CCC’s: It Is Time For An Antitrust Whistleblower Statute–Part 2

Objections to an Antitrust Whistleblower Statute

The idea of an antitrust whistleblower is not new, but it has never gained much traction in the past.  There have been significant objections, or at least disinterest—particularly from the Department of Justice.  The mood seemed to be “Our cup runneth over with Amnesty applications so let’s not screw this thing up.”  But, perhaps times have changed.  Our analysis is that the objections to a whistleblower statute were either superficial, or when having merit, still not enough to outweigh the benefits of a whistleblower statute.

Before considering some of the possible downside to an antitrust whistleblower statute, a little explanation of what we have in mind may be helpful.  We propose an SEC-style whistleblower statue where an informant can be awarded a level of compensation (bounty) when information of illegality leads to charges and recovery by the SEC. This is different than a False Claims Act qui tam case where a Relator brings a case in the name of the government alleging the government has been defrauded.  In fact, an antitrust whistleblower statute is needed because a qui tam case is not generally available in price-fixing matters since it is the private sector, not the government that has been harmed.

Concerns About an Antitrust Whistleblower statute

 It’s worth noting that the Criminal Antitrust Anti-Retaliation Act has been passed twice unanimously by the Senate in the last two Congresses and is up for vote again on the Senate floor.  It will no doubt pass—most likely again unanimously.  There is agreement that a person who reports criminal antitrust activity should not face retaliation in the workplace. (Despite the consensus, the House has failed to take up this bill the last two times it has passed the Senate).  There is controversy, however, about whether a whistleblower should be eligible for some type of bounty if the information leads to successful cartel prosecution and the imposition of fines.

In 2011, the General Accounting Office Published a report on Criminal Cartel Enforcement that reported stakeholders’ views on a possible antitrust whistleblower statute (here).  This is a summary of the GAO findings:

There was no consensus among key stakeholders GAO interviewed–antitrust plaintiffs’ and defense attorneys, among others–regarding the addition of a whistleblower reward, but they widely supported adding antiretaliatory protection. Nine of 21 key stakeholders stated that adding a whistleblower reward in the form of a bounty could result in greater cartel detection and deterrence, but 11 of 21 noted that such rewards could hinder DOJ’s enforcement program. Currently, whistleblowers who report criminal antitrust violations lack a civil remedy if they experience retaliation, such as being fired, so they may be hesitant to report criminal wrongdoing, and past reported cases suggest retaliation occurs in this type of situation. All 16 key stakeholders who had a position on the issue generally supported the addition of a civil whistleblower protection though senior DOJ Antitrust Division officials stated that they neither support nor oppose the idea.

The GAO report is several years old and it may be that positions have been reevaluated.  For example, I think the Antitrust Division today would support the anti-retaliation measures in whistleblower statute.  But below is an analysis of some of the objections raised to making a bounty available to an antitrust whistleblower.

Whistleblower Credibility

 The Antitrust Division’s principal concern was that jurors may not believe a witness who stands to benefit financially from successful enforcement action against those he implicated.  GAO Report p. 39.  But, a whistleblower is highly unlikely to ever be a principle witness at a trial.  An antitrust crime typically involves many culpable actors.  A whistleblower would generally “get the ball rolling” and provide evidence that will turn other witnesses, and allow subpoenas and search warrants from target companies.  Further, a single whistleblower who might receive a financial reward seems no less credible than witnesses from an amnesty company where everyone—including the highest-ranking culpable executives—will have escaped criminal prosecution.  Also, criminal antitrust trials are relatively rare—almost all cases are resolved by pleas.  Finally, it is not logical to worry about the credibility of a witness you would otherwise not even know about absent a whistleblower statute.

A Whistleblower Reward Could Result in Claims That Do Not Lead to Criminal Prosecution: 

 There was some fear expressed in the GAO report that would-be whistleblowers would fabricate information in order to conjure up a cartel in the hopes of collecting a reward.  GAO Report p. 40.  Anything is possible, but the Antitrust Division folks are pretty savvy and have standards for opening grand jury investigations.  Moreover, the possibility of fabricated charges exists today with a company applying for leniency in the hopes of knee-capping competitors who would have to deal with a criminal cartel investigation.  The reality is a “false accusation” simply wouldn’t be corroborated by anyone else and could land the accuser in jail for making a false statement.

In a similar vane, concern was expressed that a whistleblower statute may result in a deluge of complaints to the Antitrust Division that would take additional resources to sift through.  This seems like a good problem to have.  When Ms. Justice and I were at the Division, we received a fair number of complaints that amounted to no more than oligopoly pricing.  It did not take too much time to ask: “What else ya got?”

