Former Ohio Deputy Treasurer Extradited to Serve 15 Years in Prison for Role in Bribery and Money Laundering Scheme

On August 26, a former deputy treasurer of Ohio was extradited from Pakistan to serve a 15-year prison term in the U.S. for his involvement in a bribery and money laundering scheme spanning from January 2009 through January 2011. According to his 2013 guilty plea, the former deputy treasurer misused his position as a state official to direct official state of Ohio business to a securities broker in return for bribes. With the assistance of a Chicago businessman, the deputy treasurer concealed the broker’s payments by funneling them through (i) accounts connected to a landscaping business; and (ii) an attorney and lobbyist who was both a friend and business partner. The broker, who paid more than $500,000 in bribes, collected roughly $3.2 million in commissions as a result of 360 securities trades on behalf of the Office of the Ohio Treasurer.

Sentenced in abstentia on December 1, 2014 by a Ohio federal judge, the former state official was also ordered to forfeit $3.2 million in illegal profits. The securities broker, lobbyist, and the Chicago businessman were each sentenced in late 2014 to serve 45 months, 48 months, and 18 months in prison, respectively, for their roles in the scheme.

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DOJ and SEC Announce Parallel Action Against Former Investment Banking Analyst and Two Individuals for Alleged Involvement in Insider Trading Scheme

On August 25, the DOJ unsealed an indictment charging three defendants each with (i) one count of conspiracy to commit securities and tender offer fraud; (ii) 13 counts of securities fraud; (iii) 13 counts of tender offer fraud; and (iv) three counts of wire fraud. In a parallel action, the SEC filed a complaint in the Central District of California against the same three individuals, asserting that the three individuals violated certain provisions of the Securities Exchange Act by participating in a scheme that involved “coordinated, illegal trading in stock and stock options of two separate companies that participated in merger activity” in which the same investment bank played an advisory role. According to the SEC, having learned of impending acquisitions involving two of the investment bank’s clients and other companies, one of the investment bank’s former analysts allegedly provided information regarding the transaction to a friend before any public announcements were made. The friend then communicated the information to a third individual, and the two made a series of trades in the two companies’ securities. When the acquisitions were publicly announced, both companies’ stock prices increased, resulting in profits of more than $670,000 for the two individuals on the receiving end of the former analyst’s inside information. The SEC’s complaint seeks a final judgment ordering the three defendants “to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions from future violations of [certain] provisions of the federal securities laws.”

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Large Multinational Financial Services Company Settles FCPA Charges Relating to Internships

On August 18, the SEC announced a settlement with a large multinational financial services company over allegations that the company had violated the FCPA by giving internships to family members of government officials working at a Middle Eastern sovereign wealth fund in hopes of retaining or gaining more business from that fund. The order entered as part of the settlement quoted emails between company employees purportedly demonstrating that the company gave the internships in hopes of keeping and growing the business relationship with the fund. The SEC also alleged that the company gave the internships to the family members without requiring that they pass through the competitive screening process the company typically requires for interns. Finally, the SEC alleged that the company had inadequate controls to prevent the improper hiring of relatives of government officials. The company paid $14.8 million to settle the charges, with $8.3 million in disgorgement, $1.5 million in pre-judgment interest, and a $5 million penalty.

The company previously disclosed in January 2015 that it had received a Wells Notice concerning possible FCPA violations in connection with the internships. The settlement follows earlier press reports of a broad SEC investigation into bank hiring practices in Asia, and appears to be the first settlement resulting from the investigation.

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Former SAP Executive Pleads Guilty to Paying “Necessary” Bribes

On August 12, the DOJ and SEC announced joint enforcement actions against software giant SAP International’s former head of Latin American sales, Vicente Garcia. Garcia pleaded guilty to conspiracy to violate the FCPA and will be sentenced on December 16, 2015 in the Northern District of California. The DOJ alleges that SAP paid bribes to Panamanian officials to secure software license sales in late 2009, using sham contracts and fake invoices. Garcia “admitted that he believed paying such bribes was necessary” to secure the contracts.

