settled the SEC’s charges by agreeing to an injunction against future violations of these provisions and a penny stock bar.

In a related criminal action, charges brought by the Justice Department’s Criminal Division were unsealed today against Curshen, Krome, Salazar, Weidenbaum, Weinbaum, and Zigdon. The defendants were charged variously with conspiracy to commit securities, mail and wire fraud, violating securities regulation laws and obstruction of justice.

|Criminal Activity, Fraud, Green Technology|

Historical investment fraud sweep compels numerous civil and criminal actions

On December 6, 2010, the Financial Fraud Enforcement Task Force announced the conclusion of Operation Broken Trust, the largest investment fraud sweep ever conducted in the United Stated. Started August 16, 2010, the operation captured 343 criminal defendants and 189 civil defendants who were involved in fraud schemes that harmed more than 120,000 victims throughout the country. The criminal cases involved more than $8.3 billion in estimated losses and the civil cases more than $2.1 billion. Eighty-seven defendants have been sentenced to prison, including several who will serve more than 20 years.

The sweep focused on fraudsters who offered “investment opportunities” that were either completely fictitious or not structured as advertised. An overwhelming number of these were high-yield investment frauds and Ponzi schemes. Others involved commodities fraud, foreign exchange fraud, market manipulation (pump-and-dump schemes), real estate investment fraud, business opportunity fraud, and affinity fraud. Some of the perpetrators filed for bankruptcy in an attempt to avoid claims by victimized investors. In many instances, the criminals were trusted people within their communities—neighbors, co-workers, fellow church members—who betrayed that trust in order to line their own pockets.

|Criminal Activity, Fraud|

No background check was done on Michael Jackson’s doctor

Media sources reported that among several wrongful death lawsuits filed by the Jackson family, is a September 2010 action against event production company AEG Live and others alleging that they are responsible for the singer’s death because his “This Is It” tour contract with AEG created a legal duty to keep him healthy.

In its complaint, among other causes, the Jackson family accuses AEG of “negligent hiring” and retention of Dr. Conrad Murray to care for Jackson instead of his usual doctor. Earlier this year, prosecutors charged Murray with involuntary manslaughter, to which he pleaded not guilty. The doctor is accused of administering the drug Propofol to Jackson without the necessary resuscitation equipment or nursing support, and subsequently causing his death. The ‘Negligent Hiring’ cause of action in the complaint filed in Los Angeles County states:

“In undertaking to hire Murray, AEG performed absolutely no diligence in investigating or checking into Murray’s background, specialties, ability, or even whether he was insured, which it had a duty to do. In choosing to hire and employ a physician to treat Jackson, AEG undertook to act, and it needed to do so reasonably. AEG did not act reasonably and breached its duty.”

“During the course of Murray’s treatment, it became clear to AEG that Jackson was not doing well at all. AEG did nothing to terminate Murray and instead negligently retained him as an employee, and in so doing violated its duty of care. AEG insisted that Jackson continue treatment with Murray and receive no treatment from other physicians, a further breach of its duty of supervision.”

Along with negligent hiring, training and supervision, the complaint calls for unspecified damages for breach of contract, fraud, and negligent infliction of emotional distress. And in the most recent case filed November 30, 2010 in the Los Angeles County Superior Court, Joe Jackson is also claiming negligent hiring, training and supervision and negligence by the Murray-affiliated clinics and negligence against the pharmacy (and Murray.) A similar suit filed this past June did not include the pharmacy, and was dismissed.

Shortly after Michael Jackson’s death, ABC News reported that Murray was arrested on domestic violence charges in 1994 after an incident with his then-girlfriend. The doctor was tried and acquitted. When a company fails to conduct a background check, the employer can be held legally liable for a worker, independent contractor or volunteer who causes injury to a customer, co-worker or the general public. Whether the individual was acting within the capacity of the job for which he/she was hired does not matter. The legal theory is that even if an employer did not possess direct knowledge of the liability posed by an employee, the company is legally responsible because the employer should have known about the threat presented by the individual. Currently, fewer than 50% of the states uphold the doctrine of negligent hiring, and the criteria for determining negligent hiring differ from state to state.

|Criminal Activity, Educational Series, Employment Decisions, Lawsuit|

Massachusetts employers cannot ask about criminal history on initial job applications

As of November 4, 2010, Massachusetts employers are prohibited from asking about criminal records on the initial job application, except for positions for which a federal or state law, regulation or accreditation disqualifies an applicant based on a conviction, or if the employer is mandated by a federal or state law or regulation not to employ
individuals who have been convicted of a crime.

The new law also has two provisions that will become effective February 6, 2012. Under the first provision, an employer in possession of criminal record information must disclose that information to the applicant, prior to asking about it. And similar to the requirements of the Fair Credit Reporting Act, if an employer decides not to hire an
applicant in whole or in part because of the criminal record, the employer must provide the applicant with a copy of the record.

The second provision requires employers who conduct five or more criminal background investigations annually to implement and maintain a written criminal record information policy. The policy, at minimum, must specify procedures for (1) notifying applicants of the potential for an adverse decision based on the criminal record, (2) providing
a copy of the criminal record and the written policy to applicants, and (3) dispensing information to applicants about the process for correcting errors on their criminal record.

The law imposes penalties (including imprisonment for up to one year or a fine of up to $5,000 for an individual and $50,000 for a company) for those who request or require an applicant to provide a copy of his/her criminal record except under conditions authorized by law, and prohibits harassment of the subject of the criminal record (punishable by imprisonment of up to one year, or a fine of not more than $5,000.)

|Criminal Activity, Educational Series, Employment Decisions, Legislation|

Corporate misconduct can preclude directors from serving on other boards

Due diligence on current and prospective board directors should extend not only to the legal liability exposure but also to the possibility of losing valuable opportunities for board membership at other firms,” said Jason Schloetzer, assistant professor of accounting at Georgetown University’s McDonough School of Business and author of The Conference Board Report. “In the current litigation environment, it is particularly important for the board to demonstrate to shareholders and the judicial system that any failure to prevent or discover corporate misconduct took place in spite of the rigorous performance by the board of its oversight duties, including the establishment of a state-of-the-art compliance program.”