* * * * * Click Here for the Rest of the Story * * * * *

Buyer Beware

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by Janet Labuda

After the 2009 special enforcement initiative, called Operation Mirage, CBP compiled statistical data proved that the undervaluation of imported goods from China had risen to the level of significant risk in some product categories. Supported by the Administration’s direction to level the trade playing field, addressing undervaluation will continue to be part of CBP’s comprehensive trade enforcement strategy.

While working for CBP, an in-house counsel remarked that you would know you are on the right enforcement track when case law supports your theory of risk.

An example of this observation recently surfaced. In a press release dated October 3, Immigration and Customs Enforcement reported that, as alleged in a False Claims Act complaint, a company called Notations, acting as a wholesaler, repeatedly ignored warning signs that its business partner, which imported garments from China, was engaged in a scheme to underpay customs duties on the imported garments it sold to Notations.  Pursuant to the settlement, Notations admitted and accepted responsibility for failing to act in response to indications of fraudulent conduct. The company agreed to pay $1 million in damages, and implement measures designed to prevent future fraud in its business and supply chain operations.

The importer of women’s apparel manufactured in China presented false and fraudulent invoices to CBP, showing prices that were discounted by 75 percent, or more, to avoid customs duties. The wholesaler, Notations, which was the importer’s biggest customer, admitted that it aided this scheme by repeatedly ignoring warning signs that the importer’s irregular business practices were highly suggestive of fraud.

Notations has also agreed to implement a written compliance policy that will include measures to educate its employees on identifying red flags for fraud in import transactions, to monitor the conduct of its business partners who act as importers, and to report all potentially fraudulent conduct to CBP.

To be noted in this example, the court was successful in pursuing a case against a company that was not the importer of record, and that is in a foreign location.
This should be a warning to all companies. It is recommended that your written compliance plan include steps to monitor the players in your supply chain.   If your suppliers are buying overseas, your procurement team needs to remember that caveat emptor can save them a world of trouble.

Connecticut Just Banned Civil Forfeiture Without A Criminal Conviction

Institute For Justice “We are the national law firm for liberty.”
Nick Sibilla, Contributor

Connecticut Gov. Dannel Malloy signed HB 7146 on Monday, which curbs the state’s civil forfeiture laws. Not only did the bill earn endorsements from the Yankee Institute for the Public Policy and the state chapter of the ACLU, HB 7146 even passed both the House and the Senate without a single no vote.

Under the new law, in order to permanently confiscate property with civil forfeiture, the property must be first seized in connection to either a lawful arrest or a lawful search that results in an arrest. If prosecutors do not secure a guilty verdict, a plea bargain or a dismissal from finishing a pretrial diversion program, the government must return the property to its rightful owner. With the stroke of a pen, Connecticut now becomes the 14th state to require a criminal conviction for most or all forfeiture cases.

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Click Here for Forbes article 

CCC: Some Comments from Brent Snyder, former Antitrust Division Criminal Deputy, as he Heads to the Hong Kong Competition Commission

Some Comments from Brent Snyder, former Antitrust Division Criminal Deputy, as he Heads to the Hong Kong Competition Commission

If you ever wanted to sell a student on pursuing a career in antitrust because of the interesting possibilities, Brent Snyder’s career (which is far from over) would be a good case in point.  Mr. Snyder graduated with Honors from the University of Texas School of Law, where he was an Associate Editor of the Texas Law Review. After completing a federal judicial clerkship, he began practicing as a private commercial litigator and in 2001 became a partner at Perkins Coie, a large Seattle law firm.  Mr. Snyder joined the Antitrust Division United States Department of Justice in 2003.   In June 2017 Mr. Snyder stepped down from the Antitrust Division and will be heading to Hong Kong.  On June 19, 2017, the Hong Kong Competition Commission announced the appointment of Mr. Snyder as its next Chief Executive Officer (CEO) for a term of three years commencing 4 September 2017 (here).

Mr. Snyder had a remarkably successful career with Antitrust Division.  He started in 2003 as a trial attorney.  He was involved, both as a trial attorney and as a supervisor, in many successful cartel investigations and prosecutions.  He was part of the team that conducted the TFT-LCD international cartel investigation, which culminated in a conviction and a $500 million fine against AU Optronics.  Several AUO executives were also convicted and sentenced to lengthy prison terms.  From 2013 until his departure, Mr. Snyder served as the Deputy Assistant Attorney General for Criminal Enforcement overseeing all of the Division’s criminal investigations, prosecutions, leniency and other policy work.

