Saturday, February 23, 2008

NatWest Three Sentenced to 37 Months and May Be Headed Back to England . . . Eventually

Three former British investment bankers for NatWest Bank who were charged for their role in helping former Enron CFO Andrew Fastow dress up the company's balance sheet were sentenced to thirty-seven month prison terms.  The so-called "NatWest Three" -- David Bermingham, Giles Darby, and Gary Mulgrew -- became a cause célèbre over their extradition from Great Britain under a new treaty between the U.S. and U.K. designed to facilitate the transfer of terrorist suspects.  The appeal went to the House of Lords, which upheld the extradition order, and the three have been living in Houston for the past two years.  Their guilty plea in November 2007 to wire fraud ended one of the few remaining cases arising from the Enron collapse.  A Houston Chronicle story (here) discusses the sentencing.

As foreign nationals, the NatWest Three will be eligible to apply to the Department of Justice's International Prisoner Transfer Program to serve their terms in Great Britain.  The DOJ website on the Program (here) notes that "[w]hen a prisoner is transferred to another country, the completion of the transferred offender's sentence is carried out in accordance with the laws and procedures of the receiving country, including those governing the reduction of the term of confinement by parole, conditional release, or otherwise."  The Chronicle article points out that in England a defendant has to serve one-half the prison term and is then released on a type of probation.  This is much less stringent than the federal sentencing law, which requires a prisoner sentenced to a term such as those given here to serve 85% of the time, i.e. about two and one-half years. 

Among the criteria considered for authorizing a prisoner transfer are acceptance of responsibility, criminal history, seriousness of the offense, and ties to the two nations.  Also considered is whether the prisoner will remain in the home country or return to the United States -- rest assured, the NatWest Three are unlikely to darken our shores again any time soon.  In addition, according to the Bureau of Prisons Policy Statement (here) on transferring foreign prisoners, the transfer cannot be authorized until the prisoner pays any outstanding fine.  In addition to the sentence in this case, U.S. District Court Judge Ewing Werlein ordered the three to repay the $7.3 million they received from the transaction that triggered the charges.  While not a fine but restitution, I suspect there won't be a transfer until that money is repaid.  Even then, the application process will take at least a few months to complete ,once they begin their prison terms, as the bureaucracy processes the requests. (ph)

February 23, 2008 in Enron, International, Sentencing | Permalink | Comments (0) | TrackBack (1)

Thursday, February 21, 2008

Société Générale Isn't Too Hard On Itself Despite Losing $7.2 Billion

When you are the victim of a $7.2 billion fraud perpetrated by an employee, one would think that there would be a fair measure of self-criticism for not detecting the misconduct.  French banking giant Société Générale issued an progress report (available below) on its internal investigation, called "Mission Green," into the losses caused by rogue trader Jerome Kerviel, based on the work of its General Inspection department -- which sounds like the equivalent of the internal auditors -- and reviewed by PriceWaterhouseCoopers.  While Kerviel's unauthorized trades began in 2005 or 2006, they increased substantially in size in March 2007, and went undetected until mid-January 2008.  That's nine months in which he took increasingly risky positions, estimated to total as much as 50 billion euros at the peak. 

The obvious question is how Kerviel could get away with trading such huge amounts when he was a fairly low-level trader dealing in a narrow range of market indexes.  The progress report is not particularly critical, making Kerviel's trading the result of what almost seems like just minor oversight glitch:

The General Inspection department believes that, on the whole, the controls provided by the support and control functions were carried out in accordance with the procedures, but did not make it possible to identify the fraud before January 18th 2008. The failure to identify the fraud until that date can be attributed firstly to the efficiency and variety of the concealment techniques employed by the fraudster, secondly to the fact that operating staff did not systematically carry out more detailed checks, and finally to the absence of certain controls that were not provided for and which might have identified the fraud. The Inspection General department has refrained from drawing any conclusions at this stage regarding the responsibility of the front office managers supervising the fraud's author, given the ongoing legal investigation which has not enabled it to interview all those concerned. At this stage of the investigations, there is no evidence of embezzlement or internal or external complicity (i.e. the existence of a third party who knowingly assisted the fraudster to conceal his positions).The investigations are continuing, in particular, to cover a wider area than the activities of the author of the fraud. [Italics added]

