Tuesday, May 10, 2005

TIAA-CREF CFO Receives Notice of Possible SEC Securities Charges

As expected (see earlier post here), the SEC has sent a Wells notice to another person connected to General Re's side of the reinsurance transaction with AIG, which that company did not properly account for to inflate its insurance reserves.  After the disclosure that General Re executive Richard Napier received a notice last week, now a former executive, Elizabeth Monrad, has also been notified that she is likely to be sued for securities law violations.  Monrad is the CFO of TIAA-CREF, the large pension and insurance company [Full disclosure yet again: I still have retirement funds with the company -- darn it].  Although TIAA-CREF is a private company, so it is not subject to the disclosure rules under the federal securities laws, I suspect she may have to step down from her position, at least temporarily, until any SEC action is resolved.  A New York Times article (here) discusses the General Re-AIG transaction, which includes the alteration of documents by General Re.  Additional General Re officials involved in the transaction are likely to receive Wells notices of their own, if they haven't already. (ph)

May 10, 2005 in Civil Enforcement, Investigations, Securities | Permalink | TrackBack (0)

Bristol-Myers Bumps Up Its Litigation Reserve for the Government Investigation of Channel Stuffing

Bristol-Myers Squibb Co. announced yesterday that it had increased the reserves related to the government's investigation of the company's accounting by $110 million, indicating that the matter may be coming to a head soon.  The company's press release (here) states rather cryptically: ""In today‚Äôs Form 10-Q, pre-tax earnings were reduced by $110 million, reflecting litigation reserves for previously disclosed matters recorded after the issuance of the earnings release. The previously disclosed matters are wholesaler inventory issues and certain other accounting matters. Together with the $30 million reserve previously recorded for such matters, of which $14 million had been reflected in the previously announced first quarter results, total reserves for these matters reported in the Form 10-Q are currently $140 million."  The "previously disclosed matters" involve civil and criminal investigations of alleged channel stuffing by the company, a method to prop up revenue when a corporation's sales begin to slide unexpectedly (see earlier post here about Coke's settlement of similar charges).  A New York Times article (here) notes that the company is represented by former Southern District U.S. Attorney Mary Jo White, so it certainly has brought in the first team.  Whether Bristol-Myers is able to achieve a global settlement that will not cost it more money is still up in the air, and look for the government to seek a substantial penalty. (ph)

May 10, 2005 in Civil Enforcement, Investigations, Securities | Permalink | TrackBack (1)

The Old Fake Doctor's Note Trick

Everyone has heard about the kid in school with the fake doctor's note to get out of class.  The same type of note can have a rather unfortunate effect when it is submitted to a court by a person under indictment and out on bail when the fabrication comes to light.  Michael Alcott was charged with bank fraud in September 2004 related to a $2.5 million line of credit.  Released on bail pending the trial, Alcott submitted a letter purportedly from a doctor at Mass. General Hospital stating that Alcott suffered from terminal cancer.  On Monday, he was taken into custody while he awaits trial because the letter was a fake and he is not suffering from cancer (see USAO press release here).  Unfortunately, Alcott has made his case even harder because the indictment charges him with submitting to the bank an allegedly falsified audit opinion on the letterhead of a local auditing firm with the name of a non-existent partner.  Do you see a pattern here?  I suspect he will have a hard time testifying at trial. (ph)

May 10, 2005 in Prosecutions | Permalink | TrackBack (2)

Monday, May 9, 2005

Defendants Convicted in Philadelphia Corruption Trial

Former Philadelphia City Treasurer Corey Kemp and four other defendants were convicted on the 19th day of deliberations.  Kemp and two Commerce Bank executives, Stephen Umbrell and Glenn Holck, were convicted of conspiracy charges related to corruption in the payment and receipt of gifts in connection with the placement of city funds in banks.  Kemp was also convicted on other tax and corruption counts.  Two other defendants, Le-Van Hawkins and Janice Knight, were acquitted on the broad conspiracy charge but were convicted of perjury (Hawkins) and misuse of government property and making false statements (Knight).  The jury deadlocked on other charges against the defendants.  An article on Bloomberg.com (here) reviews the verdict.

