ATTORNEY SENT TO PRISON FOR ROLE IN PUMP-AND-DUMP STOCK FRAUD

FROM:  U.S. JUSTICE DEPARTMENT 
Friday, December 5, 2014

Attorney Sentenced to 17 Years in Prison for Multi-Million Dollar Stock Fraud
A California attorney was sentenced to serve 17 years in prison today in the Southern District of Florida for operating a five-year, multi-million dollar market manipulation and fraud scheme, announced Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division and U.S. Attorney Wifredo A. Ferrer of the Southern District of Florida.

Mitchell J. Stein, 53, of Hidden Hills, California, was convicted by a jury on May 20, 2013, of conspiracy to commit mail and wire fraud, three counts of wire fraud, three counts of securities fraud, three counts of money laundering, and one count of conspiracy to obstruct justice.  In addition to the prison sentence, U.S. District Judge Kenneth A. Marra of the Southern District of Florida ordered Stein to forfeit $5.3 million.  Restitution will be determined at a later date.

“Lawyers for companies are supposed to guide their clients through the important reporting and regulatory requirements that ensure the integrity of our financial markets,” said Assistant Attorney General Caldwell.  “Stein abdicated his responsibility, and instead abused his position of trust to defraud a public company, its shareholders, and the investing public of millions of dollars.”

“The ‘pump and dump’ scheme orchestrated by Stein and his co-conspirators was extremely elaborate,” said U.S. Attorney Ferrer.  “In an effort to conceal his fraudulent financial scheme, Stein falsely testified before the SEC and used his position of trust to arrange for others to do the same.  The sentencing announced today underscores the department's commitment to hold liable those individuals who profit from manipulating the financial markets and violating securities and other laws that are intended to protect investors and markets.”

According to evidence presented at trial, Stein’s wife held a controlling majority interest in Signalife Inc., a publicly-traded company currently known as Heart Tronics that purportedly sold electronic heart monitoring devices.  While acting as Signalife’s outside legal counsel, Stein engaged in a scheme to artificially inflate the price of Signalife stock by creating the false impression of sales activity at the company.  Specifically, the evidence at trial showed that Stein and his co-conspirators created fake purchase orders and related documents from fictitious customers, then caused Signalife to issue press releases and file documents with the Securities and Exchange Commission (SEC) trumpeting these fictitious sales.  Evidence at trial also proved that in a further effort to create the false appearance of sales activity, Stein arranged to have Signalife products shipped to and temporarily stored with an individual who had not purchased any products.

Evidence at trial further proved that Stein disguised his selling of Signalife stock at artificially inflated prices by placing shares in purportedly blind trusts, and having a co-conspirator sell the shares after Stein caused the false sales information to be disseminated to the public.  Stein also caused Signalife to issue shares to third parties so that those third parties could sell the shares and remit the proceeds to Stein.  From one co-conspirator alone, Stein received illicit gains of over $1.8 million from those sales.

In addition, evidence at trial proved that Stein conspired to obstruct the SEC investigation into Heart Tronics by testifying falsely and arranging for others to testify falsely in an effort to conceal the fraud scheme.

This case was investigated by the U.S. Postal Inspection Service, with assistance from the Office of the Special Inspector General for the Troubled Asset Relief Program.  The SEC referred this matter to the Justice Department, conducted a parallel investigation resulting in a civil enforcement action against Stein and others, and provided substantial assistance in this investigation.  The Financial Industry Regulatory Authority’s Criminal Prosecution Assistance Group likewise provided substantial assistance in this matter.    

This case was prosecuted by Assistant Chief Albert B. Stieglitz Jr., Assistant Chief Kevin B. Muhlendorf, and Trial Attorney Andrew H. Warren of the Criminal Division’s Fraud Section and Assistant Chief Darrin McCullough of the Criminal Division’s Asset Forfeiture and Money Laundering Section.

SEC CHARGES PRINCIPALS OF OIL AND GAS COMPANY WITH FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23144 / November 26, 2014
Securities and Exchange Commission v. Paul R. Downey, et al., Civil Action No. 1:14-CV-00185-C (N.D. Tex. Abilene Division)

SEC Charges Principals of a Texas Oil and Gas Company with Conducting a Fraudulent Offering, and Charges Seller with Acting as an Unregistered Broker

On November 20, 2014, the Securities and Exchange Commission charged two principals of Quest Energy Management Group, Inc. (Quest), Paul Downey of Naples, Florida and Jeffry Downey of Abilene, Texas, with conducting a fraudulent offering of preferred stock and limited partnership interests. The SEC also charged John Leonard, a salesman residing in Naples and Chicago, with acting as an unregistered broker in offering and selling the investment.

The SEC alleges that between January 2010 and May 2011, the father-son duo of Paul and Jeffry Downey used Quest, an Albany, Texas-based oil and gas company, to fraudulently offer Quest preferred stock and limited partnership units in an entity called Permian Advanced Oil Recovery Investment Fund I, LP (PAOR). Investors were told that PAOR would acquire working interests in oil and gas leases from Quest and receive revenue from those leases. With assistance from unregistered salesman John Leonard, the Downeys raised $4.8 million from approximately 17 investors. The PAOR offering was fraudulent on account of blatantly deceptive misstatements about Quest and PAOR. More particularly, the Downeys made false statements in the private placement memorandum about the financial viability of Quest; the purchase debt and liens associated with certain leases in which PAOR was acquiring an interest; the current and projected petroleum production from the leases; the use of investor funds raised in the offering; independent audits of PAOR; and foreseeable litigation against Quest and the Downeys.

On May 24, 2013, the U. S. District Court for the Middle District of Florida, Tampa Division, appointed Burton Wiand, a Tampa attorney, as receiver over Quest, based on Quest's receipt of funds from a Ponzi scheme conducted by Arthur Nadel and others. In re Arthur Nadel, et al., Lit. Rel. No. 20858 (January 21, 2009). The receivership is ongoing.

The SEC's complaint against the Downeys and Leonard alleges that the Downeys violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and that Leonard violated Section 15(a) of the Exchange Act. The SEC's complaint seeks from the Downeys and Leonard disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and permanent injunctive relief, and additionally against the Downeys, officer and director bars.

The SEC's investigation was conducted by Jeffrey Cohen, Carol Hahn, and Joann Harris, and the SEC's litigation is being led by B. David Fraser. The SEC appreciates the assistance of the Texas State Securities Board.

FTC, FLORIDA AG SETTLEMENT STOPS ROBOCALL OPERATION THAT PUSHED SALES OF MEDICAL ALERT DEVICES TO SENIORS

FROM:  U.S. JUSTICE DEPARTMENT
Settlement with the FTC and Florida Attorney General Stops Operations that Used Robocalls to Fraudulently Pitch Medical Alert Devices to Seniors

A settlement obtained by the Federal Trade Commission and the Office of the Florida Attorney General permanently shuts down an Orlando-based operation that bilked seniors by using pre-recorded robocalls to sell them supposedly free medical alert systems.

The settlement order bans the defendants from making robocalls, prohibits other telemarketing activities, and bars them from making misrepresentations related to the sale of any product or service. The order includes a judgment of nearly $23 million, most of which will be suspended after the defendants surrender assets including cash, cars, and a boat.

”This case is a great example of how federal and state law enforcement can work together to stop fraudulent telemarketing targeting older consumers,” said Jessica Rich, Director of the Federal Trade Commission’s Bureau of Consumer Protection. “The FTC will continue to work with its state partners to protect senior citizens from pernicious schemes like this one.”

“We must do everything within our power to protect Florida’s consumers. The scheme we have stopped allegedly targeted Florida’s senior citizens, and we, along with our Federal Trade Commission partners, have held these individuals accountable,” said Attorney General Pam Bondi.

According to the joint agency complaint, announced in January, the defendants violated the FTC Act, the Commission’s Telemarketing Sales Rule (TSR), and Florida’s Deceptive and Unfair Trade Practices Act (FDUTPA) by blasting robocalls to senior citizens falsely stating that they were eligible to receive a free medical alert system that was bought for them by a friend, family member, or acquaintance. Many of the consumers who received the defendants’ calls were elderly, live alone, and have limited or fixed incomes.