Mr. Snyder is known to his friends as someone whose career has always focused on positions that would be interesting, provide new challenges and allow him to make a meaningful contribution.  On these scores, his going to Hong Kong is not surprising.  Hong Kong has a relatively new but robust competition enforcement regime. Full enforcement of the Hong Kong Competition Ordinance began only a little over 18 months ago and the Competition Commission has had positive results already.  Some of these results are outlined in the Commission’s March 2017 newsletter, “Competition Matters.”  The Competition Commission also has a very helpful website.

The Hong Kong Competition Commission has been very innovative during its short history.  The Commission created an educational video on “Fighting Bid Rigging Cartels,” which can be viewed here on You Tube.  The Commission’s “Fighting Bid-rigging Cartels” Campaign was named a winner in the category “Engaging through results: Successful experience in planning, implementing and monitoring advocacy strategies” in the Competition Advocacy Contest organised by the International Competition Network (ICN) and the World Bank Group (here).

Mr. Snyder will bring a great deal of valuable experience and perspective to the Hong Kong Competition Commission. Before heading off to Hong Kong, Mr. Snyder kindly agreed to answer a few questions about his experiences to date.

Q.     Can you talk about an experience you had in the Antitrust Division that might be your fondest memory?

First, thank you for the opportunity to contribute to Cartel Capers!  Your blog has been a great and influential addition to the antitrust landscape and facilitates discussion and thinking on important topics in our field. I appreciate your interest and am happy to answer your questions.

I suppose I should have an easy answer to this question, but it is hard to pick from so many great experiences over the years.  Anyone who has worked in the Division understands what a special place it is and the exciting things its attorneys get to do.

Running through the Honolulu airport to serve a grand jury subpoena on someone trying to hightail it out of the country, the excitement of trial wins, a karaoke celebration party with the AUO team, kayaking on a bio-luminescent bay in Puerto Rico with the Peake trial team, any number of memorable drop-in interviews, planning a successful undercover operation, and, most recently, a surprise farewell party complete with a hula dancer, ukulele player and Aloha-attired Division friends (people seem to think I have a thing for Aloha shirts for some reason 😉) all come to mind.

They all have one thing in common — that I was fortunate to be part of great teams. I can’t separate any memory from the fantastic people with whom I shared the experiences and accomplishments. Experiencing those things with people I like and respect are my fondest memories. I was just so fortunate to work for and with talented, hardworking, dedicated public servants who also are fun and have a great sense of humor (and/or high tolerance for mine). Anyone who knows me knows that I value that last part especially highly!

Q.     You’ve had several different positions in the Division, starting out as a trial attorney, rising to Criminal Deputy and even being Acting Assistant Attorney General for a time.  For the trial staff, what do you think are the biggest challenges they face today in cartel enforcement?

It is a great time to be a Trial Attorney because the Division has a number of really exciting investigations and plenty of cases going to trial.  But, as always, there are challenges.  I think some of the significant ones are:

  • Keeping up with the work, especially while the Division has so many cases in litigation, which pulls resources away from investigations;
  • The complexity of several of the schemes and industries under investigation, such as LIBOR and the foreign exchange spot market;
  • Coordinating and harmonizing investigations with an increasingly greater number and variety of enforcement and regulatory agencies, especially non-competition enforcement agencies; and
  • Keeping up with ever evolving technologies that cartelists are using to communicate and that are difficult to detect and penetrate.

I have been proud to see the Division’s attorneys overcome every challenge with determination and dedication and fully expect them to have a continued track record of great success in the future.

Q.     Overall, what do you think is the biggest challenge facing the Antitrust Division in its primary mission of cartel enforcement?

You raise one of them below — keeping the incentive strong to seek  leniency.

Another challenge is that the Division has lost many of its most experienced attorneys through retirements, office closures, and other attrition over the past several years.  Although the Division was able to hire a large number of exceptionally talented attorneys, the lost experience cannot immediately be replicated. The good news is that this challenge should be short term in nature. Recent trials and investigations have provided opportunities for the new attorneys to get tremendous experience, and the Division is on its way to having a really deep pool of accomplished prosecutors to go along with a skilled group of managers.

Finally, as I mentioned above, there is a much more crowded enforcement landscape today than there was even a few years ago. I am referring less to the emergence of new competition enforcers than to investigations involving a greater number and variety of other domestic and foreign enforcement agencies and regulators.  This results in greater harmonization challenges, and these investigations no doubt complicate the leniency calculus for companies that may face non-antitrust exposure from those regulators and enforcers for the same or related conduct.

Q.     Is there any one area of international enforcement harmonization or cooperation you’d hope to see improvement in among the world’s cartel enforcement agencies?

I think the quality and quantity of international cooperation is better than it has ever been. The Antitrust Division now routinely communicates and coordinates with enforcement agencies that it had little or no interaction with just a few years ago. I think this is testament to the rate at which agencies around the world are maturing and becoming involved in international investigations.

