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.

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SEC Files Settled Enforcement Actions Against UnitedHealth Group Inc. and Former General Counsel in Stock Options Backdating Case

Litigation Release No. 20836 / December 22, 2008

The Securities and Exchange Commission filed a civil injunctive action against UnitedHealth Group Inc., a Minnetonka, Minnesota health insurance company, alleging that it engaged in a scheme to backdate stock options. Without admitting or denying the allegations, UnitedHealth agreed to settle to charges that it violated the reporting, books and records, and internal controls provisions of the federal securities laws.

In a separate complaint, the Commission charged former UnitedHealth General Counsel David J. Lubben with participating in the stock option backdating scheme. Without admitting or denying the allegations, Lubben consented to, among other things, an antifraud injunction, a $575,000 civil penalty, and a five-year officer and director bar.

The Commission alleges that between 1994 and 2005 UnitedHealth concealed more than $1 billion in stock option compensation by providing senior executives and other employees with “in-the-money” options while secretly backdating the grants to avoid reporting the expenses to investors.

According to the Commission’s complaint, certain UnitedHealth officers used hindsight to pick advantageous grant dates for the company’s nonqualified stock options that on many occasions coincided with, or were close to, dates of historically low annual and quarterly closing prices for UnitedHealth’s common stock. Although pricing the options below current prices required the company to report a compensation expense under well-settled accounting principles, UnitedHealth avoided reporting the charges by creating inaccurate and misleading documents indicating that the options had been granted on the earlier date. The backdated grants resulted in materially misleading disclosures, with the company overstating its net income in fiscal years 1994 through 2005 by as much as $1.526 billion.

For more see SEC.gov.

FASB Delays Lawsuit Disclosures — The board responds to companies’ distaste for its proposed rule on contingent liabilities

Sarah Johnson – CFO.com

The Financial Accounting Standards Board has changed the deadline for when companies would have been required to provide new disclosures about their contingent liabilities under a controversial proposal.

Companies with a calendar fiscal year-end had been expected to comply with the rule in mid-December. At a board meeting today, FASB pushed off that date by another year after hearing that many companies could not implement a new policy for disclosing potential lawsuit liabilities in time. Plus, the board is still sifting through the wealth of feedback from lawyers, auditors, and financial statement preparers who worry the newly shared information would reveal confidential data and turn into an undeserved boon to the plaintiffs’ bar.

In the meantime, FASB will collect even more feedback by asking companies to do sample runs of its proposal along with an alternative method that has yet to be introduced. The rule overhauls FAS 5, Accounting for Contingencies — requiring companies to disclose “specific quantitative and qualitative information” about potential lawsuit liabilities — and changes the contingent losses that companies disclose under FAS 141(R), regarding mergers and acquisitions.

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Remarks as Delivered by Deputy Attorney General Mark R. Filip at American Bar Association Securities Fraud Conference

Arlington, Virginia
Thursday, October 2, 2008 – 12:30 P.M. EDT

Good afternoon. It’s a pleasure to be here.

I’m very grateful for the chance to speak about an issue that I know is of great importance to both this group and the Department of Justice: the role of attorney-client privilege in the investigation of corporations. As you know, the Department recently made significant revisions to its policy for the investigation and prosecution of corporate crimes. The new policy addresses issues that have been of great interest to prosecutors, corporate counsel, both in-house and outside counsel, particularly in the area of cooperation between business organizations and the government. I welcome this opportunity to discuss the Department’s new policy and what it means, I think, to the legal and corporate communities.

Let me please begin with some background. For many years now, federal prosecutors have been guided by Department of Justice policy that governs how they investigate, charge, and prosecute corporate crimes. These matters are critical to the public interest, and they are a high priority for the Department. Through our investigation of corporate crime — and, where appropriate, our prosecution of corporate crime — the Department strives to protect the integrity of our Nation’s free markets, and to safeguard investors, employees, and the general public from the potentially devastating effects of corporate wrongdoing.

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E-Mail at Work: Tips to Keep You Out of Trouble

by Heidi Glenn

Ever wonder whether your boss is looking over your shoulder as you write e-mails from work? You’re not being paranoid. Companies large and small have turned to monitoring employee e-mail, looking for everything from proprietary data leaks to cyberslacking.