Consumers who pressed one (1) on their phones for more information were transferred to a live representative who continued the deception by falsely saying that their medical alert systems are recommended by the American Heart Association, the American Diabetes Association, and the National Institute on Aging. In addition, the telemarketers falsely said that the $34.95 monthly monitoring fee would be charged only after the system has been installed and activated. In reality, consumers were charged immediately, regardless of whether the system was activated or not.

The court order settling the agencies’ charges also imposes a judgment of $22,989,609, the total amount consumers paid for monthly monitoring services for their medical alert devices. The judgment will be suspended as to all of the settling defendants once the individual defendants turn over cash and other assets valued at about $79,000, including $24,000 that was transferred in violation of a court-ordered asset freeze.

Assets that will be sold include a 2008 BMW, a 1984 Hans Christian sailboat, a 2004 Mercedes, and a 2008 Lincoln Navigator. In addition, defendant Joseph Settecase is subject to a second judgment of $39,300, which will not be suspended. This judgment reflects the funds that Settecase retained after selling his Ferrari in violation of the asset freeze and transferring a portion of the proceeds to another defendant.

The defendants subject to the settlement include: 1) Worldwide Info Services, Inc., also doing business as (d/b/a) The Credit Voice; 2) Elite Information Solutions Inc., also d/b/a The Credit Voice; 3) Absolute Solutions Group Inc., also d/b/a The Credit Voice; 4) Global Interactive Technologies, Inc., also d/b/a The Credit Voice Inc.; 5) Global Service Providers, Inc.; 6) Arcagen, Inc., also d/b/a ARI; 7) American Innovative Concepts, Inc.; 8) Unique Information Services Inc.; 9) National Life Network, Inc., and their principals 10) Michael Hilgar; 11) Gary Martin; 12) Joseph Settecase; and 13) Yuluisa Nieves.

One defendant, Live Agent Response 1 LLC, also d/b/a LAR, has not settled, and the FTC and Florida AG are seeking a default judgment against it. In May, the parties stipulated to the dismissal of The Credit Voice, Inc. as a defendant.

The FTC and Florida Attorney General’s Office appreciate the assistance of the following agencies, offices, and organizations in helping to investigate and bring this case: 1) the Indiana Office of the Attorney General; 2) the Minnesota Office of the Attorney General; 3) the Florida Department of Agriculture and Consumer Services; 4) the Better Business Bureau Serving Eastern Missouri and Southern Illinois; 5) the American Heart Association; 6) the American Diabetes Association; 7) the National Institute on Aging;  8) the United States Postal Inspection Service, including its Atlanta, Boston, and Houston divisions; and 9) the Seminole County Sheriff’s Office, Financial Crimes Task Force.

SEC CHARGES CALIFORNIA ATTORNEY IN PUMP-AND-DUMP SCHEME TO DEFRAUD INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission last week charged an attorney in Orange County, Calif., and two men in Massachusetts behind a pump-and-dump scheme that defrauded investors in a Boston-based ticket brokering business.

The SEC alleges that Richard Weed, a partner in a Newport Beach law practice, facilitated a scheme to pump and dump the stock of CitySide Tickets Inc., which he helped structure into a publicly traded company through reverse mergers.  Weed created backdated promissory notes and authored false legal opinion letters that enabled Thomas Brazil and Coleman Flaherty to obtain millions of purportedly unrestricted shares of stock in the company.  Investors were then blitzed with a false and misleading promotional campaign touting CitySide Tickets as a budding national leader on the verge of acquiring smaller ticket firms across the country and positioning itself as an attractive takeover target for Ticketmaster.  As the company’s stock price increased on the false hype, Brazil and Flaherty sold their shares to unsuspecting investors for illicit proceeds of approximately $3 million, and Weed was well-compensated for his role in the scheme.  Shortly thereafter, the market for CitySide Tickets stock collapsed and the company eventually went out of business.

In a parallel case, the U.S. Attorney’s Office for the District of Massachusetts today announced criminal actions against Weed, Brazil, and Flaherty.

“CitySide was billed as the hottest ticket in town and investors were encouraged to get in the game when the playing field was actually tilted against them,” said Paul G. Levenson, Director of the SEC’s Boston Regional Office.  “Weed exploited his position of legal authority to enable Brazil and Flaherty to get the stock needed to pull off the scheme, and he served as an officer and director of CitySide to help them secretly control the company.”

According to the SEC’s complaint filed in federal court in Boston, all of the false promotions painted a rosy, optimistic picture of a company that was actually in dire financial straits.  For example, one promotional alert falsely claimed that CitySide Tickets was “in the process now of swallowing up 5 smaller ticket resellers that could send next year’s profits through the roof.”  In reality, CitySide Tickets lacked the means for such acquisitions.  The alert further embellished that the company’s growth from purportedly swallowing up smaller fish in the ticket-selling market would make CitySide Tickets “an irresistible takeover target for Ticketmaster, the biggest fish of all.”  The alert estimated that a Ticketmaster acquisition of CitySide Tickets “could easily jump this under-50-cent stock to $2.50 - $3.50 overnight.”  

The SEC’s complaint charges Brazil, Flaherty, and Weed with violating antifraud provisions of the federal securities laws and related rules.  The SEC is seeking disgorgement of ill-gotten gains from the scheme plus interest and penalties as well as penny stock bars and permanent injunctions against further violations of the securities laws.  The SEC also is seeking to bar Weed from serving as an officer or director of any public company.  Weed lives in Newport Beach, Brazil lives in Topsfield, Mass., and Flaherty lives in Hingham, Mass.

The SEC’s investigation was conducted by Andrew J. Palid and Mark Albers of the SEC’s Boston Regional Office and supervised by Michele T. Perillo.  The SEC’s litigation will be led by Martin F. Healey.  SEC attorney Eric A. Forni has been appointed a Special Assistant U.S. Attorney in the parallel criminal case.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Massachusetts, Federal Bureau of Investigation, and Financial Industry Regulatory Authority.

POLITICAL CONSULTANT PLEADS GUILTY IN ILLEGAL POLITICAL CONTRIBUTION CASE

FROM:  U.S. JUSTICE DEPARTMENT 
Wednesday, November 5, 2014

Washington Political Consultant Pleads Guilty in Fraud and Corruption Scheme
Political consultant Thomas Lindenfeld, 59, of Washington, D.C., pleaded guilty today in the Eastern District of Pennsylvania to conspiracy to commit wire fraud for his role in a fraud and corruption scheme related to illegal campaign contributions.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Zane David Memeger of the Eastern District of Pennsylvania, Special Agent in Charge Edward J. Hanko of the FBI’s Philadelphia Field Office and Acting Special Agent in Charge Richard Gross of the Internal Revenue Service – Criminal Investigation (IRS-CI) made the announcement.

According to admissions in his plea agreement, Lindenfeld agreed to route an illegal $1 million political contribution for “Elected Official A” during a 2007 campaign for elected office. The contribution was in the form of a loan routed through Lindenfeld’s political consulting firm, LSG Strategic Services Corporation (LSG).  When the campaign donor attempted to collect on the outstanding balance of the $1 million loan, however, Lindenfeld and his co-conspirators, at the direction of Elected Official A, engaged in a complicated series of transactions using federal grant money and monies from Sallie Mae’s charitable arm illegally to repay the loan.  These transactions were routed through several entities, including LSG, and were all falsely labeled as payments for services that were never actually rendered.

Lindenfeld admitted that, in exchange for the work he had done on the campaign, which included concealing the illegal campaign contribution, Elected Official A agreed to use his elected position to steer federal funding to Lindenfeld’s proposed environmental advocacy group, Blue Guardians.  Lindenfeld further admitted that he created Blue Guardians at the direction of Elected Official A for the purpose of receiving the federal funding.