If there is one area that I would like to see improved, it would be in the area of witness interviews. As I have said at other times, I think enforcers can do a better and more efficient job of coordinating the timing of and approach to witness interviews among enforcement agencies. This would not only benefit our investigations but also be more cost effective and efficient for the witnesses and cooperating companies.

Q.     Do you think “leniency” has lost some of its appeal to potential cooperators? If so, can/should anything be done about that?

I don’t think leniency has lost its appeal. For a company confronted with exposure to a cartel offense and the resulting large fines, civil liability, and incarceration for executives, it is still a great opportunity.  And, I believe that companies and their counsel still see it as one.

But, as I mentioned above, the decision to seek leniency is undoubtedly more complicated than it has ever been as a result not only of the proliferation of competition enforcement agencies but also the more frequent involvement of other types of enforcement agencies and regulators in parallel investigations of the same conduct.  The proliferation of enforcement agencies increases the potential cost and burden of seeking leniency, and the involvement of other enforcement agencies and regulators increases the risk of liability not covered by leniency.

I think the expense and burden of multi-jurisdictional cartel investigations can be addressed through greater coordination and efficiency enhancements among competition enforcement agencies. I think that harmonizing leniency with non-competition enforcement agencies and regulators presents greater challenges, but I believe it will become easier as they have more experience with leniency and see its results.  I saw improvements in this area during my years as DAAG.

Finally, the best way to make leniency attractive is to prove you can and will detect and prosecute cartels even without a leniency applicant. The Antitrust Division has an excellent track record of doing so, and cartelists who choose not to seek leniency face a real risk of detection and prosecution.

Q.     As mentioned above with “Fighting Bid Rigging Cartels” video the Hong Kong Competition Commission has been innovative and active in public outreach.  Do you think that kind of outreach can be duplicated in the United States?

I have been really impressed by innovative public outreach efforts in other jurisdictions, such as Hong Kong, and have often wondered if they can be replicated here. Unfortunately, I am doubtful that they can be replicated here because the U.S. is so large and the channels for communicating to the general population are diffuse or prohibitively expensive.

Nonetheless, the Antitrust Division has prioritized making public outreach more systematic and diverse than in the past. I don’t think we’ll see any national ad campaigns or public service announcements from the Division, but I do think it will be finding ways to get in front of a greater number of groups and constituents than in the past.

I think this outreach is very important not only from the perspective of developing investigative leads but also to educate the public regarding the illegality of cartel offenses.  In 2015, Prof. Andreas Stephan of the University of East Anglia published an interesting survey of public attitudes to price fixing in the UK, Germany, Italy, and the U.S. which showed that the U.S. lags behind the other jurisdictions in knowledge that cartel conduct is illegal.  Outreach can certainly help with this.

Q.     You no doubt had many possible very lucrative opportunities upon leaving the Department of Justice.  Why did you chose to go to work with the Hong Kong Competition Commission? 

I thought it was an incredible and interesting opportunity to go from one of the most established and experienced agencies in the world to one of the newest. You’ve already noted that the Hong Kong Competition Commission has shown itself to be innovative and thoughtful during its relatively short existence. I am excited to get to contribute to what Stanley Wong, Rose Webb, and others have already begun to build there and hope to make good use of my experience at the Antitrust Division.

It should come as no surprise that I think the Antitrust Division is the finest competition enforcement agency in the world, but I jokingly told Acting Assistant Attorney General Andrew Finch that we’re going to try to knock them back to second best. 😀

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Thanks Brent.  Best of luck in the new position in Hong Kong!

3C’s Recommended Amicus Brief on Section One Summary Judgment Standard

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Here is a link to a brief filed by a number of professors asking the Supreme Court to clarify the standard to be applied by districts courts to a defendant’s motion for summary judgment in a Section One antitrust case,  evergreen – petition for certiorari – amicus brief – filed copy – 4.21.17 – evergreen partnering group v. pactiv corp.  The petition notes:

“[C]ircuit courts are mired in an abiding difference of opinion concerning the appropriate interpretation of the summary judgment paradigm in cases brought under Section 1 of the Sherman Act as applied to circumstantial evidence.”

The professors are going to bat for plaintiff Evergreen, which had its group boycott claimed dismissed on summary judgment. The amicus brief argues that the First Circuit incorrectly applied the Matsushita standard that requires the plaintiff to produce evidence that “tends to exclude the possibility of independent conduct.” The brief goes on to argue say this strict standard should only be applied where the defendants’ conduct is arguably pro-competitive (like the price cutting in Matsushita). In this case, the brief argues, the correct standard, is found in Eastman Kodak Industry Co. v. Image Technical Services Inc.,: whether the plaintiff has produced evidence that the defendants’ conduct is unreasonable.