Société Générale may give itself only a B- in the internal controls department, but it's hard to see any oversight system that misses such a large amount of unauthorized trading for nearly nine months as anything other than a  abject failure.  The bank continues to maintain that Kerviel acted alone, and to this point it hasn't identified any accomplices nor even any theft or personal enrichment from the trading.  Kerviel admitted his role in the transactions, but asserts that there were warning signs about what he was doing that were ignored by his superiors, or perhaps even worse, they acquiesced in his conduct because at one point he had generated profits for Société Générale of over 1 billions euros.  An International Herald Tribune story (here) discusses the report. (ph)

Download socit_gnrale_progress_report_feb_20_2008.pdf

February 21, 2008 in Fraud, International, Investigations | Permalink | Comments (2) | TrackBack (0)

Sunday, February 3, 2008

Export Controls

A DOJ Press Release tells that "the director of a Singapore-based aviation company was arraigned [this past week] in federal court in Brooklyn on charges that she illegally exported controlled U.S. military aircraft components and shipped commercial aircraft components to Iran."

Defendants were "indicted with one count of conspiring to export aircraft parts to Iran and 15 counts of exporting aircraft parts to Iran, in violation of the International Emergency Economic Powers Act (IEEPA); one count of conspiring to export defense articles without a license and two counts of exporting and attempting to export defense articles without a license, in violation of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR); and one count of conspiring to launder the proceeds of the unlawful export of defense articles."

(esp)

February 3, 2008 in International | Permalink | Comments (0) | TrackBack (0)

Thursday, January 31, 2008

Yet Another Difference With the French

The Wall Street Jrl (here) points out yet another difference between the French and the United States when discussing the support the CEO received from the board of directors at Societe Generale. Prior differences were discussed here and here. In the United States, the board might be very reluctant to back a company head or individuals within a company when there is a potential investigation or potential civil or criminal liability.  With deferred and non-prosecution agreements, companies often leave the individuals at risk and without support, as the entity becomes the sole focus in saving the company from the devastating effect of a possible prosecution.  So far, it appears that in France the decision is to support the CEO, at least in this case. Will a difference like this move more companies into operating abroad?

(esp)

January 31, 2008 in International, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Saturday, January 26, 2008

Responding to the Massive Fraud at Société Générale -- A Study in Contrasts

Legal cultures respond differently to reports of wrongdoing, and the disclosure of the massive fraud in France perpetrated by a "rogue trader" identified as Jérôme Kerviel shows how different things can be.  One of France's oldest banks, Société Générale was chartered in 1864 by Napoleon III and is now the country's second largest publicly traded financial institution, well-known for its extensive and heretofore sophisticated derivatives trading operation.  The controls on the trading desk were somehow circumvented by Kerviel, described as a mid-level trader, whose transactions in European stock index options and futures totaled as much as €40 billion and ended up down over €2 billion when discovered on January 19.  Société Générale secretly began to unwind the trades over three days beginning on Monday, January 21, in the midst of a market meltdown that may have been exacerbated by its transactions.  The sales triggered even greater losses for the bank, with the total estimated at €4.9 billion, or about $7.2 billion, from Kerviel's investments.  This surely ranks among the largest financial frauds ever, and raises serious concerns about Société Générale's internal controls -- how do you not notice positions as large as €40 billion in your portfolio, even if computer programs to flag these types of risk were circumvented?

The interesting point is not so much the size of the losses, but the response of the bank and French authorities, in contrast to how U.S. regulators and prosecutors would have acted when informed of similar conduct.  As an initial matter, it appears that Société Générale informed very few officials in the French government of the problem.  While the governor of the Banque de France, Christian Noyer, was kept abreast of the issues, upper levels of the French government did not learn of the problem until the day before its disclosure (see Bloomberg story here).  Meanwhile, Société Générale tried to get out of the investments without making any disclosure to protect itself from even greater losses, which could be viewed as favoritism by the Banque de France.  I suspect that a U.S. bank could not get away with disclosing such problems to only one banking regulator, such as the Comptroller of the Currency or the Federal Reserve, while keeping the rest of the government in the dark about transactions involving this type of misconduct.  When the news emerged, neither Société Générale nor the Banque de France issued any statement, or at least there's nothing on either's website discussing Kerviel's fraud (see here and here).  It is hard to imagine federal regulators not taking the lead on such an issue to explain how the government will respond.