According to Lindenfeld, Elected Official A advocated for $15 million in federal funding for Blue Guardians as a reward for Lindenfeld’s services.  Five hundred thousand dollars was approved in 2009 as an earmark through the National Oceanic and Atmospheric Administration (NOAA).  Lindenfeld admitted, however, that the Blue Guardians did not exist in December 2009, and that he only created an email address, articles of incorporation, and a tax identification number for Blue Guardians in April 2010.  After receiving questions from NOAA and members of the press, Lindenfeld declined the funding, stating that he and Elected Official A decided it could be better spent on the oil spill in the Gulf.  NOAA did not disburse the $500,000 to Lindenfeld or Blue Guardians.

U.S. District Court Judge Harvey Bartle III scheduled a sentencing hearing for March 25, 2015.

The case is being investigated by the FBI and the IRS-CI with assistance provided by NASA’s Office of Inspector General and the Department of Commerce’s Office of Inspector General.  This case is being prosecuted by Assistant U.S. Attorney Paul L. Gray of the Eastern District of Pennsylvania and Trial Attorney Eric L. Gibson of the Criminal Division’s Public Integrity Section.

SEC ALLEGES CFO OF CHINA-BASED CO. SIGNED OFF ON NON-EXISTENT BUSINESS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23116 / October 21, 2014

Securities and Exchange Commission v. Subaye, Inc. and James T. Crane, Civil Action No. 13 CIV 3114 (S.D.N.Y.)

Judgment Entered Against Former Chief Financial Officer of China-Based Company in Fraudulent Scheme Involving Purported Web Services Business

The Securities and Exchange Commission announced today that on October 20, 2014, a federal court in New York entered a final judgment, in an enforcement action filed by the Commission in May 2013, against James T. Crane, the former Chief Financial Officer of Subaye, Inc., a company based in China whose stock traded in the U.S. Among other things, the judgment orders Crane to pay a civil penalty of $150,000 and bars Crane from serving as an officer or director of a public company for a period of ten years.

The Commission's complaint, filed on May 8, 2013, in the U.S. District Court for the Southern District of New York, alleged that Subaye began promoting itself during 2010 as a provider of cloud computing services to Chinese businesses. According to the complaint, Subaye claimed to have over 1,400 sales and marketing employees in 2010, with reported revenues of $39 million that fiscal year and projected revenues of more than $71 million for 2011. However, by May 2011, according to the complaint, Subaye was revealed to be a company with no verifiable revenues, few, if any, real customers, and no infrastructure to support its claimed cloud computing business. The complaint alleges that the business that Subaye had presented to investors and described in filings with the Commission was imaginary and non-existent.

The complaint further alleged that Crane signed Subaye's materially misleading filings with the Commission that contained false statements about Subaye's revenues, business, number of employees, and number of paying customers. According to the complaint, Crane also falsified the books, records, and accounts of Subaye and provided false information to Subaye's outside auditors. The Commission's complaint also charged Crane with violating a bar from the Public Company Accounting Oversight Board (PCAOB). According to the complaint, in January 2011, Crane and his Cambridge, Massachusetts-based accounting firm were sanctioned by the PCAOB, which permanently revoked his firm's registration and barred him from being associated with a registered accounting firm or being associated with any public company in an accounting or financial management capacity. The complaint allege that, in violation of the January 2011 PCAOB order, Crane remained as the CFO of Subaye until March 2011, even after the PCAOB denied his request to remain as Subaye's CFO for those two months.

Crane consented to the injunction and penalty components of the final judgment. The court determined the length of the officer and director bar after considering the filings in the case. The final judgment permanently enjoins Crane from violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2 thereunder, and Section 105(c)(7)(B) of the Sarbanes-Oxley Act of 2002, and from aiding and abetting any violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules12b-20, 13a-1, 13a-11, thereunder, and orders Crane to pay a civil penalty of $150,000. The final judgment also prohibits Crane from serving as an officer or director of a public company for a period of ten years.

The Court previously entered a final judgment by consent against Subaye on May 16, 2013.

The Commission acknowledges the assistance of the Ontario Securities Commission and the Public Company Accounting Oversight Board.

MAN CONVICTED FOR ROLE IN DEFRAUDING AND EXTORTING MONEY FROM SPANISH-SPEAKERS THROUGH CALL CENTERS

FROM:  U.S. JUSTICE DEPARTMENT

Friday, October 17, 2014

Jury Convicts Peruvian Man of Defrauding and Extorting Spanish-Speaking Customers through Fraudulent Call Centers

A jury in Miami convicted a Lima, Peru, man on 26 felony charges of conspiracy, fraud and attempted extortion arising from his operating call centers in Peru that lied to and threatened Spanish-speaking victims into paying fraudulent settlements, the Department of Justice announced today.

Juan Alejandro Rodriguez Cuya, 35, was convicted by a jury after less than two hours of deliberation following a two-week trial before U.S. District Court Judge Patricia A. Seitz in Miami federal court. His co-defendant at trial, Maria Luzula, 52, of Miami, pleaded guilty to all of the charges against her midway through the trial.  Luzula is Cuya’s mother.

Cuya and Luzula both face a statutory maximum of 20 years in prison on each count. Both defendants remain in custody pending their sentencing on Jan. 22, 2015, and Dec. 18, respectively.

“The defendants targeted and preyed upon the Spanish-speaking community – and the evidence of the harm that their fraud caused on individual victims is heart-wrenching,” said Acting Assistant Attorney General Joyce R. Branda of the Justice Department’s Civil Division.  “The Justice Department is committed to prosecuting those who defraud consumers for their own personal gain.”

According to evidence presented at trial, the defendants’ employees in Peru used Internet-based telephone calls to threaten Spanish-speaking victims in the United States.  The Peruvian callers falsely accused the victims of having refused delivery of certain products and claimed that the victims owed thousands of dollars in fines and that lawsuits would be brought against them.  In reality, the victims had never ordered these products and nothing had been delivered.

Additional evidence at trial established that Luzula’s and Cuya’s employees claimed that the consumers could resolve the fines if they immediately paid a “settlement fee.”  Consumers who contested these settlement fees were told that failure to pay could lead to arrest, deportation or forfeiture of property.  Thousands of victims succumbed to these threats and paid fees that they did not owe.  A phone room in Miami collected the fees.

Victims who testified at trial spoke of how anxious the calls made them.  The victims were so afraid of the threats that they paid fees they simply could not afford.

Acting Assistant Attorney General Branda commended the U.S. Postal Inspection Service for their investigative efforts and thanked the U.S. Attorney’s Office for the Southern District of Florida for their contributions to the case.  The case was prosecuted by Trial Attorney Phil Toomajian and Assistant Director Richard Goldberg of the Civil Division’s Consumer Protection Branch.

SEC SAYS WHISLTEBLOWER AWARD OF $30 MILLION TO BE PAID TO PERSON LIVING ABROAD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced an expected award of more than $30 million to a whistleblower who provided key original information that led to a successful SEC enforcement action.

The award will be the largest made by the SEC’s whistleblower program to date and the fourth award to a whistleblower living in a foreign country, demonstrating the program’s international reach.

“This whistleblower came to us with information about an ongoing fraud that would have been very difficult to detect,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “This record-breaking award sends a strong message about our commitment to whistleblowers and the value they bring to law enforcement.”

Sean McKessy, Chief of the SEC’s Office of the Whistleblower, added, “This award of more than $30 million shows the international breadth of our whistleblower program as we effectively utilize valuable tips from anyone, anywhere to bring wrongdoers to justice.  Whistleblowers from all over the world should feel similarly incentivized to come forward with credible information about potential violations of the U.S. securities laws.”

The SEC’s whistleblower program rewards high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million.  Whistleblower awards can range from 10 percent to 30 percent of the money collected in a case.  The money paid to whistleblowers comes from an investor protection fund established by Congress at no cost to taxpayers or harmed investors.  The fund is financed through monetary sanctions paid by securities law violators to the SEC.  Money is not taken or withheld from harmed investors to pay whistleblower awards.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.  The previous high for an SEC award to a whistleblower was $14 million, which was announced in October 2013.  