From the brief:

The Second, Third, Fifth, Sixth, Seventh, Ninth, and Tenth Circuits “have narrowed the application of Matsushita’s “tends to exclude the possibility of independent conduct” test to situations where the plaintiff ’s theory: (1) is implausible; and (2) challenges pro-competitive conduct….The First, Fourth, Eighth, and Eleventh Circuits, however, do not interpret Kodak as a limitation on Matsushita’s “tends to exclude” test. These courts universally apply the test to all motions seeking entry of summary judgment on a conspiracy claim under Section 1, regardless of whether plaintiff’s theory makes economic sense or there is little or no risk of chilling pro-competitive behavior.”

The brief notes that Judge Posner has been critical of the Matsushita “tends to exclude the possibility of independent conduct” standard for requiring the plaintiffs to disprove the defendants’ case with a “sweeping negative.” Richard Posner, Antitrust Law, 100 (2d ed. 2001).  The brief also quotes a Judge Posner opinion:

“That would imply that the plaintiff in an antitrust case must prove a violation of the antitrust laws not by a preponderance of the evidence, not even by proof beyond a reasonable doubt (as indeed is required in criminal antitrust cases), but to a 100 percent certainty, since any lesser degree of certitude would leave a possibility that the defendant was innocent.”

In re Brand Name Prescription Drugs Antitrust Litig., 186 F.3d 781, 787 (7th Cir. 1999) (Posner, C.J.).

The brief concludes:

“In sum, the decision below illustrates and intensifies confusion among the lower courts about the Matsushita standard for Section 1 antitrust claims at summary judgment. The question is critical; private enforcement is essential to maintaining the correct balance between under and over deterrence to foster healthy competition. But when it comes to Matsushita, inconsistency in its application is now the rule, rather than the exception. For these reasons, the Court should clarify the standard, resolve the circuit split, and emphasize that the correct interplay between Matsushita and Kodak properly limits the “tends to exclude” summary judgment standard to cases where the alleged conspiracy is economically irrational and the conduct is pro-competitive.”

Whichever side of the “v.” you are on [plaintiff or defendant] the brief is a useful read for the discussion of the differences among the circuits on the proper standard for summary judgment.

Evergreen is represented by Richard Wolfram  who earlier had filed a petition for certiorari with Supreme Court. A copy of the petition can be found here.

Thanks for reading.

3C’s: What She [Sally Q. Yates] Said….

What She [Sally Q. Yates] Said….

I have written often about the need to reform the Sentencing Guideline for antitrust violations.  U.S.S.G. 2R1.1. (here)(here)(here).  My major beef is that the antitrust guideline measures culpability primarily by the volume of commerce subject to the agreement, to the exclusion of many other very relevant factors.  The cartel boss who engages the firm in the illegal conduct is tagged with the same volume of commerce as the employee who is assigned the task of going to cartel meetings to work out the details.

Sally Q. Yates served in the Justice Department from 1989 to 2017 as an assistant U.S. attorney, U.S. attorney, deputy attorney general and, briefly this year, as acting attorney general.  Ms. Yates described the problem with overweighting a quantifiable factor better than I ever have, though in a slightly different context:

“But there’s a big difference between a cartel boss and a low-level courier. As the Sentencing Commission found, part of the problem with harsh mandatory-minimum laws passed a generation ago is that they use the weight of the drugs involved in the offense as a proxy for seriousness of the crime — to the exclusion of virtually all other considerations, including the dangerousness of the offender.”

Sally Yates, Making America Scared Won’t Make us Safer.  Washington Post, June 23, 2017

For the record, the issue of mandatory minimums is a far more serious issue than the problem of sentencing individual criminal antitrust offenders.  While I hope for antitrust sentencing reform, it is not really a “need.” The antitrust sentencing guidelines are so divorced from actual culpability that virtually no individual–even a cartel boss–is sentenced to a guideline range term of imprisonment.

Thanks for reading.

War Against Global Warming Creates Major Enforcement Risks to Grantees

Despite what you hear about United States withdrawal from the Paris accords and increased grant enforcement from Inspector Generals at the EPA, Department of Energy, and NASA, government and corporate action and funding continues to coalesce around this issue cluster and that is not likely to change quickly if at all, even as the U.S. government reduces its “green” footprint.

However quickly you dismiss the political fight’s effect on the ultimate outcome of the war that is currently raging between global warming advocates and global warming deniers, you should not dismiss the effects this battle has on the risk profile of current government contractors and government grantees.  In short, pushback by the current administration policy against “green” initiatives increase the perceived value of these grant fraud cases to enforcers.