The case was marked by an unusually contentious atmosphere in the courtroom, as discussed in an earlier post here, including calls for U.S. District Judge Michael Baylson to recuse himself because of alleged favoritism shown to the government.  Judge Baylson is a former U.S. Attorney for the Eastern District of Pennsylvania.  The grounds for an appeal of the convictions will be numerous, the two most important being alleged Brady violations by the government (earlier post here) and the removal of a juror for bias who had indicated she did not believe the government had proven its case (earlier post here).  This case is far from over. (ph)


UPDATE (5/10): The Philadelphia Inquirer has an excellent scorecard of the verdicts on each count and each defendant here.

May 9, 2005 in Corruption, Perjury, Prosecutions | Permalink | TrackBack (0)

Opening Day of "Senator A's" Fundraiser's Trial

This trial will definitely be a "must watch" for those who enjoy media related trials.  According to the New York Times, "David F. Rosen, the former fund-raising director for Senator Hillary Rodham Clinton, will go on trial on charges that he illegally underreported the cost of a fund-raiser held for Mrs. Clinton's 2000 Senate campaign." (see here)  The site for the case is LA, and the essence of the case as noted by the New York Times are allegations that Rosen " falsely reported that the gala cost $401,419 when it actually cost at least $1.2 million." 

One has to feel sorry for those who become targets because they are associated with prominent people who are constantly being scrutinized.  On the other hand, one who associates with people of this stature must realize in advance that someone will always be looking over their shoulder on every move they make.  The question here will be whether Rosen can standup to this scrutiny and walk out of the courtroom even after every piece of paper is fully examined. 

On the sidelines of this case you have some who are just ready to jump on any word, phrase, or comment that tarnishes the name of Hillary Clinton.   Interestingly, I have to give the prosecutors in this case applause for trying hard to keep some of the politics out of the case.  The indictment speaks to "Senator A." (see here).


May 9, 2005 in Media | Permalink | TrackBack (0)

Who Stole the Cookie from the Cookie Jar?

Today's round of American International Group revelations, courtesy of the New York Times (here), is that the company routinely used reserves from its Directors & Officers (D&O) insurance policies to prop up earnings.  Reserves are cookie jars for most companies, available pots of money that can be dribbled out to prop up earnings because the amounts are based on reasonable estimates of future liabilities and those estimates can change -- especially at the end of a quarter or year when the real earnings are going to fall a bit short.  D&O reserves are especially tempting because claims tend to come years down the road, once litigation is settled, and rates can be raised to pay for impending claims, thus postponing the effect of drawing down the reserves.  At some point in time, of course, the reserves have to be rebuilt, and that can come at a bad time in the economic cycle, as the banking industry learned in the early 1990s.  One of the reasons AIG entered into the reinsurance agreement with General Re that it has admitted was not properly accounted for was to prop up its reserves, which analysts felt had dropped to a sufficiently low level to call into question the value of AIG's stock, anathema to former CEO Maurice Greenberg. 

The revelations in the Times story are not new -- AIG's release on May 1 acknowledged misuse of reserves -- but show where the government investigators will be looking for evidence of financial fraud.  The accounting rules related to reserves are quite vague, so proving a fraud case will be difficult absent testimony or documentary evidence showing the manipulation of the accounts.  For the government to bring a civil or criminal case, it will need the cooperation of senior AIG executives, so cooperation agreements or plea deals in the near future may signal the direction of the investigation if they include any admissions of wrongdoing related to reserves.