The SEC awarded its first whistleblower under the program following its inception in fiscal year 2012.  The program awarded four more whistleblowers in FY 2013, and has awarded nine whistleblowers in FY 2014.

“We’re pleased with the consistent yearly growth in the number of award recipients since the program’s inception,” Mr. McKessy said.

SEC ANNOUNCES WHISTLEBLOWER AWARD OF $300,000

 FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission announced a whistleblower award of more than $300,000 to a company employee who performed audit and compliance functions and reported wrongdoing to the SEC after the company failed to take action when the employee reported it internally.

It’s the first award for a whistleblower with an audit or compliance function at a company.

“Individuals who perform internal audit, compliance, and legal functions for companies are on the front lines in the battle against fraud and corruption.  They often are privy to the very kinds of specific, timely, and credible information that can prevent an imminent fraud or stop an ongoing one,” said Sean McKessy, Chief of the SEC’s Office of the Whistleblower.  “These individuals may be eligible for an SEC whistleblower award if their companies fail to take appropriate, timely action on information they first reported internally.”

This particular whistleblower award recipient reported concerns of wrongdoing to appropriate personnel within the company, including a supervisor.  But when the company took no action on the information within 120 days, the whistleblower reported the same information to the SEC.  The information provided by the whistleblower led directly to an SEC enforcement action.

The SEC’s whistleblower program rewards high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million.  Whistleblower awards can range from 10 percent to 30 percent of the money collected in a case.  By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower’s identity.

POLITICAL CONSULTANT PLEADS GUILTY FOR ATTEMPT TO CONCEAL CAMPAIGN FINANCE-RELATED FRAUD SCHEMES

FROM:  U.S. JUSTICE DEPARTMENT 

Wednesday, August 27, 2014

Philadelphia Political Consultant Pleads Guilty for His Role in Attempting to Conceal Campaign Finance-Related Fraud

Political consultant Gregory Naylor, 66, of Philadelphia, pleaded guilty today to making false statements to federal agents and misprision of a felony in connection with his role in attempting to conceal two campaign finance-related fraud schemes.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Zane David Memeger of the Eastern District of Pennsylvania, Special Agent in Charge Edward Hanko of the FBI’s Philadelphia Field Office and Special Agent in Charge Akeia Conner of the Internal Revenue Service-Criminal Investigation (IRS-CI) made the announcement. The plea was entered by U.S. District Court Judge Harvey Bartle III of the Eastern District of Pennsylvania.

According to court documents, the charges stem from Naylor’s participation in two campaign finance-related schemes initiated by a long-time friend and former employer, identified in the information as Elected Official A. In the first scheme, Naylor helped conceal the theft of federal grant funds and private charitable funds that were used to repay an illegal campaign debt incurred by Elected Official A during a 2007 campaign for elected office.

Specifically, Naylor was aware that large amounts of money from an unexplained source were being spent on Elected Official A’s campaign, and Naylor helped to conceal the source of those funds by preparing a false invoice for services rendered by his consulting firm. Naylor subsequently learned that Elected Official A and others orchestrated the theft of federal grant funds to repay the outstanding balance of the campaign debt, and he agreed to the falsification of campaign finance reports to further conceal Elected Official A’s activities.

Also according to court documents, in the second scheme, Naylor conspired with Elected Official A to pay down portions of the college debt of Elected Official A’s son using federal and local campaign funds. Some of the payments originated directly from the local campaign fund, and some were illegally sourced from Elected Official A’s federal campaign election committee and passed through the local campaign fund account to Naylor. Naylor made approximately $22,000 in improper payments between August 2007 and April 2011 at Elected Official A’s request. Naylor also falsely claimed on IRS forms that the payments made towards the college debt were earned income to Elected Official A’s son for services rendered as an independent contractor to Naylor’s consulting firm. When confronted by federal agents in investigative interviews about the payments, Naylor lied on two occasions and repeated his cover story that the son of Elected Official A was an independent contractor working for his political consulting firm.

Sentencing is scheduled for Dec. 2, 2014.

The case was investigated by the FBI and the IRS-CI with assistance provided by the NASA Office of the Inspector General. This case is being prosecuted by Assistant U.S. Attorney Paul L. Gray of the Eastern District of Pennsylvania and Trial Attorney Eric L. Gibson of the Criminal Division’s Public Integrity Section.

FORMER CITIGROUP DIRECTOR TO PAY $500,000 FOR DEFRAUDING COMPANY

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Federal Court Orders Former Citigroup Director, John Aaron Brooks, to Pay $500,000 for Defrauding Two Citigroup Companies by Mismarking and Inflating the Value of His Position in Ethanol Futures to Conceal His Trading Losses

Washington, DC –The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Kimba M. Wood of the U.S. District Court for the Southern District of New York entered a Consent Order against Defendant John Aaron Brooks for defrauding Citigroup, Inc. and Citigroup Energy, Inc. (collectively, Citi) by mismarking and inflating the value of his position in ethanol futures in Citi’s proprietary account. Brooks currently resides in Houston, Texas.

The court’s Order requires Brooks to pay a $500,000 civil monetary penalty. The Order also permanently bans Brooks from registering with the CFTC; bans him for seven years from trading any CFTC-regulated products for or on behalf of others; and bans him for five years from trading, or having others trade, CFTC-regulated ethanol products on his behalf. The Order further permanently enjoins Brooks from violating the Commodity Exchange Act (CEA) and a CFTC Regulation, as charged.

The Order finds that from November 2010 through October 2011 (the Relevant Period), Brooks was employed by Citicorp North America Inc. and served as a Director in the commodities business of Citigroup, Inc. According to the Order, Brooks cheated and defrauded Citi by inflating and mismarking the value of his position in New York Mercantile Exchange (NYMEX) Chicago Ethanol (Platts) Futures contracts (NYMEX ethanol futures) in Citi’s proprietary account, by misrepresenting his profits and losses to Citi, and by knowingly offsetting and masking the losses in his other futures positions. The Order finds that, by this conduct, Brooks violated the anti-fraud provisions of the CEA and a CFTC Regulation.

Additionally, the Order finds that at the end of each trading day during the Relevant Period, Brooks knew or recklessly disregarded the fact that he was entering false values for NYMEX ethanol futures into Citi’s computer system. The total losses to Citi as a result of Brooks’s mismarking were approximately $42.4 million.

The court’s Order, entered on August 1, 2014, stems from a CFTC Complaint filed on September 27, 2013, that charged Brooks with, among other things, employing manipulative or deceptive devices and contrivances, cheating and defrauding, and concealing trading losses from a large commercial bank and its affiliate by inflating the value of NYMEX ethanol futures, in violation of the CEA and a CFTC Regulation (see CFTC Press Release and Complaint 6716-13).

CFTC staff members responsible for this case are Janine Gargiulo, Michael Geiser, Trevor Kokal, David Acevedo, Lenel Hickson, and Manal Sultan.

CEO, COMPANIES TO PAY PENALTY $70 MILLION FOR INVESTMENT FRAUD

 FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced that it has obtained a final judgment in federal court in Tennessee requiring a Richmond, Va.-based financial services holding company, a subsidiary brokerage firm, and their CEO to pay nearly $70 million as the outcome of a trial that found them liable for fraud.

The SEC’s complaint filed against AIC Inc., Community Bankers Securities LLC, and Nicholas D. Skaltsounis alleged that they conducted an offering fraud while selling AIC promissory notes and stock to numerous investors across multiple states, many of whom were elderly or unsophisticated brokerage customers.  They misrepresented and omitted material information about the investments when pitching them to investors, including the safety and risk associated with the investments, the rates of return, and how the proceeds would be used by AIC.  In reality, AIC and its subsidiaries were never profitable, and Skaltsounis and the companies used money raised from new investors to pay back principal and returns to existing investors.

