The Limestone Cops — Tips on Madoff Red Flags Never Escalated at SEC

It’s hard to believe that with all the resources poured into government following the adoption of Sarbanes Oxley Act in 2002, the escalation process in the SEC failed in the Madoff case. New reports show that junior SEC staff neglected to involve more seasoned enforcement officers and failed to stop what ended up to be a $65 billion Ponzi scheme. See SEC chiefs in dark as Madoff evaded junior staff.

The cost to all the investors has been devastating and the internal escalation process in the agency needs signicant remediation.

Feds Set Sights on ‘Gatekeepers’ in Fraud Investigations

Joe Palazzolo
Legal Times

Federal law enforcement officials said Wednesday they are targeting lawyers, mortgage brokers, real estate brokers and other “gatekeepers” who perpetrated fraud that contributed to the current economic crisis — a clear warning shot as the federal government is pumping billions of dollars into the financial sector.

“They have the most to lose, they’re the most likely to flip, and they make the best examples,” said Neil Barofsky, the special inspector general for the Troubled Assets Relief Program, during a congressional hearing on fraud enforcement. Senate Judiciary Committee Chairman Patrick Leahy, D-Vt., was even more blunt: “I want to see these people prosecuted,” he said. “Frankly, I want to see them go to jail.” The hearing was meant to underscore the need for more law enforcement resources amid an upsurge in mortgage and corporate fraud investigations.

Leahy and Sen. Charles Grassley, R-Iowa, have introduced a bill that would expand the scope of federal fraud laws and provide funding for more prosecutors and investigators. FBI Deputy Director John Pistole told the committee that mortgage fraud investigations nearly doubled in the last two years to more than 1,600 in 2008. The bureau, he said, has more than 530 corporate fraud investigations open, including 38 directly related to the current financial crisis.

Pistole said he could see that number potentially rising into the hundreds. But federal law enforcers could do much more with additional resources, he said, pointing to the Justice Department’s successes in the wake of the savings-and-loan crisis of the 1980s. At the time, 1,000 agents and forensic investigators and dozens of federal prosecutors were devoted to the effort, which produced more than 600 convictions and $130 million in restitution. Compared to the $160 million lost during the S&L crisis, the current situation is far more dire, with financial institutions globally reducing their assets by more than $1 trillion.  But the Justice Department’s focus on national security has diminished the fraud ranks.

Pistole said 240 agents, supplemented by investigators from other agencies, are working on fraud cases stemming from the economic crisis. Rita Glavin, acting head of the Justice Department’s Criminal Division, said the department was in discussions with Barofsky about how best to handle criminal referrals and prosecutions when his office uncovers wrongdoing. She also said the Justice Department’s fraud section had created a mortgage fraud working group, with a collection of other enforcement agencies. Sen. Sheldon Whitehouse, D-R.I., asked Glavin whether DOJ had any designs for a nationwide mortgage fraud taskforce. Then-Attorney General Michael Mukasey repeatedly rejected the idea, saying individual U.S. Attorneys’ Offices were better equipped to handle the work. Glavin said the department was studying the issue. “No decision has been made with respect to that,” she said.

Welcome to 2009: the year of the regulator

British businesses will have to navigate a “regulatory minefield” in 2009 as global law enforcement agencies and regulators step up activity in response to the economic downturn, leading lawyers warn.

Neil Gerrard, head of the regulatory and litigation practice at DLA Piper, said: “I have no hesitation in calling the developing situation a regulatory minefield – and this is not an exaggeration. We are operating in an unprecedented time of financial pressures and market volatility and the authorities are more determined than ever that everyone will play by the rules.”

Mr Gerrard’s comments, which are echoed across the legal industry, follow an intense burst of regulatory activity in 2008. Last year saw the Financial Services Authority (FSA) launch its maiden criminal prosecutions for insider dealing and forging documents as well as tens of civil cases for market abuse and other offences. It also saw the Office of Fair Trading (OFT) launch its first criminal price-fixing prosecutions and levy record fines on businesses for breaking competition rules. Elsewhere the Serious Fraud Office (SFO), HM Revenue and Customs and the Health and Safety Executive all announced major investigations against British businesses and individuals.