The biggest question, however, is where are the prosecutors?  The French system is obviously quite different in its approach to criminal investigations, with magistrates conducting investigations.  But according to news reports (see Bloomberg here), Kerviel is "on the run" and not in custody, seemingly having slipped away.  Société Générale interviewed him on January 19 to figure out what he had done, and Kerviel was around at least in the early part of this week.  In the United States, there is no doubt that a trader accused of such conduct would have been in custody the moment the government learned of the fraud.  Indeed, the banking regulators would likely have contacted prosecutors before doing anything on the case, assuming they found out first, and not kept the Department of Justice in the dark.  Kerviel's motive for engaging in the transactions is unknown at this point, and it does not appear he was an embezzler or somehow sent the money abroad, at least to this point.  His disappearance, however, raises questions about the handling of the case, and I suspect the French authorities hope he does not show up in Namibia or a like jurisdiction. (ph)

                                                                                                    

UPDATE: An AP story (here) states that Kerviel is now in custody as part of the criminal investigation of his trading. (ph)

January 26, 2008 in Fraud, International | Permalink | Comments (0) | TrackBack (0)

Monday, November 12, 2007

Hungary - White Collar Crime Problem

If you think that the United States has white collar crime issues, check this article out about Hungary.  It notes that a PricewaterhouseCoopers study said that "up to 62% of Hungarian companies were the victim of financial crime during the previous two years."

(esp)

November 12, 2007 in International | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 6, 2007

Plea in International Bid-Rigging Case

A DOJ Press Release reports that "[t]wo executives of Trelleborg Industrie S.A.S., a manufacturer of marine hose located in Clermont-Ferrand, France, agreed to plead guilty to participating in a conspiracy to rig bids, fix prices and allocate market shares of marine hose in the United States and elsewhere."  They are pleading to a "one-count felony charge" and the fines agreed to be paid are $75,000 and $100,000.  The pleas include cooperation and 14 months in jail, although the pleas are subject to court approval.

(esp)

November 6, 2007 in International | Permalink | Comments (0) | TrackBack (0)

Friday, October 12, 2007

DoJ Sets National Counter-Proliferation Initiative

The Department of Justice is using the task force approach targeting illegal exports of restricted U.S. military and dual-use technology to foreign nations and terrorist organizations.  According to a press release (here) states that the National Counter-Proliferation Initiative will address a growing problem, and that "China and Iran pose particular U.S. export control concerns. The majority of U.S. criminal export prosecutions in recent years have involved restricted U.S. technology bound for these nations as opposed to others. Recent prosecutions have highlighted illegal exports of stealth missile technology, military aircraft components, Naval warship data, night vision equipment, and other restricted technology destined for China or Iran." The Initiative involves the Department’s National Security Division, which will meet with "districts with large concentrations of high-tech businesses and research facilities -- all of which are potential targets for illegal foreign acquisition efforts -- as potential venues for new task forces."  A report (here) summarizes export control prosecutions in the past year. (ph)

October 12, 2007 in International, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Friday, October 5, 2007

Siemens Settles German Overseas Bribery Probe

Multinational industrial giant Siemens A.G. settled with German prosecutors the probe of corrupt overseas payments by its telecom unit by agreeing to pay €201 million.  The company will also pay an additional €179 million to the tax authorities because it improperly deducted the foreign payments as ordinary business expenses.  As discussed in an earlier post (here), the scope of the questionable overseas payments is much broader than first suspected, with Debevoise & Plimpton's internal investigation raising questions about as much as €1.6 billion in transfers throughout the company and not just the telecom unit.  While the settlement with the German prosecutors closes one avenue of problems, Siemens still faces investigations by the SEC and Department of Justice in the United States and an inquiry by the Italian authorities.  Given the size of the payments and their occurrence in different parts of the company, this is the type of case that the federal government will pursue vigorously.  A Bloomberg story (here) discusses the settlement.  (ph)