“The very significant penalties in this case reinforce the message that we’re prepared to aggressively pursue companies and individuals, and when necessary take them to trial, in order to hold them accountable when they aren’t truthful with investors,” said Andrew Ceresney, director of the SEC’s Division of Enforcement.

A jury returned a verdict in the SEC’s favor in October 2013 after a nearly three-week trial in the Knoxville division of U.S. District Court for the Eastern District of Tennessee.  Chief Judge Thomas A. Varlan issued the final judgments today that include the following monetary sanctions:

AIC: disgorgement of $6,647,540, prejudgment interest of $969,262.10, and a penalty of $27.95 million for a total of $35,566,802.10.
Community Bankers Securities: disgorgement of $2,830,946 plus prejudgment interest of $412,773.53 and a penalty of $27.95 million for a total of $31,193,719.53.
Skaltsounis: disgorgement of $948,389.13 plus prejudgment interest of $138,282.35 and a penalty of $1.505 million for a total of $2,591,671.48.
The court also imposed permanent injunctions against AIC, Community Bankers Securities, and Skaltsounis for future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The trial team on this case consisted of trial attorneys Michael J. Rinaldi, John V. Donnelly III, G. Jeffrey Boujoukos, and Scott A. Thompson and trial paralegal Nichelle Pridgen, who work in the agency’s Philadelphia Regional Office.

RETIRED NAVY OFFICIAL PLEADS GUILTY IN BRIBERY SCANDAL

FROM:   U.S. JUSTICE DEPARTMENT 

Thursday, July 3, 2014

Former U.S. Navy Officer Pleads Guilty in International Bribery Scandal

Defendant Admits Overcharging Navy by up to $2.5 Million for Port Services in Japan

A retired Navy official who started a second career working for defense contractor Glenn Defense Marine Asia (GDMA) pleaded guilty in federal court today, admitting that he and others overcharged the Navy by up to $2.5 million for port services to American ships and then used some of the proceeds to treat Navy officials to lavish dinners, cocktails and entertainment.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Laura E. Duffy for the Southern District of California, Director Andrew L. Traver of Naval Criminal Investigative Service (NCIS) and Acting Deputy Inspector General of Investigations James R. Ives of the Department of Defense (DCIS) made the announcement.

“There is an old Navy saying: ‘Not self, but country.’  Edmond Aruffo instead put self before country when he stole from the U.S. Navy as part of a massive fraud and bribery scheme that cost the U.S. Navy more than $20 million ,” said Assistant Attorney General Caldwell.

“This corruption scandal continues to lead us in new directions, and we continue to marvel at the extent of it,” said U.S. Attorney Laura Duffy. “If there are others who, like Edmond Aruffo, have traded integrity and honesty for greed and profit, we will find them and prosecute them.”

“Retired U.S. Navy Lieutenant Commander Edmond A. Aruffo, who previously held a position of trust and responsibility conferred on him by the Navy, betrayed his former service for personal gain by rigging invoices and deserves to be held accountable for his criminal actions,” said Director Traver.   “NCIS will continue to work with DCIS and the Department of Justice in vigorously investigating and prosecuting these crimes of corruption and fraud.”

“The guilty plea of Edward Aruffo is part of an ongoing effort by the DCIS and its law enforcement partners to bring to justice individuals who seek to illegally enrich themselves at the expense of U.S. taxpayers,” said Acting Deputy Inspector General Ives.   “While the vast majority of DOD contractors engage in lawful business practices, a few are driven by greed to break the law.   Those who do will be caught and punished.   American taxpayers will accept nothing less.”

Edmond A. Aruffo, who retired in 2007 at the rank of lieutenant commander after a military career spanning more than 20 years, is the seventh defendant charged – and the fourth to plead guilty – in the expanding corruption scandal involving GDMA’s illicit relationships with Navy officials.  GDMA is a Singapore-based contractor that has serviced Navy ships and submarines in the Pacific for decades.

Aruffo, who became manager of GDMA’s Japan operations in 2009, entered his plea before U.S. Magistrate Judge Karen S. Crawford of the Southern District of California to a single count of conspiracy to defraud the United States.  Aruffo’s bond was set at $40,000; however, he indicated to the court he not post bond and immediate self-surrender.  A sentencing hearing was scheduled for Oct. 3, 2014, at 9 a.m. before U.S. District Judge Janis L. Sammartino of the Southern District of California.

According to court documents, GDMA owner and CEO Leonard Francis enlisted the clandestine assistance of Navy personnel – including Commander Michael Vannak Khem Misiewicz, Commander Jose Luis Sanchez, NCIS Special Agent John Beliveau and Petty Officer First Class Daniel Layug – to provide classified ship schedules and other sensitive information about an ongoing criminal investigation of GDMA.   Court documents also allege that Francis and his cousin, GDMA executive Alex Wisidagama, conspired to defraud the United States through a number of overbilling schemes.  In total, GDMA allegedly overcharged the Navy under its contracts and submitted bogus invoices for more than $20 million.  Wisidagama, Beliveau and Layug have pleaded guilty while the others are awaiting trial.

According to Aruffo’s plea agreement, Aruffo was hired by GDMA’s Francis, who is accused of bribing Navy personnel with cash, luxury travel, expensive meals, consumer electronics and prostitutes in exchange for classified and proprietary information to win contracts and favorable treatment for his company.

According to the plea agreement, Aruffo was serving as the operations officer of the USS Blue Ridge when he met Francis.  GDMA was providing “husbanding” services, such as tug boats, harbor pilots, trash removal, line handlers and transportation to that ship and numerous others.

In the plea agreement, Aruffo admitted that he and others defrauded the U.S. Navy in connection with charges for port services provided to nearly every Navy ship that came to port in Japan from July 2009 to September 2010.

As part of its contract with the Navy, GDMA was required to coordinate various vendors to provide port services for the Navy ships.  Those vendors were to submit invoices directly to the Navy, rather than through GDMA.

The plea agreement said that Aruffo and others obtained letterhead from the Japanese vendors and used it to prepare bogus invoices which inflated the cost for services by tens of thousands of dollars.  Aruffo admitted he arranged kickbacks to GDMA from the vendors, once they were paid by the Navy.

For example, according to the plea agreement, in February of 2010 the USS Lake Erie visited the port of Sukomo, Japan.  Aruffo arranged for a Japanese vendor to provide a variety of husbanding services.  The vendor invoiced the Navy $145,229.77 – an amount inflated by about $50,000, which the vendor ultimately gave to GDMA as a kickback.

A few days later, Aruffo arranged for another Japanese vendor to provide such services to the USS Blue Ridge at the port of Otaru, Japan, the plea agreement said.  The vendor billed the Navy in the amount of $432,476.14 and then kicked back $204,961.20 to GDMA.

The ongoing investigation is being conducted by NCIS, DCIS and the Defense Contract Audit Agency.   The case is being prosecuted by Director of Procurement Fraud Catherine Votaw and Trial Attorneys Brian Young and Wade Weems of the Criminal Division’s Fraud Section and Assistant U.S. Attorneys Mark Pletcher and Robert Huie of the Southern District of California.

STATE DEPARTMENT PRESS STATEMENT ON AFGHAN ELECTIONS

Spokesperson, Office of the Spokesperson

Washington, DCFROM:  U.S. STATE DEPARTMENT 

Press Statement

Jen Psaki

Department Spok

July 7, 2014

The United States reaffirms its support for a sovereign, unified, and democratic Afghanistan and for the Afghan election process. We have seen today’s announcement of preliminary results and note that these figures are not final or authoritative and may not predict the final outcome, which could still change based on the findings of the Afghan electoral bodies. Serious allegations of fraud have been raised and have yet to be adequately investigated.

We note that the United Nations, invited by President Karzai and both candidates to facilitate the process, has proposed a series of additional audits of suspect ballots, and that other measures have been under discussion. As the Independent Election Commission (IEC) statement noted, four additional measures have been accepted by both camps. Those measures affect more than 7000 ballot boxes, and potentially more than 3 million ballots. It is essential that the IEC work with the Independent Electoral Complaints Commission and the United Nations to execute the UN proposed audits and to answer all the legitimate questions raised by the two campaigns and independent observers.