The SEC simultaneously issued an administrative cease and desist order against Garcia describing a scheme by which Garcia, in violation of SAP’s internal controls, gave discounts to a local business partner to generate excess earnings, which were used to create the slush fund used to pay at least $145,000 in bribes to secure approximately $3.7 million in sales. Garcia and others also arranged to receive kickbacks from the sales. Garcia agreed to pay disgorgement of the kickbacks he received plus prejudgment interest, totaling $92,395.

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Orthofix Deferred Prosecution Agreement Extended for Two Months

In a recently-filed status report, the DOJ and medical device manufacturer Orthofix revealed that the company’s Deferred Prosecution Agreement (DPA) will be extended by two months. The DPA was due to expire on July 17, 2015, but the status report states that Orthofix agreed to the extension in June to give DOJ “additional time to (1) evaluate Orthofix’s compliance with the internal controls and compliance undertakings in the DPA and (2) further investigate potentially improper conduct the company disclosed during the term of the DPA.” The report continued that DOJ intended to complete its investigation in August and inform Orthofix “of its proposed course of action shortly thereafter.”

Orthofix entered into the DPA on July 10, 2012 to resolve allegations that a Mexico-based subsidiary paid bribes to employees of Mexico’s government-operated health system (see prior FCPA scorecard coverage).

Earlier this year, another medical device manufacturer, Biomet, announced that its DPA would be extended for one year after it disclosed additional potential FCPA violations to the DOJ and SEC.

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SEC Sues 32 Defendants Involved in Insider Trading Operation; DOJ Files Criminal Charges Against Leaders

On August 10, the SEC filed a complaint against 32 defendants in the District of New Jersey for their alleged involvement in an international scheme to profit from stolen, confidential information regarding corporate earnings announcements. According to the SEC, the defendants hacked at least two newswire services’ computer servers to retrieve unpublished corporate press releases, subsequently using it to make trades generating over $100 million in profits. The SEC further asserted that the two leaders of the scheme designed a “secret web-based location to transmit the stolen data to traders in Russia, the Ukraine, Malta, Cyprus, France, and three U.S. states, Georgia, New York, and Pennsylvania.” The SEC contends that, for five years, the two leaders of the scheme (i) disguised their identity by posing as newswire service employees, using proxy servers, and/or using backdoor access-modules; and (ii) recruited traders by making a video that displayed their ability to steal earnings information prior to public release. In return for information, the traders paid the hackers either a percentage of the profits obtained from trading the stolen information, or a flat fee. The SEC Director called the scheme “one of the most intricate and sophisticated trading rings [the agency has] ever seen.” The U.S. Attorneys’ offices for New Jersey and the Eastern District of New York also announced criminal charges against nine of the same defendants, including the two leaders of the scheme.

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Vantage Drilling Self-Reports Potential FCPA Violation

On August 4, Vantage Drilling Company, an international offshore drilling contractor, acknowledged that an overseas agent had entered into plea discussions with Brazilian authorities and provided evidence in the ongoing corruption investigation focused on Petrobras. Vantage acknowledged that the agent had purportedly provided evidence related to a former director of Vantage and Petrobras. The company disclosed that it had opened an internal investigation and self-reported the matter to the DOJ and the SEC.

The Brazilian corruption investigations into Petrobras and its affiliates and counterparties continue to expand with no end in sight, and the expected related U.S. investigations are beginning to be disclosed.

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Former Derivatives Trader Convicted and Sentenced in U.K. on Libor Manipulation Charges, Also Facing Criminal Charges in U.S.

On August 3, a jury in the United Kingdom convicted former derivatives trader Tom Hayes on eight counts of fraud for his role in the manipulation of the London Interbank Offered Rate (Libor) for Japanese Yen. Hayes was subsequently sentenced to 14 years in prison. Prosecutors had argued that Hayes, a former trader at two international banks, had asked traders at his bank who were responsible for submitting the bank’s daily Libor submissions for publication – as well as submitters at other banks and brokers involved in the Libor process – to raise or lower their submissions for the Yen Libor from 2006 to 2010 to help Hayes increase the profit on his trades. Hayes was the first individual to be tried in U.K. courts for Libor manipulation, with some of Hayes’ alleged co-conspirators set to go to trial in late September. Hayes is also facing criminal charges for the same conduct in the U.S.