May 9, 2005 in Civil Enforcement, Fraud, Securities | Permalink | TrackBack (0)

Lawyers May Be Next Targets for Giving Loans to Judge

Former Kansas City Municipal Court Judge Deborah Neal entered a guilty plea last Tuesday in which she admitted to soliciting $28,000 of loans from lawyers who appeared before her and a bonding company, and stated that she gave favorable treatment to the lawyers in some cases.  Neal solicited the money because of an admitted gambling addiction.  Now comes the fall-out for the lawyers, who will certainly be looking at disciplinary proceedings and possibly criminal investigations for lending a judge money while they had matters pending before her.  In fact, an Assistant U.S. Attorney in Kansas City is quoted in a Kansas City Star article (here) stating that the loans may open up the attorneys to criminal charges.  A range of federal corruption statutes can be used, most likely Section 666 and the right of honest services theory for mail/wire fraud (assuming there were telephone calls or mailings).  As long as we're on the topic of legal ethics, is it proper for a federal prosecutor to comment publicly about possible criminal charges? The Legal Ethics Forum blog (here) highlighted the lawyers' potential exposure. (ph) 

May 9, 2005 in Corruption, Legal Ethics | Permalink | TrackBack (0)

21 Month Sentence for Computer Hacker

The U.S. Attorney's Office for the Eastern District of Virginia (Alexandria) announced that Raymond Steigerwalt, a 21-year old former member of an international hacking group, received a 21-month sentence for conspiracy to commit computer fraud and possession of child pornography.  According to a press release (here), Steigerwalt engaged in the following conduct:

Between October 2002 to March 2003 Steigerwalt was a member of the Thr34t Krew (TK), an Internet group devoted to hacking. TK conspirators created a computer worm to spread across the Internet and install Trojan software, i.e. software that masqueraded as legitimate software, but allowed Steigerwalt and other co-conspirators to remotely control infected computers. The TK created the worm to self-propagate and would use computers connected to the Internet to command and control the computers infected by the worm with the Trojan software. At least two computers belonging to the Department of Defense were infected and damaged by the worm. Between October 2002 and March 7, 2003, the TK commanded computers infected by the worm to disconnect other computers that were connected to the Internet. Furthermore, Steigerwalt was found in knowing possession of computer image files which contained a visual depiction of a minor engaging in sexually explicit conduct.


May 9, 2005 in Computer Crime | Permalink | TrackBack (1)

Sunday, May 8, 2005

"Control Fraud" Book

This book certainly sounds interesting.  It is titled, "The Best Way to Rob a Bank is to Own One."  It's an April 2005 book published by  University of Texas Press and is authored by William K. Black, the "Interim Executive Director of the University of Texas at Austin Institute of Fraud Studies and Assistant Professor of Public Affairs at the LBJ School of Public Affairs."  In an email Bill described the book to me as discussing:

"'control fraud' (fraud by those who control corporations and use them as 'weapons' of fraud and 'shields' against prosecution.  It gives an insider/academic account of the regulators' war with the S & L control frauds during the debacle."

You can access the details on the book here and the preface here.


May 8, 2005 in Scholarship | Permalink | TrackBack (15)

More Military Issues

In the post here, questioned was whether there was of a military compliance program to stop improper tactics by military recruiters or by supervisors who might be pressuring the recruiters.  Now questioned is whether there is a corporate compliance program focused on possible fraud within the military.

According to a DOJ Criminal Division Press Release here:

"Between 2001 and 2003, Powers served as the Deputy Commander and Civilian Executive Assistant for the United States Army, Depot Support Activity, Far East (DSAFE) for United States Forces, Korea. He was responsible for purchasing and contracting on behalf of the Army. Powers used his official position to violate Defense Department (DOD) contracting rules and sole-source several DOD contracts for truck parts, supplies and services to a Korean contractor in exchange for more than $20,000 in bribes."

Several questions:

1. The press release says "Korean contractor" but gives no further information.  Was this scheme reported by a company that did not receive the bid and was it a U.S. company?

2. Not that bribes should ever be tolerated, but was the total cost of the items more or less than if they had been processed through normal routes?

3. According to the press release the accused received a sentence of 26 months and also "was sentenced to three years of supervised release and ordered to pay $55,000 in restitution to the U.S. Army."  Why if the bribes were "more than $20,000" was the restitution $55,000?  Was this amount just agreed upon for purposes of the plea?

Most likely these questions have easy answers, answers that would not normally be included in a press release.  But one has to wonder if instances such as these could be avoided with a more "effective" compliance program.


May 8, 2005 in Fraud | Permalink | TrackBack (0)