A full and thorough review of all reasonable allegations of irregularities is essential to ensure that the Afghan people have confidence in the integrity of the electoral process and that the new Afghan President is broadly accepted inside and outside Afghanistan. It is the two electoral Commissions’ responsibility to address all credible allegations of fraud. They must implement a thorough audit whether or not the two campaigns agree.

We call upon both campaigns and their supporters to cooperate with these audits and to refrain from provocative statements or actions. As the Commission made clear, these results are not final and neither candidate should claim victory on the basis of this announcement. It is especially important that both campaigns send agents to observe the audit process. We believe that UN recommended audit process, provided it begins immediately, can be completed in time to allow the inauguration of the next President to proceed as scheduled on August 2.

The United States does not support any individual candidate. We have long stated our support for a credible, transparent, and inclusive process that is broadly supported by the Afghan people and produces a president who can bring Afghanistan together and govern effectively. We call on all sides to work toward this goal and to avoid steps that undermine national unity. The continued support of the United States for Afghanistan requires that Afghanistan remains united and that the result of this election is deemed credible.

FTC TESTIFIES BEFORE SENATE ON DECEPTIVE CLAIMS IN THE WEIGHT-LOSS INDUSTRY

FROM:  U.S. FEDERAL TRADE COMMISSION 

FTC Testifies Before Senate Commerce Subcommittee on Agency Efforts to Combat Fraudulent and Deceptive Claims for Weight-Loss Products

The Federal Trade Commission testified before Congress about its ongoing efforts to combat fraudulent and deceptive claims for weight-loss products through law enforcement, media outreach, and consumer education.

Testifying on behalf of the FTC before the Committee on Commerce, Science, and Transportation, Subcommittee on Consumer Protection, Product Safety, and Insurance, Mary Engle, Associate Director for Advertising Practices at the Federal Trade Commission, said that amid an ongoing obesity epidemic – in which nearly 70 percent of U.S. adults are obese or overweight – the FTC’s most recent fraud study shows that more consumers were victims of fraudulent weight-loss claims than of any other specific fraud type covered by the survey.

The testimony also noted that despite consumer spending of $2.4 billion on weight-loss products and services last year, there is very little evidence that pills or supplements alone will cause sustained, meaningful weight loss – without changes to diet and lifestyle. According to the testimony, consumers are especially susceptible to weight-loss fraud, there is an enormous amount of money to be made in the diet industry, and fraudsters will continue to gravitate toward the money.

“The endless flood of unfounded claims being made in the weight-loss industry vividly illustrates the challenges we, and consumers, are up against,” the testimony stated.

The FTC’s program to combat fraud in the weight-loss industry includes:

Law enforcement: In the past 10 years, the FTC has brought 82 weight-loss-related law enforcement actions, and since 2010, it has collected nearly $107 million for consumer restitution. Early this year, the agency announced Operation Failed Resolution, targeting new weight-loss fads that include food additives, human hormones, skin creams and acai berries.

The Commission has also noted several disturbing developments in weight-loss advertising:

reliance on proprietary studies using erroneous or fabricated data.
marketers capitalizing on weight-loss fads propelled to popularity by trusted spokespeople such as one recent FTC case involving marketers of the Pure Green Coffee dietary supplement. Within weeks of an April 2012 Dr. Oz Show touting green coffee bean extract, these marketers were making overblown claims about the supplement online, such as, “lose 20 pounds in four weeks” and “lose 20 pounds and two to four inches of belly fat in two to three months.”
Media Outreach: To combat the promotion of fraudulent weight-loss products in respected media outlets, the FTC recently issued a “Gut Check” reference guide that advises media outlets on seven claims in weight-loss ads that experts say simply cannot be true and that should cause media outlets to think twice about running the ads.

Consumer Education: Recent FTC brochures, articles, and blog posts geared toward consumers hammer home the message that the only thing they will lose is money if they fall for ads promising quick weight loss without diet or exercise. The FTC also has created teaser websites designed to reach people who are surfing online for weight-loss products.

Today, the agency is also launching a new consumer video and game – the FTC Weight Loss Challenge. The Challenge is an interactive game designed to help consumers think critically about weight-loss products and claims. Available in English and Spanish, the game separates fact from fiction in ads for products touting fast weight loss without the need for diet and exercise.

The Commission vote approving the testimony and its inclusion in the formal record was 5-0.

SEC CHARGES CHARTER SCHOOL OPERATOR WITH DEFRAUDING INVESTORS IN $37.5 MILLION BOND OFFERING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged a charter school operator in Chicago with defrauding investors in a $37.5 million bond offering for school construction by making materially misleading statements about transactions that presented a conflict of interest.

The SEC alleges that UNO Charter School Network Inc. and United Neighborhood Organization of Chicago not only failed to disclose a multi-million-dollar contract with a windows company owned by the brother of one of its senior officers, but investors also weren’t informed about the potential financial impact the conflicted transaction had on its ability to repay the bonds.

UNO is settling the SEC’s charges by agreeing to undertakings to improve its internal procedures and training, including the appointment of an independent monitor.

“UNO misled its bond investors by assuring them it had reported conflicts of interest in connection with state grants when in fact it had not,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Investors had a right to know that UNO’s transactions with related persons jeopardized its ability to pay its bonds because they placed the grant money that was primarily funding the projects at risk.”

According to the SEC’s complaint filed in federal court in Chicago, UNO entered into two grant agreements with the Illinois Department of Commerce and Economic Opportunity (IDCEO) in 2010 and 2011 to build three schools.  Each grant agreement contained a provision requiring UNO to certify that no conflict of interest existed when it signed the agreements.  UNO was required to immediately notify IDCEO in writing if any actual or potential conflicts subsequently arose.  If UNO breached this conflict of interest provision, IDCEO could suspend the payment of grants and recover grant funds already paid to UNO.

According to the SEC’s complaint, UNO breached the conflict of interest provision as it entered the construction phases of the project in 2011 and 2012.  UNO contracted two companies owned by brothers of its chief operating officer.  UNO agreed to pay one company approximately $11 million to supply and install windows and the other company approximately $1.9 million to serve as an owner’s representative during construction.  UNO did not advise IDCEO in writing about either of those conflicted transactions.

The SEC alleges that when UNO conducted its $37.5 million bond offering in October 2011, it issued an official statement to investors in bond offering documents that devoted an entire subsection to the subject of conflicts of interest.  UNO affirmatively assured investors that its conflicts policy was more robust than required for non-profit organizations.  UNO did disclose the contract with the company serving as owner’s representative, which was owned by the chief operating officer’s brother – who was a former UNO board member himself.

The SEC alleges that UNO nonetheless failed to disclose its much larger transactions with the windows company owned by another brother of the chief operating officer.  Moreover, nothing in the official statement disclosed that UNO already was in breach of the conflict of interest provision in its June 2010 grant agreement with the IDCEO because it already had transacted with both companies without advising the agency in writing about those engagements.  UNO also failed to disclose in the official statement that IDCEO could recoup all of the grant money as a result of this breach of the conflicts of interest provision.  Had IDCEO exercised its rights under the grant agreements and recouped the entire amount of the grants, UNO would not have had the cash to repay the grants and therefore would have had to liquidate its charter schools – the very revenue-producing assets essential for repayment of the bonds.

“Conflicted transactions and self-dealing by issuer officials can be material information for municipal bond investors and should be given appropriate focus by issuers and underwriters in disclosure documents,” said LeeAnn Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “Failing to disclose material information undermines investor confidence in the municipal securities market and places at risk an important source of funding for local government projects.”

The SEC complaint charges UNO with violations of Section 17(a)(2) of the Securities Act of 1933.  UNO neither admitted nor denied the charges in the settlement.