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SEC Subpoenas Flowserve Corporation Related to FCPA Investigation

On July 30, Flowserve Corporation, a global supplier of industrial pumps, valves, and seals, disclosed that the SEC had issued a subpoena in connection with an investigation of potential FCPA violations. Flowserve revealed earlier this year that it had terminated an employee of an overseas subsidiary for conduct that violated its Code of Business Conduct and “may have violated” the FCPA. It self-reported the matter to the SEC and the DOJ and has now completed an internal investigation. Flowserve stated that it “currently believe[s] that this matter will not have a material adverse financial impact,” but that there are no assurances that it will not be subjected to penalties and additional costs.

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SEC Drops Investigation of NCR Corporation

On July 28, NCR Corporation, a leading global provider of ATM machines, announced that the SEC had decided not to pursue an enforcement action following an investigation of the company’s FCPA compliance. In 2013, the company disclosed that an anonymous whistleblower had alleged various FCPA and other violations in China, the Middle East (including Syrian sanctions issues), and Africa. The company stated that it had investigated internally and determined the allegations to be without merit. The company then disclosed the matter to the SEC and the DOJ, both of whom requested additional information. The company did not provide an update regarding the status of the DOJ’s inquiries.

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DOJ Announces Charges Against Two Florida Men for Operating Underground Bitcoin Exchange

On July 21, U.S. Attorney for the Southern District of New York Preet Bharara, along with the Assistant Director-in-Charge of the New York Field Office of the FBI and the Special Agent-in-Charge of the New York Field Office of the United States Secret Service, announced the unsealing of criminal complaints filed against Anthony R. Murgio and Yuri Lebedev. According to the complaints, since at least late 2013, the two men and their co-conspirators illegally ran a money transfer operation called Coin.mx, which allowed customers to exchange cash for bitcoins for a fee. Murgio’s and Lebedev’s allegedly illegal money transfer operation involved exchanging cash for people whom they believed may be engaging in criminal activity, as well as allowing victims of “ransomware” attacks to trade cash for bitcoins. During these “ransomware” attacks, cybercriminals would “electronically block access to a victim’s computer system until a sum of ‘ransom’ money, typically in bitcoins, [was] paid to them.” In an attempt to evade detection, Murgio, Lebedev, and their co-conspirators operated through “Collectables Club,” a fake front-company. Also in an attempt to avoid detection, Murgio obtained beneficial control of a New Jersey-based federal credit union, then placed Lebedev and others on the Board of Directors so that Coin.mx’s operations could be transferred to the credit union. The individuals used the credit union as a “captive bank for their unlawful business,” until at least early 2015, at which point, the NCUA discovered the illegal activity and forced the credit union to “cease engaging in such activity,” but Murgio “thereafter found new, overseas payment processing channels for his unlawful business.” Murgio and Lebedev are each being charged with one count of conspiracy to operate an unlicensed money transmitting business, and one count of operating an unlicensed money transmitting business. Each of these charges carries a maximum prison sentence of five years. Murgio also was charged with one count of money laundering and one count of willful failure to file a suspicious activity report. These additional charges carry maximum prison sentences of 20 years and 5 years, respectively‎.

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LBI Enters Into DPA and Former Executives Plead Guilty to Resolve DOJ FCPA Investigation

On July 17, the DOJ announced that Louis Berger International Inc. (“LBI”) had agreed to enter into a Deferred Prosecution Agreement to resolve the DOJ’s FCPA investigation into the New Jersey-based construction management company’s operations in India, Indonesia, Vietnam, and Kuwait.  LBI also agreed to pay a $17.1 criminal penalty.  LBI admitted that it bribed foreign officials to secure government construction management contracts around the world.  According to the company’s admissions regarding a conspiracy to violate the anti-bribery provisions of the FCPA, from 1998 to 2010, LBI concealed $3.9 million in corrupt payments through various methods, including (i) using inflated and fictitious invoices that were used for the payments of bribes through intermediaries, and (ii) paying fictitious “commitment fees,” “counterpart per diems,” “marketing fees,” and “field operation expenses.”