Robert Wardle, former director of the SFO and a consultant at DLA Piper, said the aftermath of the credit crunch would create a particular focus: “We live in a fast changing world and have witnessed drastic and irreversible changes to our financial sector this year with the effects due to continue well into the new year and into the next decade,” he said.

“In the UK, the SFO has already announced a 50 per cent increase in investigations planned for 2009, whilst the FSA and City of London Police are keen to show that London is no soft touch on regulatory enforcement,” Mr Wardle added.

Although experts are divided over whether there is an increase in the actual level of corporate crime committed during an economic downturn, they are united in the belief that the level of such crime which is discovered always surges when times are tough. “When credit dries up and management changes, fraud comes to light,” Mr Wardle said, “There will be lots of material for regulators to look at it in 2009.”

As well as having more material to investigate, regulators and prosecutors will have the benefit of new tools to help pursue wrongdoing. In particular, Mr Wardle points out that the current recession is the first for which the Fraud Act 2006 will be in effect. In addition to simplifying the offence of fraud, the act also criminalises new practices such as making false representations and failing to disclose information, making it easier to prosecute behaviour that previously slipped outside the definition of fraud.

For more see timesonline.com.

‘Silo’ Thinking Let Us Down — Actions that made sense in isolation guaranteed a financial crisis when added together

By Stefan Szymanski

Abraham Lincoln once said, “I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts.” Business schools set out to prepare people to manage by telling them the truth about business, so does the present crisis prove that they have failed us?

As with bankers, this is a time for business school professors to show some humility. What most business schools do best is teach disciplines, such as accounting, finance, strategy, organizational behavior, and human resource management. Strengths vary, and employers have been adept at tapping into the richest veins buried in the leading schools. Thus there is a very real sense in which the best business school thinking in finance ended up being implemented in the most creative banks, that the best business school thinking in strategy ended up being sold by consultants to the world’s leading corporations, that the best business school thinking in organizational behavior and human resource management ended up being applied to the recruitment and performance management of employees at the highest levels.

This thinking let us down. The current economic crisis is a crisis of financial analysis, a crisis of strategic thinking, and a crisis of employee management. Bankers and dealers sold products whose risks they either did not understand or did not care for; their senior managers approved strategic plans neither understanding nor caring about the risks that were being run, and the whole show was underpinned by incentive management schemes that made no sense in anything other than the very short term. These actions made sense taken in isolation, but when added together they more or less guaranteed a crisis. In other words, the coordination failure of the banks reflects a coordination failure inside business schools, a “silo” mentality in which the value of specifics with strictly limited applicability outweighs the value of a broader wisdom.

For more see businessweek.com.

Securities and Exchange Commission v. Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC (S.D.N.Y. Civ. 08 CV 10791 (LLS)) SEC Obtains Preliminary Injunction, Asset Freeze, and Other Relief Against Defendants

The United States Securities and Exchange Commission announced that on December 18, 2008, the Honorable Judge Louis L. Stanton, a federal judge in the Southern District of New York, entered a preliminary injunction order, by consent, against Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC (“BMIS”).

The preliminary injunction continues to restrain Madoff and BMIS from violating certain antifraud provisions of the federal securities laws. Also, by consent, Judge Stanton ordered that assets remain frozen until further notice, continued the appointment of a receiver for two entities owned or controlled by Madoff in the United Kingdom (while defendant BMIS remains subject to oversight by a SIPC trustee), and granted other relief. The preliminary injunction order continues the relief originally obtained on December 12, 2008, in response to the Commission’s application for emergency preliminary relief that sought a temporary restraining order, an order freezing assets, and other relief against Madoff and BMIS based on his alleged violations of the federal securities laws.

The SEC’s complaint, filed on December 11, 2008, in federal court in Manhattan, alleges that the defendants have committed a $50 billion fraud and violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act of 1940. The complaint alleges that Madoff last week informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was “finished,” that he had “absolutely nothing,” that “it’s all just one big lie,” and that it was “basically, a giant Ponzi scheme.” The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.