The SEC’s investigation is continuing.  It has been conducted jointly by staff in the Chicago Regional Office and the Municipal Securities and Public Pensions Unit, including Michael Mueller, Eric Celauro, and Michael Foster.  The case is being supervised by Peter K.M. Chan.

FEDERAL TRADE COMMISSION SAYS DATA BROKERS NEED TO BE MORE TRANSPARENT

FROM:  U.S. FEDERAL TRADE COMMISSION 

FTC Recommends Congress Require the Data Broker Industry to be More Transparent and Give Consumers Greater Control Over Their Personal Information

Agency Report Shows Data Brokers Collect and Store Billions of Data Elements Covering Nearly Every U.S. Consumer

In a report issued today on the data broker industry, the Federal Trade Commission finds that data brokers operate with a fundamental lack of transparency. The Commission recommends that Congress consider enacting legislation to make data broker practices more visible to consumers and to give consumers greater control over the immense amounts of personal information about them collected and shared by data brokers.

The report, “Data Brokers: A Call for Transparency and Accountability” is the result of a study of nine data brokers, representing a cross-section of the industry, undertaken by the FTC to shed light on the data broker industry. Data brokers obtain and share vast amounts of consumer information, typically behind the scenes, without consumer knowledge. Data brokers sell this information for marketing campaigns and fraud prevention, among other purposes. Although consumers benefit from data broker practices which, for example, help enable consumers to find and enjoy the products and services they prefer, data broker practices also raise privacy concerns.

“The extent of consumer profiling today means that data brokers often know as much – or even more – about us than our family and friends, including our online and in-store purchases, our political and religious affiliations, our income and socioeconomic status, and more,” said FTC Chairwoman Edith Ramirez. “It’s time to bring transparency and accountability to bear on this industry on behalf of consumers, many of whom are unaware that data brokers even exist.”

The report finds that data brokers collect and store billions of data elements covering nearly every U.S. consumer. Just one of the data brokers studied holds information on more than 1.4 billion consumer transactions and 700 billion data elements and another adds more than 3 billion new data points to its database each month.

Among the report’s findings:

Data brokers collect consumer data from extensive online and offline sources, largely without consumers’ knowledge, ranging from consumer purchase data, social media activity, warranty registrations, magazine subscriptions, religious and political affiliations, and other details of consumers’ everyday lives.
Consumer data often passes through multiple layers of data brokers sharing data with each other. In fact, seven of the nine data brokers in the Commission study had shared information with another data broker in the study.

Data brokers combine online and offline data to market to consumers online.
Data brokers combine and analyze data about consumers to make inferences about them, including potentially sensitive inferences such as those related to ethnicity, income, religion, political leanings, age, and health conditions. Potentially sensitive categories from the study are “Urban Scramble” and “Mobile Mixers,” both of which include a high concentration of Latinos and African-Americans with low incomes. The category “Rural Everlasting” includes single men and women over age 66 with “low educational attainment and low net worths.” Other potentially sensitive categories include health-related topics or conditions, such as pregnancy, diabetes, and high cholesterol.

Many of the purposes for which data brokers collect and use data pose risks to consumers, such as unanticipated uses of the data. For example, a category like “Biker Enthusiasts” could be used to offer discounts on motorcycles to a consumer, but could also be used by an insurance provider as a sign of risky behavior.

Some data brokers unnecessarily store data about consumers indefinitely, which may create security risks.

To the extent data brokers currently offer consumers choices about their data, the choices are largely invisible and incomplete.

To help rectify a lack of transparency about data broker industry practices, the Commission encourages Congress to consider enacting legislation that would enable consumers to learn of the existence and activities of data brokers and provide consumers with reasonable access to information about them held by these entities.

For data brokers that provide marketing products, Congress should consider legislation to:

Centralized Portal. Require the creation of a centralized mechanism, such as an Internet portal, where data brokers can identify themselves, describe their information collection and use practices, and provide links to access tools and opt- outs;

Access. Require data brokers to give consumers access to their data, including any sensitive data, at a reasonable level of detail;

Opt-Outs. Require opt-out tools, that is, a way for consumers to suppress the use of their data;

Inferences. Require data brokers to tell consumers that they derive certain inferences from from raw data;

Data Sources. Require data brokers to disclose the names and/or categories of their data sources, to enable consumers to correct wrong information with an original source;

Notice and Choice. Require consumer-facing entities – such as retailers – to provide prominent notice to consumers when they share information with data brokers, along with the ability to opt-out of such sharing; and Sensitive Data. Further protect sensitive information, including health information, by requiring retailers and other consumer-facing entities to obtain affirmative express consent from consumers before such information is collected and shared with data brokers.

For brokers that provide “risk mitigation” products, legislation should:

When a company uses a data broker’s risk mitigation product to limit a consumers’ ability to complete a transaction, require the consumer-facing company to tell consumers which data broker’s information the company relied on;
Require the data broker to allow consumer access to the information used and the ability to correct it, as appropriate.

For brokers that provide “people search” products, legislation should:

Require data brokers to allow consumers to access their own information, opt-out of having the information included in a people search product, disclose the original sources of the information so consumers can correct it, and disclose any limitations of an opt-out feature.    
           
The nine data brokers in the study are Acxiom, CoreLogic, Datalogix, eBureau, ID Analytics, Intelius, PeekYou, Rapleaf and Recorded Future. In December 2012, the Commission voted to issue orders requiring these data brokers to produce the information that was used in the study.

The Commission vote approving the issuance of the report was 4-0, with Commissioner McSweeny not participating.

FORMER OIL SERVICES COMPANY CEO INDICTED ON FOREIGN BRIBERY AND KICKBACK CHARGES

FROM:  U.S. JUSTICE DEPARTMENT 

Friday, May 9, 2014

Former Chief Executive Officer of Oil Services Company Indicted in New Jersey on Foreign Bribery and Kickback Charges

The former co-chief executive officer (CEO) of PetroTiger Ltd. – a British Virgin Islands oil and gas company with operations in Colombia and offices in New Jersey – was indicted today for his role in a scheme to pay bribes to foreign government officials in violation of the Foreign Corrupt Practices Act (FCPA) and to defraud PetroTiger.

Acting Principal Deputy Assistant Attorney General Marshall Miller of the Justice Department’s Criminal Division, U.S. Attorney Paul J. Fishman of the District of New Jersey and Special Agent in Charge Aaron T. Ford of the FBI’s Newark Division made the announcement.

Joseph Sigelman, 43, of Miami and the Philippines, was indicted today by a federal grand jury in the District of New Jersey and charged with conspiracy to violate the FCPA and to commit wire fraud, conspiracy to launder money, and substantive FCPA and money laundering violations.   Gregory Weisman, 42, of Moorestown, New Jersey, the former general counsel of PetroTiger, pleaded guilty on Nov. 8, 2013, to conspiracy to violate the FCPA and to commit wire fraud.   Sigelman’s co-CEO, Knut Hammarskjold, 42, of Greenville, South Carolina, pleaded guilty to the same charge on Feb. 18, 2014.

According to court records, Sigelman and others allegedly paid bribes to an official in Colombia in exchange for the official’s assistance in securing approval for an oil services contract worth roughly $39 million.   To conceal the bribes, they first attempted to make the payments to a bank account in the name of the foreign official’s wife for purported consulting services she did not perform.  Sigelman and Hammarskjold provided Weisman invoices, including her bank account information.   The conspirators made the payments directly to the official’s bank account when attempts to transfer the money to his wife’s account failed.   Sigelman and his conspirators then took steps to conceal the bribe payments from PetroTiger’s board members.

In addition, court documents allege that Sigelman and others attempted to secure kickback payments while negotiating an acquisition of another company on behalf of PetroTiger, including on behalf of several members of PetroTiger’s board of directors who were helping to fund the acquisition.   In exchange for negotiating more favorable terms for the owners of the target company, two of the owners agreed to kick back to the conspirators a portion of the increased purchase price.   To conceal the kickback payments, Sigelman and others had the payments deposited into Sigelman’s bank account in the Philippines, created a “side letter” to falsely justify the payments and used the code name “Manila Split” to refer to the payments amongst themselves.