October 5, 2007 in FCPA, International, Settlement | Permalink | Comments (0) | TrackBack (0)

Thursday, October 4, 2007

Report of Insider Trading at EADS

A preliminary investigation by the French financial regulator Autorité des marchés financiers (AMF) indicates that a number of senior executives at Franco-German aircraft manufacturer European Aeronautic Defense & Space Co. NV (EADS) sold shares before the announcement of problems with the company's largest development project ever, the A380.  The AMF report was discussed in the French newspaper Le Figaro and the trading allegedly occurred between November 2005 and March 2006, before the June 2006 announcement of technical problems with the superjumbo A380 and also the A350 aircraft.  The stock dropped over 25% on that announcement, and it is not clear how far in advance the information was known to 21 managers and executives who sold shares.  The AMF issued a statement (here) that

it submitted an interim memorandum to the prosecuting authorities in Paris in early September, in accordance with law; it obviously has no comment on the Le Figaro report; it insists that it has not completed its investigations and is unlikely to do so before the beginning of 2008; consequently, the AMF Board, which has sole authority to commence regulatory proceedings against persons suspected of infringing its General Regulation, has not given an opinion on the matters reported in the article and, at this stage, has decided solely to inform the criminal court thereof; at this stage of the procedure, which is still a standard inquiry, the persons concerned have not had the opportunity to exercise their right of defence.

Insider trading cases in the European Union are fairly uncommon, at least as compared to the United States.  It will be interesting to see how the investigation develops, especially when it involves a company with the political significance of EADS.  A story on CNN.com (here) discusses the report. (ph)

October 4, 2007 in Government Reports, Insider Trading, International | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 5, 2007

SEC Insider Trading Investigation Goes International

The SEC's insider trading investigation of questionable options purchases in Placer Dome in October 2005 has taken an international turn as the Commission is seeking authority to interview witnesses in Canada, the U.K., and the Isle of Man.  On October 31, 2005, Barrick Gold Corp. made a hostile offer for Placer Dome, and as happens in so many deals, there was questionable trading in Placer Dome before the announcement.  Both companies are headquartered in Canada, and the SEC recently made a filing in federal court in New York seeking judicial authorization to require witnesses outside the United States to testify in its investigation.  The SEC filed an "unknown traders" suit on November 3, 2005, to freeze the $3 million proceeds of the Placer Dome options trading (see SEC Litigation Release here), and has identified the primary investor in Toronto.  The SEC is now trying to trace who might have been the source of the information. 

While the federal court has subpoena authority to compel witnesses to appear in the U.S., the Commission has to resort to the foreign courts and foreign securities regulators to obtain evidence abroad.  In its filing, the Commission cited an e-mail sent on October 23, 2005, by the Toronto investor who purchased the Placer Dome call options that states, "I hear from the Swiss lads that G is running at PDG. Act accordingly."  "G" is the ticker symbol for Barrick Bold, and "PDG" the symbol for Placer Dome.  There's more than a little smoke coming from that e-mail, which likely means a criminal investigation for insider trading.  A Globe and Mail story (here) discusses the SEC filing. (ph -- with thanks to YH)

September 5, 2007 in Insider Trading, International, Investigations | Permalink | Comments (0) | TrackBack (0)

Thursday, August 9, 2007

Kobi Gets the Run of Namibia

Former Comverse Technology CEO Kobi Alexander seems to be prospering in Namibia, where he moved – or fled, depending on your point of view – prior to being indicted for his role in options backdating at the company. Since his arrival in August 2006, Alexander has begun investing in low-cost housing in the country and creating scholarships for Namibian students. Now, the High Court has granted Alexander’s request to be allowed to move about country with the permission of the head of the local Interpol office, rather than being confined to the capitol city of Windhoek, where he lives with his family. The extradition proceeding has been moving at a snail’s pace, if that, with no substantive hearings but many postponements at his attorney’s request.