The Commission continues to seek, among other things, a permanent injunction, disgorgement of ill-gotten gains plus pre-judgment interest, and civil money penalties.

SEC Files Settled Foreign Corrupt Practices Act Charges Against Siemens AG for Engaging in Worldwide Bribery With Total Disgorgement and Criminal Fines of Over $1.6 Billion

The Securities and Exchange Commission filed a settled enforcement action on December 12, 2008, in the U.S. District Court for the District of Columbia charging Siemens Aktiengesellschaft (“Siemens”), a Munich, Germany-based manufacturer of industrial and consumer products, with violations of the anti-bribery, books and records, and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”). Siemens has offered to pay a total of $1.6 billion in disgorgement and fines, which is the largest amount a company has ever paid to resolve corruption-related charges. Siemens has agreed to pay $350 million in disgorgement to the SEC. In related actions, Siemens will pay a $450 million criminal fine to the U.S. Department of Justice and a fine of €395 million (approximately $569 million) to the Office of the Prosecutor General in Munich, Germany. Siemens previously paid a fine of €201 million (approximately $285 million) to the Munich Prosecutor in October 2007.

The SEC’s complaint alleges that:

Between March 12, 2001 and September 30, 2007, Siemens violated the FCPA by engaging in a widespread and systematic practice of paying bribes to foreign government officials to obtain business. Siemens created elaborate payment schemes to conceal the nature of its corrupt payments, and the company’s inadequate internal controls allowed the conduct to flourish. The misconduct involved employees at all levels, including former senior management, and revealed a corporate culture long at odds with the FCPA.

For more see SEC.gov.

SEC Files Settled Books and Records and Internal Controls Charges Against Fiat S.p.A. and CNH Global N.V. For Improper Payments to Iraq Under the U.N. Oil for Food Program — Fiat Agrees to Pay Over $10 Million in Disgorgement, Interest, and Penalties

The Securities and Exchange Commission filed Foreign Corrupt Practices Act books and records and internal controls charges against Fiat S.p.A. and CNH Global N.V. in the U.S. District Court for the District of Columbia. Fiat S.p.A., an Italian company, provides automobiles, trucks and commercial vehicles. CNH Global N.V., a majority-owned subsidiary of Fiat, provides agricultural and construction equipment. The Commission’s complaint alleges that from 2000 through 2003, certain Fiat and CNH Global subsidiaries made approximately $4.3 million in kickback payments in connection with their sales of humanitarian goods to Iraq under the United Nations Oil for Food Program (the “Program”). The kickbacks were characterized as “after sales service fees” (“ASSFs”), but no bona fide services were performed. The Program was intended to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions. The Program required the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The kickbacks paid by Fiat’s and CNH Global’s subsidiaries diverted funds out of the escrow account and into Iraqi-controlled accounts at banks in countries such as Jordan.

According to the Commission’s Complaint:

During the Oil for Food Program, Fiat’s subsidiary, IVECO S.p.A., used its IVECO Egypt office to enter into four direct contracts with Iraqi ministries in which $1,803,880 in kickbacks were made on the sales of commercial vehicles and parts. After agreeing to pay the ASSFs, IVECO Egypt increased its agent’s commissions from five percent to between fifteen and twenty percent of the total U.N. contract price, which the agent funneled to Iraq as kickbacks. The agent submitted invoices for the inflated commissions, and IVECO financial documents show line items for “contract pay-back” due to the agent. IVECO and the agent secretly inflated the U.N. contracts by ten to fifteen percent. Despite the agent’s invoices being held for one year and the unusually large commissions, IVECO paid the invoices. In one instance, IVECO set up a bank guarantee in the amount of the ASSF in favor of a Dubai-based firm that operated as a front company for Iraq. IVECO’s bank guarantee was canceled and, instead, the agent established an identical bank guarantee to conceal IVECO’s role. A line item identified as “pay-back” on IVECO documents corresponded to the amount of the agent’s bank guarantee. The ASSFs were incorrectly recorded as legitimate commissions on the company’s books and records.

For more see SEC.gov.