Why?  Cases against grantees that received money under the last Administration’s priorities helps undermine the moral case for global warming. In fact, undermining the case for global warming through the development of “green” grant fraud cases is a smaller mountain to climb than having to disprove the so-called scientific consensus which, from their vantage point, was created through government grant funding.  While it is hard to “prove the negative” (that man-made CO2 has no effect on temperature) it is easier to show that “green” research and development was subject to fraud, waste and abuse.  Once the case is made that “green” grants involved fraud, waste and abuse, it is but a small step to establish in public opinion that the “green” technologies themselves are fraudulent.

The Trump Administration can pursue a blue print in the current struggle that was drafted by the Iraq anti-war movement that many believe adversely impacted what was then called the “War on Terror” resulting in what may be viewed as hasty withdrawal from Iraq.  In 2005-2006, media accounts began circulating about fraud, waste and abuse in the “war zone.”  In October 2006, the National Procurement Fraud Task Force was formed to marshal the efforts by agents and prosecutors.  A similar effort involving Grant Fraud has already started today.  In January 2007, there were perhaps a half-dozen “war-zone” cases filed. Within three years, there were over 100 warzone cases filed.  The vast increase spilled over into fraud generally and in 2010 there had been perhaps 700 cases filed across the Department of Justice involving procurement fraud and grant fraud.  There were probably ten to twenty times that number of inquiries, investigations, and qui tam suits filed.

Although it is impossible to factor the effect the public perceptions of fraud and corruption had on public opinion regarding the War in Iraq, no one can argue that its effect was negligible.  Here the current Administration wants to undermine resolve in continuing to fight the “War Against a Heating Planet” so prosecutors looking to advance their careers under the new Administration already have begun beating the investigative bushes to see what complainants, informers, complaints and investigations are coming into the “green” fraud enforcement pipeline.

Federal Grand Jury in Chicago Indicts Two Former Tech Executives For Allegedly Conspiring to Obstruct SEC Probe into Sale of Company

Department of Justice
U.S. Attorney’s Office
Northern District of Illinois

FOR IMMEDIATE RELEASE
Friday, June 30, 2017

CHICAGO — A federal grand jury in Chicago has indicted two former executives of a Florida technology company for allegedly conspiring to obstruct an investigation by the U.S. Securities and Exchange Commission.

CHRISTOPHER YOUNG, the former President of Tampa-based M2 Interactive Group Inc., and JOSHUA CARLUCCI, M2 Interactive’s former Chief Executive Officer, are charged with conspiracy to obstruct, influence, and impede an official proceeding. The pair allegedly conspired with executives from Schaumburg-based Quadrant 4 System Corp. to obstruct an SEC investigation into Quadrant 4’s 2013 purchase of M2 Interactive.

The indictment was returned Thursday in federal court in Chicago. In addition to the conspiracy count, Young, 35, of Norwich, N.Y., and Carlucci, 39, of Tampa, Fla., are also charged with attempting to obstruct, influence, and impede an official proceeding. Carlucci also faces a charge of making false statements to the Federal Bureau of Investigation. The Court will schedule arraignments for Young and Carlucci at a later date.

New and expanded criminal charges were also filed Thursday against the two Quadrant 4 executives, NANDU THONDAVADI and DHRU DESAI. A criminal information filed in federal court in Chicago charged them with wire fraud. Arraignments for Thondavadi, 63, of North Barrington, and Desai, 55, of Barrington, have been scheduled for July 6, 2017, at 10:00 a.m., before U.S. District Judge Charles Norgle.

The charges were announced by Joel R. Levin, Acting United States Attorney for the Northern District of Illinois; and Michael J. Anderson, Special Agent in Charge of the Chicago office of the FBI. The Chicago office of the SEC provided valuable assistance.

M2 Interactive was a technology company that developed applications for mobile devices and conducted business under the name Momentum Mobile. Quadrant 4 provides software products, platforms and consulting services to customers in the healthcare and education sectors. As a public company, Quadrant 4 is required to provide to the SEC a detailed report of its financial condition.

In 2015 the SEC launched an investigation of Quadrant 4 based on indications that the firm may have violated federal securities laws. The FBI initiated an investigation of Quadrant 4 in 2016. As set forth in the information against Thondavadi and Desai, the investigation revealed that Thondavadi and Desai engaged in a wide-ranging scheme to defraud Quadrant 4’s shareholders by misappropriating more than $3 million from the company, fraudulently inflating Quadrant 4’s revenue, and regularly concealing Quadrant 4’s liabilities. The information charges that Thondavadi and Desai certified false SEC reports, including Quadrant 4’s 2014 Form 10-K, in which the defendants fraudulently inflated Quadrant 4’s revenue by more than $4.2 million – nearly 10% of Quadrant 4’s reported income that year.