According to an article in The Namibian (here), there may be one bump in the road for Alexander remaining in Namibia. Apparently, Alexander received a two-year work visa when he entered Namibia, and the Ministry of Home Affairs and Immigration is planning to open an investigation into whether he fully disclosed his U.S. residence and potential criminal problems when he applied for the visa. Although Alexander denies any problems, if he lost his visa there’s a chance he could be expelled from the country and sent to a place where the United States may have a better chance of extraditing him – but don’t count on it. The recent conviction of former Brocade CEO Gregory Reyes on options backdating charges can’t make Alexander comfortable, so efforts to resist extradition or expulsion will likely intensify. (ph)

August 9, 2007 in International, Prosecutions, Securities | Permalink | Comments (0) | TrackBack (0)

Saturday, August 4, 2007

Tom Cruise Wedding Pictures

A press release of the US Attorney's Office of the Central District of California reports on the arrest of two individuals for their alleged "roles in a[n alleged] scheme to extort actor Tom Cruise for $1.3 million in exchange for copies of Mr. Cruise’s wedding photos which had been stolen." One claim is that one of the individuals maintained that "he could sell the images in foreign countries where U.S. copyright laws are not enforced."

(esp)

August 4, 2007 in Celebrities, International | Permalink | Comments (0) | TrackBack (0)

Conviction for Violating the Economic Espionage Act and Arms Export Control Act

The U.S. Attorney's Office for the Northern District of California announced the guilty plea of a defendant for trying to send to China the computer source code for a visual simulation software program used for training military fighter pilots.  The defendant pleaded guilty to violating the Economic Espionage Act, because the code constitutes a trade secret, and for violating the Arms Export Control Act along with the International Traffic in Arms Regulations.  According to a press release (here) issued by the USAO: "This conviction, the first in the nation for illegal exports of military-related source code, demonstrates the importance of safeguarding our nation’s military secrets and should serve notice to others who would compromise our national security for profit." (ph)

August 4, 2007 in International, Prosecutions | Permalink | Comments (0) | TrackBack (1)

Friday, August 3, 2007

The Cooperation Vise

The Wall Street Journal (here) and Washington Post (here) have interesting articles on possible criminal charges against board members of Chiquita Brands International for payments to a Columbian paramilitary group to protect the company's operations.  While Chiquita settled the case by pleading guilty and paying a $25 million fine, the investigation of individuals has moved forward because the payments continued after the company informed the government of them.  Chiquita apparently believed it could not simply cut off paying the paramilitary organization, which was designated a terrorist group on September 10, 2001, without endangering its workers.  While the government never said they could continue, it appears that federal prosecutors, including the then-head of the Criminal Division, Michael Chertoff, the current secretary of the Department of Homeland Security, did not tell Chiquita it had to stop.

As co-blogger Ellen Podgor points out in the WSJ story, "This case will make companies think twice about self-reporting."  At a minimum, the government's consideration of criminal charges against individual board members signals that when a company decides to cooperate it better be ready to stop all illegal activity it plans to disclose.  It may be that Chiquita did not have a Plan B in case the government did not authorize it to continue the payments because prosecutors clearly look askance at cooperation that does not include a cessation of the underlying activity.  The prosecution of Stolt-Nielsen is an example of a company accused of wrongdoing after agreeing to cooperate due to what prosecutors alleged is continued misconduct.  In addition to the decision to cooperate, the timing of the disclosure is an important issue if a company wants to show that it has made a clean break for prior illegal conduct. (ph)

August 3, 2007 in FCPA, International, Investigations | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 31, 2007

Plea in Export Case

The U.S. Attorney's Office for the Central District of California issued a press release of a plea in an export case where according to the information, the accused failed to secure the "required expert license to export vibration amplifiers, cable assemblies, and vibration processor units."  The accused "was an international sales manager and was responsible for all exports at Endevco Corporation, an Orange County, California company that manufactures electronic sensors, vibration testing equipment, and other technology with both civilian and military applications.  The information alleges that [the defendant] illegally exported a variety of sensitive items in 1999 and 2000 from the United States to Hindustan Aeronautics Limited (HAL), Engine Division, in Bangalore, India." 