Under the terms of the DPA, the DOJ will defer criminal prosecution of LBI for a period of three years and the company will retain an independent compliance monitor for three years.  In addition, Richard Hirsch of the Philippines and James McClung of the United Arab Emirates, both former executives of LBI, each pleaded guilty to one count of conspiracy to violate the FCPA and one substantive count of violating the FCPA.  They are scheduled to be sentenced on Nov. 5, 2015. Continuing its recent trend, the DOJ emphasized the company’s self-disclosure and cooperation, as well as remediation efforts.

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Mortgage Company Owner and Others Plead Guilty to Mortgage Fraud Scheme Involving FHA-Insured Loans

On July 14, the DOJ, in coordination with HUD’s Office of Inspector General and  the U.S. Attorney’s Office for the Southern District of Florida, announced that a Miami-area real estate developer and mortgage company owner, his business partner, and a senior underwriter with the mortgage company each pleaded guilty to a mortgage fraud scheme that resulted in $64 million in losses to the FHA. According to the August 2014 indictment, the three defendants knowingly participated in a scheme to alter important information contained in potential borrowers’ loan applications so that they appeared qualified for FHA-insured loans when, in reality, they were not qualified. According to the DOJ, the developer/owner and his business partner “admitted to pressuring their employees to approve and close loans using earnings statements and verification of employment forms that made it appear as if the borrowers had higher incomes and more favorable work histories than they actually did, and documents falsely improving or explaining borrowers’ credit histories.” The senior underwriter admitted to providing false information to her co-workers and endorsing borrowers’ applications when she knew that they did not qualify for the loans. Eventually, many of the loans went into foreclosure and HUD was obligated to pay the outstanding loan balances to the financial institution investors. To date, 25 individuals have pleaded guilty to offenses related to this mortgage fraud scheme.

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SEC Settles with Post It-Eating Middleman in Law Firm Insider Trading Case

On July 13, the SEC announced a settlement with Frank Tamayo, who acted as a middleman in a $5.6 million insider trading scheme.   According to the SEC, a law firm clerk used the firm’s internal databases to access confidential information concerning clients’ pending corporate transactions, and tipped Tamayo at coffee shops to the pending transactions.  Tamayo wrote ticker symbols of target companies on a Post-It note or napkin, met a stockbroker in Grand Central Terminal’s main concourse, flashed the Post-It or napkin to the stockbroker, and then immediately chewed up and swallowed it.  Tamayo also conveyed additional information about the pending deals, in total passing information on over a dozen companies.  The stockbroker then traded in the shares of the subject companies on behalf of the co-conspirators and other customers. The settlement involved no monetary penalties based on Tamayo’s extensive cooperation with the SEC.  A $1 million disgorgement as part of the settlement can be satisfied by forfeiture or restitution in a parallel criminal proceeding pending in the District of New Jersey, where Tamayo has already pleaded guilty.

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DOJ Deputy Assistant AG Delivers Testimony at Senate Subcommittee Hearing Regarding Cyber Crime

On July 8, the DOJ’s Deputy Assistant AG, David Bitkower, delivered his testimony before the Senate Judiciary Subcommittee on Crime and Terrorism’s hearing entitled, “Cyber Crime: Modernizing Our Legal Framework for the Information Age.” Bitkower’s testimony focused on two of President Obama’s earlier 2015 legislative proposals regarding the security of online privacy for American citizens and businesses. The first proposal, with an emphasis on the “insider threat,” seeks to amend a provision of the Computer Fraud and Abuse Act (CFAA) – the primary statute the DOJ uses to charge computer crime cases – to ensure that corrupt employees using their authority to access sensitive data for personal gain are not immune from federal punishment. Bitkower noted that recent judicial decisions have impeded the government’s ability to prosecute cases where “serious violations and invasions of privacy” were prevalent. The second legislative proposal would enhance the DOJ’s ability to combat botnets, the networks of computers that are infected with malware and used by criminals to steal personal information, evade detection, and hold computers and computer systems for ransom. The proposed legislation would broaden the categories of crimes committed with botnets that can be enjoined by courts, which, under the current law, are mostly limited financial crimes.

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