The fraud scheme also involved numerous misrepresentations related to Quadrant 4’s acquisitions, including misrepresentations about the terms of Quadrant 4’s purchase of Momentum Mobile in 2013. Quadrant 4 purchased Momentum Mobile for $100,000 in cash and 250,000 shares of Quadrant 4 stock, plus assumption of approximately $165,000 in Momentum Mobile liabilities, according to the indictment against Young and Carlucci. Federal authorities discovered that Thondavadi and Desai later concealed the true terms of the deal from Quadrant 4’s auditor and its shareholders, according to the charges. The pair furnished the auditor with a fictitious agreement that Thondavadi created, the charges state. The bogus document inflated the purchase price and failed to mention the liabilities Quadrant 4 assumed, according to the charges.

As set forth in the charges, the investigation further revealed that Thondavadi and Desai attempted to obstruct the SEC’s investigation of Quadrant 4 as it related to the Momentum Mobile acquisition. In July 2016 SEC attorneys sought to question Young and Carlucci, who were unaware of the fictitious acquisition agreement that Thondavadi created. Carlucci notified Thondavadi and Desai of the SEC’s inquiry, and the Quadrant 4 executives responded by striking a deal with Young and Carlucci to pay them cash in exchange for their agreement to send Thondavadi an e-mail falsely stating that Momentum Mobile had previously authorized the terms of the fictitious agreement, according to the charges. The defendants attempted to disguise the payments – $102,900 to Young and $60,000 to Carlucci – as “consulting” fees, the charges state.

The public is reminded that charges are not evidence of guilt. The defendants are presumed innocent and entitled to a fair trial at which the government has the burden of proving guilt beyond a reasonable doubt.

The conspiracy, obstruction and wire fraud charges are each punishable by up to 20 years in prison, while making false statements to the FBI is punishable by up to five years. If convicted, the Court must impose a reasonable sentence under federal statutes and the advisory U.S. Sentencing Guidelines.

Defense Contractor Sentenced To 30 Months In Federal Prison For $53 Million Procurement Fraud And Illegal Gratuities Scheme

Department of Justice
U.S. Attorney’s Office
District of Maryland

FOR IMMEDIATE RELEASE
Tuesday, June 27, 2017

JUNE 27, 2017

FOR IMMEDIATE RELEASE                                               Contact ELIZABETH MORSE

www.justice.gov/usao/md                                                                          at (410) 209-4885

Baltimore, Maryland – On June 27, 2017, U.S. District Judge Marvin J. Garbis sentenced Andrew Bennett, age 37, of Tampa, Florida to 30 months in prison, followed by 36 months of supervised release, for a wire fraud conspiracy and for paying illegal gratuities to a government official, in connection with the award of more than $53 million in federal government contracts. Judge Garbis also ordered Bennett to pay forfeiture and restitution in the amount of $500,000.00

 

Co-conspirator John Wilkerson, age 51, of Moultrie, Georgia was previously sentenced to five years in prison, followed by three years of supervised release. James T. Shank, who was separately charged and has pled guilty, was a Program Manager at the United States Navy’s Space and Naval Warfare (SPAWAR) Systems Center.

 

The sentence was announced by Acting United States Attorney for the District of Maryland Stephen M. Schenning; Commander of the Air Force Office of Special Investigations (OSI); Special Agent in Charge Robert Craig, Special Agent in Charge, Robert E. Craig Jr, Defense Criminal Investigative Service (DCIS), Mid-Atlantic Field Office; and U.S. Small Business Administration Acting Inspector General Mike Ware.

 

According to Bennett’s plea agreement, he was a program manager for Advanced C4 Solutions, or AC4S, from 2005 until 2011. AC4S was an information technology company headquartered in Tampa, Florida. In 2011, Bennett left AC4S and went to work for Co-conspirator Wilkerson at Superior Communications Solutions, Inc. (SCSI). According to co-conspirator Shank’s indictment, from August 28, 2006 until he retired on June 30, 2011, Shank was employed as a Program Manager at the United States Navy’s Space and Naval Warfare (SPAWAR) Systems Center. Shank worked with agencies within the Department of Defense to procure telecommunications equipment, software, and related services. According to his plea agreement, Wilkerson was a Department of Defense Account Manager for Iron Bow Technologies, LLC (Iron Bow), which provided IT consulting and other services to government and industry customers. Wilkerson was also part-owner and operated Superior Communications Solutions, Inc. (SCSI).