Plea Agreement -

(esp)

Download india_arms_export_peng_plea_agreement.pdf

July 31, 2007 in International | Permalink | Comments (0) | TrackBack (0)

Saturday, June 30, 2007

English Magistrate Rejects Extradition and Castigates the U.S. Prosecutor

An English Magistrate rejected the request of the U.S. government to extradite Stanley Tollman to face bank fraud and tax evasion charges that he defrauded investors of over $100 million (opinion available below).  The ground for denying the request was that the passage of time since the underlying criminal conduct would make it "unjust and oppressive" to extradite the defendant to face the charges.  Among other things, the Magistrate noted that two important witnesses, one Tollman's brother, have died since the case was first indicted, and the underlying transactions took place in the early 1990s so documents may no longer be available.  Interestingly, the Magistrate did not find that Tollman was a fugitive even though he left the U.S. while his lawyers were negotiating his surrender with prosecutors (see New York Times story here).  The court noted that Tollman, a South African citizen, lived openly in Great Britain after the indictment.  Therefore, his argument that the passage of time harmed his defense was not negated by his having been a fugitive.

While the court did not rest its decision specifically on the ground of prosecutorial misconduct, it found that the Assistant U.S. Attorney in the case had been less than honest in his dealings with foreign courts and his conduct "reprehensible."  In one instance, the Magistrate determined that the prosecutor misled a Canadian court related to having Tollman's brother returned to the United States.  The prosecutor was also alleged to have said that he would make Tollman's "life as miserable as possible" and would make his wife, who was also indicted, do a "perp walk" when she returned to New York -- the same Magistrate earlier turned down an extradition request for Mrs. Tollman.  The prosecutor submitted an affidavit denying he made the statements, which the Magistrate found "to be untruthful."  The English court sent a clear message that there was prosecutorial overreaching, a point that will not aid the Department of Justice if it appeals the decision. (ph)

Download us_v_tollman_magistrate_extradition_decision.pdf

June 30, 2007 in Fraud, International, Tax | Permalink | Comments (0) | TrackBack (0)

Internet Gambling Processor Pleads Guilty

The co-founder of NETeller PLC, which acted as a middleman to facilitate Americans placing bets with on-line gambling sites, entered a guilty plea to one count of conspiracy and is cooperating with the government investigation.  The company did not take any bets itself, instead served as the conduit through which the money passed to the gambling concerns located off-shore and handled the proceeds of any pay-offs.  The defendant was arrested in January 2007, along with the company's other founder, as part of a broad federal crackdown on internet gambling that caused the shares of a number of companies, most traded in London, to fall sharply.  Federal law now prohibits virtually all internet gambling.  A Reuters story (here) discusses the guilty plea. (ph)

June 30, 2007 in International, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Friday, June 8, 2007

First Extradition Hearing for Kobi Alexander

The first hearing on the U.S. government's request to Namibia that it extradite Kobi Alexander is set to start on June 8 in Windhoek, the nation's capital.  Alexander is the former CEO of Comverse Technology, and was indicted in August 2006 on securities fraud and conspiracy charges related to options backdating at the company.  Comverse's former CFO and general counsel entered guilty pleas and are cooperating in the government's prosecution of Alexander, assuming it ever takes place in the Eastern District of Brooklyn where he was indicted.  Alexander left the U.S. while the investigation heated up in July 2006 and then bobbed to the surface in Namibia a couple months later, where he moved with his family.  He has begun investing in Namibia and spreading his largesse in the country.  He has started a scholarship program for Namibian students, and billboards have appeared in Windhoek in the name of "Alexander Enterprises" stating "Yes to investment."  At least they don't say "Let me stay and I'll give you money!"  The extradition process promises to be slow, with appeals likely to take years if an extradition order is issued.  A story from Globes (here) discusses the hearing and billboards. (ph)

June 8, 2007 in International, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 29, 2007

Death Penalty in Bribery Case

Just when one thinks that the recent white collar sentences have been usually high (e.g. Ebbers, Skilling), one finds a comparison of a sentence given outside the United States.  In this case, the sentence is death, and the place is China.  According to an article on Yahoo.com (AP), a drug regulator in China has been sentenced to death for allegedly taking "bribes to approve substandard medicines."  Arguably one could say that this is not a white collar crime case, despite it being bribery, as the report states that deaths resulted from the alleged activity.

(esp)

May 29, 2007 in Corruption, International, Sentencing | Permalink | Comments (0) | TrackBack (0)