The Conference Board Report, released November 4, 2010, analyzed the changes in directorships held by outside board members of 113 public companies involved in shareholder class-action lawsuits that alleged misrepresentation of information to investors. The study, encompassing the period of 1996 to 2005, tracked directorship changes for three years after the start of litigation and used data from proxy statements to identify director turnover.

Within three years of litigation, 83.2% of outside directors remained on the board of the public company involved in the lawsuit, the study found. Related research showed that outside directors in firms involved in litigation did not appear to turn over any more frequently than the average among all outside directors. However, outside directors whose companies were involved in litigation experienced reduced opportunities to serve on other companies’ boards. The average number of board seats held by these individuals at other companies dropped from 0.95 in the year prior to the litigation to 0.47 three years after the suit was filed.

|Criminal Activity, Educational Series|

One of many case studies from our files that stopped a deal in its tracks

Our client, a commercial lender, requested background investigations of a consumer products company and its two principals in connection with their application for working capital financing. The loan officer was familiar with the subjects, and was astonished by the information that SI quickly uncovered. Searches of federal court records revealed a 2008 action filed against the subjects under the Federal Trade Commission Act for falsely advertising that using their electronic exercise belt caused weight and inch loss without exercise. The action was resolved by stipulated orders as part of a global settlement of both the FTC’s lawsuit and related actions brought by county and city prosecutors. The subjects and certain retailers collectively were ordered to pay over $2 million. The FTC and state orders further barred the defendants from making false advertising claims for the product or any similar device, and provided other injunctive relief to prevent future deceptive practices. And the subjects’ nefarious acts did not stop here. Both principals had several unpaid tax liens and judgments ranging in amounts from $48,000 to $650,000, and both were convicted within the last two years of driving under the influence of alcohol.

|Criminal Activity, Judgment, Taxes|

A look into money laundering

In U.S. law, money laundering is the process of engaging in financial transactions to conceal the identity, source, and/or destination of illegally gained money. It is believed that the term “money laundering” originated from the Mafia’s ownership of Laundromats whereby large sums of money were made through illegitimate activities that showed origination from a legitimate-appearing business.

The U.S. Criminal Code contains more than 100 predicate offenses to the crime of money laundering, which include drug trafficking, smuggling, prostitution rings, illegal arms sales, embezzlement, insider trading, bribery, and computer fraud. The Internal Revenue Service (IRS) considers money laundering a “tax evasion in progress.” And when no other crimes could be pinned to Al Capone, the IRS obtained a conviction for tax evasion. Leaving the courthouse, Capone said, “This is preposterous. You can’t tax illegal income!” Had the money laundering statutes been in effect in the 1930s, Capone also would have been charged with this crime. However, since October 1986, with the passage of the Money Laundering Control Act, organized crime members and many others have been convicted of both tax evasion and money laundering.

One of the most notable money laundering cases was settled in March of this year. Wachovia Bank, which is owned by Wells Fargo & Co., reached a $160 million settlement with the Justice Department over allegations that a failure in bank controls enabled drug traffickers to launder drug money by transferring $420 billion from Mexican currency-exchange houses to the bank. Under a deferred-prosecution agreement, Wachovia “admitted failure to identify, detect, and report suspicious transactions in third-party payment processor accounts.”

And money laundering has even reached the Vatican. Media reports from the past week say that the Vatican Bank, along with its chairman Ettore Gotti Tedeschi and director general, Paolo Cipriani, have been targeted for alleged violations of money laundering laws. Italian authorities temporarily froze 23 million euros ($30 million) from an account registered to the Institute for Works of Religion (IOR) a.k.a. the Vatican Bank. The investigation was opened after the Bank of Italy, adhering to anti-money-laundering directives issued by the European Union, alerted officials to two suspicious transfers on September 6, 2010. The Holy See expressed surprise at the allegations.

|Criminal Activity, Educational Series|

Decoding criminal records in the UK

In the UK, a criminal record is technically any conviction in a court of criminal offence. However, many motor vehicle offences are not deemed as crimes for criminal record purposes, since such offences carry fixed penalties and are not considered criminal convictions. Offences that are prosecuted by local authorities are sometimes classified as criminal offences, although they are unlikely to be in the Police National Computer (the “PNC”). Even if an individual has accepted a “police caution” as an alternative to prosecution, this would count as a criminal conviction.

The Criminal Records Bureau standard and enhanced disclosures contain information about convictions, cautions, reprimands, and warnings retained in the PNC and the equivalent systems in Scotland and Northern Ireland. For the purposes of CRB disclosures, a caution, reprimand, or warning that has been entered into the PNC will constitute a criminal record.

Criminal convictions also are labeled as “spent” and “unspent.” A “spent” conviction is removed from public records, meaning that the defendant has served time and passed through a rehabilitation period. Until then, the conviction is “unspent.” Some convictions, such as crimes with a prison sentence of more than 2.5 years, remain “unspent” indefinitely, regardless of the elapsed time. For convicted minors under 18 years of age, the “unspent” period is cut in half.

During the “unspent” time, the conviction must be disclosed when applying for jobs and on other applications. And for certain jobs such as law enforcement, some roles in the financial services sector, prison services, health services, private security, and for work with children, the elderly, and disabled, “spent” convictions also must be disclosed.

|Criminal Activity, Educational Series, International|

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