 

From September 2009 through August 2012 Bennett conspired with Wilkerson, to give them and the companies they worked for and/or owned an unfair competitive advantage in obtaining government contracts. Court documents state that Wilkerson offered, and Shank accepted, employment with SCSI while Shank was still a government employee and while he was taking official actions that benefited Wilkerson. In addition, Wilkerson paid Shank $86,000 in the year after Shank retired from government service, funneling the payment through two other companies in order to conceal the source of the funds.

 

According to Bennett’s plea agreement, Shank improperly shared information with Bennett and Wilkerson, and worked with them to structure the government contracts so as to give their companies an unfair advantage over other potential bidders.

 

For example, according to Bennett’s indictment, Bennett and Wilkerson developed a request for proposal (RFP) for DO27, a contract to supply labor services for an Air Force technology project, including for overall project management services, so that AC4S would win the contract. On June 10, 2010, DO27 was awarded to AC4S in the amount of $18,332,738.10. Wilkerson provided Bennett with a quote for labor for the installation of specific technology on behalf of SCSI that was less than the quote he had previously submitted on behalf of Iron Bow as their sales representative. After SCSI was selected as a subcontractor on DO27, it subcontracted with Iron Bow to provide most of the labor SCSI was supposed to provide under DO27 for the installation of the technology. Wilkerson was able to earn income from the work Iron Bow employees were doing by having SCSI act as a middleman and charging a mark-up on Iron Bow’s work. Bennett and Wilkerson then directed an SCSI employee to create false invoices supposedly documenting the hours SCSI employees spent working on DO27, which were submitted to AC4S and paid by the United States government. SCSI received $6,794,432.98 on DO27 out of the $18 million AC4S received for providing labor for the project.

 

In February 2011, Bennett left AC4S and went to work for Wilkerson at SCSI. According to the plea agreement, Bennett received a $500,000 bonus when he joined SCSI, which was paid for by profit Wilkerson had earned on the Air Force contracts.

 

By March 2011, the Air Force project was incomplete and there were numerous contract disputes related to the project. Shank was directed not to take any other action related to the project without the approval of a senior manager. Nevertheless, in April 2011, Shank accepted more than $3.7 million worth of invoices that benefited SCSI without informing the senior manager. In May, 2011, after Shank accepted employment with SCSI, but was still working for SPAWAR, he allegedly approved more than $1.1 million worth of invoices that benefitted SCSI and Wilkerson.

 

The National Procurement Fraud Task Force was formed in October 2006 to promote the early detection, identification, prevention and prosecution of procurement fraud associated with the increase in government contracting activity for national security and other government programs. The Procurement Fraud Task Force includes the United States Attorneys’ Offices, the FBI, the U.S. Inspectors General community and a number of other federal law enforcement agencies. This case, as well as other cases brought by members of the Task Force, demonstrate the Department of Justice’s commitment to helping ensure the integrity of the government procurement process.

 

Acting United States Attorney Stephen M. Schenning thanked Air Force OSI, Defense Criminal Investigative Service, and the U.S. Small Business Administration Office of the Inspector General for their work in the investigation. Mr. Schenning commended Assistant U.S. Attorneys Leo J. Wise and Philip A. Selden, who are prosecuting the case.

Duke admits faked data “potentially affected” grant applications

From Retraction Watch (which makes my list of “must read” blogs):

“A former researcher at Duke University has admitted to faking data that allegedly were used to secure hundreds of millions of dollars in federal grants.

Duke has also admitted that it knew Erin Potts-Kant, a pulmonary scientist, faked data, but it’s unclear whether that was discovered prior to using those data to apply for grants, as a lawsuit alleges.

The admissions come from court documents submitted by Potts-Kant, her supervisor — former Duke researcher William Michael Foster — and Duke itself, responding to allegations in a whistleblower suit that says they defrauded the government.

Regular readers may recall that Joseph Thomas, a former colleague of Potts-Kant and Foster, has filed a False Claims Act suit against the three defendants on behalf of the U.S. government. The responses, submitted separately by the three defendants, are the latest development in what could be a landmark case for research misconduct. The lawsuit has survived motions to dismiss and is moving through the discovery process, which is likely to reveal more than the defendants have already said.

The suit claims that Potts-Kant “knew that the reported research results in question were false and/or fabricated, having generated the results herself.” To which she responded (in writing):

“Defendant admits that she has generated experiment data that was altered.”

Later on, she responded:

“to the extent she altered experiment data, she knew the altered experiment data was false.” 

In addition, Duke has admitted that it found out about the fraud when Potts-Kant told an investigative committee about it. The pulmonary division launched an investigation in 2013 after discovering the embezzlement and Duke launched a formal scientific misconduct investigation in June 2013.

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An admission that there’s falsity of data in the context of research misconduct doesn’t in and of itself create False Claims Act liability.

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