E-mail creates the electronic equivalent of DNA evidence, according to the ePolicy Institute, which conducted, along with the American Management Association, surveys of e-mail monitoring among U.S companies. That means your electronic paper trail can be restored and reviewed — and can also be retrieved as part of a future lawsuit’s discovery process.

Here are some suggestions on how to e-mail without worry.

Expect Zero Privacy. Employers are increasingly monitoring staff e-mails, instant messages and Internet usage. According to a 2007 American Management Association survey of 304 U.S. companies, 43 percent of employers store and review employees’ e-mail messages. Nearly 30 percent of them have fired workers for e-mail misuse — for violating company policy, for using inappropriate or offensive language, for excessive personal use, and for breach of confidentiality. So unless your company states otherwise, assume your employer is monitoring your workplace communications, including e-mails and IMs, according to Sharon Nelson, head of Sensei Enterprises, a computer forensics and data recovery company in Fairfax, Va. Nelson suggests that before you hit send, conduct this three-part test: imagine your e-mail in a major newspaper, imagine your mom reading it and imagine it winding up on a billboard along the highway. “If it passes these tests, then it’s fine,” Nelson says.

How Do They Do It? Computer monitoring takes several forms. Most employers use software to automatically monitor e-mail, but many hire staff to read and review chunks of random e-mail, the survey found. Time stamps allow employers to gauge time spent on personal e-mail. And if you’re afraid your boss may have it out for you, be careful: she could be monitoring your e-mail for when you slip up. So avoid using obscene, pornographic, sexual, harassing, discriminatory, defamatory, menacing or threatening language — anything that could make you a liability in your employer’s eyes.

Will I know? Not generally. Two states — Connecticut and Delaware — require that employers notify employees when they’re being monitored. And while an alert at log-in is a best practice for all companies, monitoring e-mail is generally unregulated. Besides, Nelson says, it’s a universal given that the computer you work on is your employer’s equipment. That has been “tested in the courts over and over again. It’s their equipment. It’s their right” to monitor. As head of Sensei, she says “I even assume I’m monitored” by Sensei’s vice president of technology.

G-Mail Is No Refuge. Employers can still recover and read Internet-based e-mail like Yahoo! Mail or Hotmail when it’s opened from a work-based computer. That’s because the e-mail is saved to your local, company-owned hard drive. For this reason, personal e-mail from your attorney opened on your company’s computer may result in waiving the attorney-client privilege.

But I Hit Delete! Computer forensics firms like Sensei can recover work e-mails that you thought you deleted. Over time, e-mail is overwritten from your work’s server, but don’t expect to know whether it’s an e-mail from five days ago or five years ago, Nelson says. She recalls a case involving three stockbrokers who claimed they did not leave with the company database when they separated from their employer.Their e-mail logs indeed said the information had been deleted just before they left, but there was also evidence that their Palm Pilots had been synced up to their computers and, sure enough, forensics discovered the database on their handheld devices.

Disclaimers Aren’t Worth a Darn. Most experts agree the sometimes ridiculously long disclaimers at the bottom of e-mails are worthless, Nelson says. “They’re rote. Nobody’s reading them.” However, she adds, a lawyer may tell you to include them on your e-mails anyway.

Avoid the AutoComplete. One of the most frequent e-mail blunders is the AutoComplete function featured in programs such as Microsoft Outlook. AutoComplete predicts the e-mail address as you type, and if you’re not careful, your message could wind up in a very different inbox than the one you intended. Case in point: the New York Times broke a story early this year that Eli Lilly and Co. was in settlement talks with the government after a lawyer associated with the company accidentally e-mailed confidential information to a Times reporter instead of to her colleague with a similar name. Either double-check that your e-mail’s recipient is who you intend, or try disabling your AutoComplete function.