Sigelman and Hammarskjold were charged by sealed complaints filed in the District of New Jersey on Nov. 8, 2013.   Hammarskjold was arrested Nov. 20, 2013, at Newark Liberty International Airport.   Sigelman was arrested on Jan. 3, 2014, in the Philippines.   The charges against Sigelman, Hammarskjold and Weisman were unsealed on Jan. 6, 2014.

The charges contained in the indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.

The case was brought to the attention of the department through a voluntary disclosure by PetroTiger, which cooperated with the department’s investigation.   The department has worked closely with and has received significant assistance from its law enforcement counterparts in the Republic of Colombia and greatly appreciates their assistance in this matter.   The department also thanks the Republic of the Philippines, including the Bureau of Immigration, and the Republic of Panama for their assistance in this matter.   Significant assistance was also provided by the Criminal Division’s Office of International Affairs.

The case is being investigated by the FBI’s Newark Division.   The case is being prosecuted by Assistant Chief Daniel S. Kahn of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Zach Intrater of the District of New Jersey.

MAN SENTENCED IN $4 MILLION HOME LOAN MODIFICATION SCAM

FROM:  U.S. JUSTICE DEPARTMENT 

Thursday, April 24, 2014

Maryland Man Sentenced for Defrauding Thousands of Homeowners in $4 Million Nationwide Home Loan Modification Scam

A Maryland man was sentenced today to serve one year and a day in prison for defrauding thousands of homeowners in a $4 million nationwide home loan modification scheme.

Acting Assistant Attorney General David A. O’Neil of the Justice Department’s Criminal Division, U.S. Attorney Carmen M. Ortiz of the District of Massachusetts and Special Inspector General for the Troubled Asset Relief Program (SIGTARP) Christy Romero made the announcement.

Brian Kelly, 37, of Forest Hill, was sentenced by U.S. District Court Judge Rya W. Zobel of the District of Massachusetts and ordered to serve three years of supervised release following his prison term.   Restitution will be determined at a later date.

Kelly pleaded guilty on May 2, 2013, to one count of conspiracy, nine counts of mail fraud and nine counts of wire fraud.

According to court records, Kelly and others, operating under the name Home Owners Protection Economics Inc. (HOPE), made a series of misrepresentations to induce struggling homeowners to pay HOPE $400 to $2,000 in up-front fees in exchange for HOPE’s help obtaining federally funded home loan modifications.   Kelly was one of HOPE’s more successful salespeople, receiving approximately $24,000 after arranging fraudulent home loan modifications totaling approximately $180,000.

Also according to court documents, the conspirators misrepresented that, with HOPE’s assistance, the homeowner was guaranteed to receive a loan modification under the Home Affordable Modification Program (HAMP), which is part of the Troubled Asset Relief Program (TARP) and is a federally funded mortgage-assistance program.   For example, the defendants routinely claimed that the homeowner had already been approved for a loan modification, provided phony “approval codes,” quoted new (and wholly fictitious) mortgage terms and due dates, touted their 98 percent past success rate and claimed that they were “underwriters” or were otherwise affiliated with the homeowners’ mortgage companies.   HOPE also claimed that it would offer homeowners refunds in the unlikely event that they did not receive a loan modification.

According to court documents, in exchange for the up-front fees, HOPE sent its customers, including homeowners in Massachusetts, a do-it-yourself application package, which was virtually identical to the application that the government provides free of charge.   The HOPE customers had no advantage in the application process, and, in fact, most of their applications were denied.   Through these misrepresentations, HOPE was able to persuade thousands of homeowners to pay more than $4 million in fees.

Two co-defendants, Christopher S. Godfrey, 44, of Delray Beach, Fla., and Dennis Fischer, 42, of Highland Beach, Fla., were convicted after trial and were each sentenced on Feb. 20, 2014, to serve 84 months in prison.  A third co-defendant, Vernell Burris, Jr., 54, of Coconut Creek, Fla, pleaded guilty and was sentenced on Feb. 25, 2014, to serve a year and a day in prison.

The case was investigated by SIGTARP and is being prosecuted by Senior Trial Attorney Mona Sedky of the Criminal Division’s Computer Crime and Intellectual Property Section and Assistant U.S. Attorney Adam Bookbinder in the District of Massachusetts’s Computer Crimes Unit.

SEC CHARGES MAN WITH USING PHONY CREDIT UNION TO DEFRAUD INVESTORS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Indiana Man for Defrauding Investors in "Credit Union" Ponzi Scheme

On April 11, 2014, the Securities and Exchange Commission filed an action charging Indianapolis-based Timothy J. Coughlin, 63, and two entities that did business as "Oxford International Credit Union" or "Oxford International Cooperative Union" with conducting an Internet offering fraud in which investors lost millions of dollars by investing funds in a fictitious credit union. The complaint alleges that between June 2007 and December 2009, Coughlin and Oxford International Credit Union collected deposits from more than 5,000 investors exceeding $12.8 million dollars. Approximately 3,300 of the investors were U.S. residents, with victims residing in all 50 states and the District of Columbia. The SEC's complaint alleges that Coughlin misappropriated investor money to pay personal expenses, fund unrelated business expenses, and make distributions to other investors in a classic Ponzi-scheme fashion.

According to the SEC's complaint, to further the fraud, the defendants posted false information to investors' online accounts to create the appearance that their deposits in the fake credit union were earning substantial daily investment returns. The Oxford International Credit Union website for example, showed investors that their deposits were purportedly earning investment returns that averaged, during the January 2007 through December 2009 period, 0.471% each trading day, equating to an approximately 356% average annual rate of return. According to the complaint, however, the defendants did not actually make investments with the members' deposits sufficient to generate the returns they boasted. Coughlin and Oxford International Credit Union also falsely claimed that member accounts were insured by a private insurance company. Then, beginning in December 2008, Coughlin began operating a successor to Oxford International Credit Union, called Oxford International Cooperative Union, which also boasted bogus investment returns on its website from its inception in late 2008 through December 2011.

The SEC's complaint alleges that Coughlin misappropriated at least $5.97 million and used investor money for illegitimate purposes, including $1.57 million used for personal expenditures and $4.4 million (or approximately 35%) to pay other investors who had requested withdrawals from their Oxford International Credit Union accounts . Coughlin also transferred money from Oxford International Credit Union's accounts to bank accounts he controlled in the names of two relief defendants.

According to the SEC's complaint, in late 2008 and 2009, Coughlin began to deny investors' requests for withdrawals from their accounts. To explain his refusal to allow investors to access their funds, Coughlin falsely claimed that Internal Revenue Service and foreign tax authorities had frozen Oxford International Credit Union and Oxford International Cooperative Union's accounts.

In a parallel action, the U.S. Attorney's Office for the Eastern District of Virginia today unsealed a criminal complaint against Coughlin.

The SEC's complaint charges Coughlin, OICU Ltd. and OICU Investments Corp. with violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and seeks disgorgement of all ill-gotten gains with prejudgment interest, civil penalties, conduct-based injunctions, and an officer-and-director bar against Coughlin. The SEC also seeks disgorgement and prejudgment interest from relief defendants American Quality Cleaning Services, Inc. (d/b/a "Oxford Privacy Group") and Avocalon LLC.

The SEC's investigation was conducted by Adam J. Eisner and Carolyn E. Kurr in the Washington, D.C. office, and supervised by C. Joshua Felker. The SEC's litigation is being led by Stephan J. Schlegelmilch and Bridget M. Fitzpatrick.

The SEC appreciates the assistance of the U.S. Attorney's Office for the Eastern District of Virginia; the Federal Bureau of Investigation; the Department of the Treasury, Treasury Inspector General for Tax Administration; the Indiana Secretary of State, Securities Division; the National Credit Union Administration; and the Ontario Securities Commission.

The SEC's investigation is continuing.