Watch out for copyrighted material. You wouldn’t make photocopies of a chapter of a book and distribute them, would you? Same goes for electronic publications. So watch out before you send your co-workers and friends a magazine article that your company subscribes to. Say, for example, your company of a few hundred has only a handful of subscriptions to a magazine, but an article is distributed companywide. The publisher is losing out on all that subscription revenue, and your company could be liable. And if the publisher sued, your forwarded e-mails would be discoverable (and your company may be scanning your e-mail to head off potential copyright infringement lawsuits). Kim Jessum, an intellectual property attorney with Stradley Ronon in Philadelphia, suggests that before forwarding articles, find out what’s permissible under the contract with the publisher: Your contract may allow for printing rights, which means you can make a printout copy of the article available to staff.

Financial Firms Still Coming to Grips With E-Discovery

Despite the penalties for inadequate e-discovery capabilities, many firms still are challenged to establish effective programs.

By Melanie Rodier 

A year and a half after amendments to the Federal Rules of Civil Procedure (FRCP) ushered in critical new e-discovery obligations for parties to lawsuits in federal court, Wall Street firms still are scrambling to come to grips with the e-discovery burden.

“I would have thought corporations would have recognized and responded much more quickly to the new amendments, get their papers in order and have a litigation plan ready,” relates Hope Haslam, director of consulting services at Epiq Systems, a provider of integrated technology products and services for legal proceedings. “But that’s not happening as often as I would have hoped.”

Legal counsel, Haslam adds, can be intimidated by the technology needed to recover documents in an e-discovery case, and as such may not encourage firms to engage in the process. “There’s a possibility that they don’t want to go to their fellow executives and say, ‘We need help,'” she contends.

Following the FRCP amendments, businesses must have clear policies on data retention so that they can easily identify what data is applicable to a discovery motion. They also must address e-discovery issues — including preserving discoverable data, developing a plan for producing the data within a reasonable amount of time and determining the format in which the data will be handed over — upon the filing of a case. When a company cannot produce data subject to discovery, regulators can slap them with huge fines — as Morgan Stanley and UBS, among others, have found out in what emerged as landmark e-discovery cases in the securities industry.

Nevertheless, Haslam asserts, with the exception of publicly traded companies, many corporations don’t have adequate e-discovery procedures in place and are playing Russian roulette — they’re just hoping they won’t get sued, she says. “This is because the e-discovery requirements talk about how you don’t have to be prepared until litigation is anticipated,” Haslam explains.

Some experts say firms underestimated the impact of e-discovery regulations. “When the rules came into effect, some wondered if it was going to be another Y2K issue and much ado about nothing without any tangible results,” says John Patzakis, chief strategy officer at e-discovery vendor Guidance Software. “But this proved not to be the case.”

One of the main e-discovery problems with which firms have been grappling is skyrocketing data volumes. According to a study by The Radicati Group, in 2007 a typical corporate e-mail account was expected to generate around 4.3 gigabytes (GB) of electronic data. The number is forecast to grow to 6.7 GB per year by 2011.

One executive at a top buy-side firm on Wall Street with expertise in the area, speaking on condition of anonymity, says things are only going to get worse as people find new messaging streams. “You can’t limit the data, but you can have technology to cull data and search through it,” he says.

According to Lisa Walkush, managing director at SMART Business Advisory and Consulting, increasing data volumes make it even more critical for firms to have strong records management policies in place. “Companies really need to understand where their data resides and have really good retention policies,” she adds. “And when the record-retention time frame is up, you want to get rid of it. So someone needs to be managing record policies.”

For more see WallStreetandTech.com

That Stinks! Congressional Subcommittee Discovers Food Industry Emails on Meat Packaging, Raising New Health Issues

The controversial practice of adding carbon monoxide to meat packages took a beating Tuesday when members of Congress said federal regulators may have relied on faulty data when deciding to allow the packaging, which keeps meat red even after it has spoiled.

A congressional subcommittee Tuesday revealed e-mails from foodmakers in which workers questioned study data that lawmakers say went to government reviewers, who allowed the packaging in 2004.

In the e-mails, a Hormel employee said he was “puzzled” that the data didn’t produce a “clear correlation” between microbial counts, gas and odor in tested meats — as would be expected. He was responding to a Cargill employee who, in another e-mail, questioned why meat with more odor had microbial counts similar to less smelly meat.

For more see USA.com