Former Deputy Director of USAID Contractor Sentenced for Theft of Grant Funds

Tuesday, August 1, 2017

South African Doctor Took Over $200,000 Meant to Promote Safer Childbirth

WASHINGTON – Eugene Sickle, the former deputy executive director of a South African research institute, was sentenced today to seven months of incarceration and ordered to pay $206,250 in restitution for a scheme in which he stole grant funds originating with the U.S. Agency for International Development (USAID).

The sentencing, in the U.S. District Court for the District of Columbia, was announced by Channing D. Phillips, U.S. Attorney for the District of Columbia, and Jonathan Schofield, Special Agent in Charge for the USAID Office of Inspector General, Office of Investigations.

Sickle, 47, a chemist and a citizen of South Africa, pled guilty in May 2017 to a charge of theft concerning programs receiving federal funds. The plea, which was contingent upon the Court’s approval, called for an agreed-upon sentence of six months to 12 months and a day of incarceration. The Honorable Ketanji Brown Jackson accepted the plea today and sentenced Sickle accordingly. In addition to the restitution order, the judge issued a forfeiture money judgment of $206,250. Following his release, Sickle will be subject to deportation proceedings.

Based in Washington, D.C., USAID is a U.S. government agency that provides international development assistance and humanitarian aid worldwide. It implements and administers foreign assistance programs and funds, including those supporting global health, from dedicated offices (“missions”) around the world. USAID’s South Africa mission is one such office that works with local organizations in that country. USAID’s Office of Inspector General bases investigators in 11 countries outside the United States, including South Africa, and provides oversight of USAID programs and operations around the world.

According to a statement of offense, signed by the defendant as well as the government, Sickle was deputy executive director of the Wits Reproductive Health and HIV Institute, a South African research institute focusing on sexual and reproductive health as well as vaccine-preventable diseases. Its primary source of funding is USAID, and Sickle administered grant funds for projects. One such project involved a mobile electronic device software application, in connection with the South African National Department of Health, which would help facilitate safer childbirth deliveries in South Africa.

On Oct. 2, 2015, according to the statement of offense, Sickle and the institute’s chief executive officer signed a contract with a company called Alzar Consulting Services Ltd. to develop the childbirth app. Likewise, an individual named “Dr. Carla Das Neves” Alzar’s purported director, signed the contract. Pursuant to this contract, the institute made two payments to Alzar totaling $206,250. However, the childbirth app has never been developed.

Subsequent investigation revealed that Sickle created Alzar in the British Virgin Islands. Unbeknownst to anyone at the research institute, he was the sole owner of the company. Sickle also created e-mail accounts for Alzar and fake Alzar employees, including “Carla Das Neves.” He created a fake LinkedIn page for “Carla Das Neves,” which had a beach scene for a picture, and falsely claimed that “Carla Das Neves” was a trained expert in aid/relief work.

Sickle shepherded the research institute’s contract with Alzar through the approval and compliance process. He signed the contract both as himself and also as “Carla Das Neves.”

According to the statement of offense, Sickle did not perform any of the work required under the contract, nor did anyone else. None of the USAID money was used for its intended purpose to facilitate safer childbirth in South Africa. Instead, Sickle diverted the money to himself personally, and an associate.

Sickle resigned from his position last year. Agents with the USAID Inspector General’s Office arrested him in Washington, D.C., in February 2017. He has been in custody ever since.

This case was investigated by the U.S. Agency for International Development Office of Inspector General. It was prosecuted by Assistant U.S. Attorneys John P. Marston and Denise Simmonds and Special Assistant U.S. Attorney Vesna Harasic-Yaksic of the U.S. Attorney’s Office for the District of Columbia.

District of Columbia Woman Sentenced to 63 Months in Prison For Her Role in Scheme That Used Stolen Identities To Fraudulently Seek Tax Refunds

Thursday, July 27, 2017

Wide-Ranging Operation Filed Over 12,000 Fraudulent Tax Returns Seeking More Than $42 Million

WASHINGTON – A District of Columbia woman was sentenced today to 63 months in prison for her involvement in a scheme to fraudulently obtain millions of dollars in income tax refunds, announced U.S. Attorney Channing D. Phillips; Acting Deputy Assistant Attorney General Stuart M. Goldberg of the Justice Department’s Tax Division; Special Agent in Charge Kimberly Lappin of the Internal Revenue Service Criminal Investigation (IRS-CI) Washington D.C. Field Office; Inspector in Charge Robert B. Wemyss of the U.S. Postal Inspection Service, Washington Division, and Assistant Inspector General for Investigations John L. Phillips of the U.S. Department of the Treasury.

Tarkara Cooper, 34, was convicted by a jury on Feb. 17, 2017, for conspiring to commit theft of government funds and defraud the United States and theft of public money. Two of her co-defendants, Tony Bryant, 55, and his son, Brian Bryant, 29, both of Clinton, Md., were also convicted at trial and are awaiting sentencing.

Cooper was part of a massive sophisticated stolen identity refund fraud scheme that involved a network of more than 130 people, many of whom were receiving public assistance. Conspirators fraudulently claimed refunds for tax years 2005 through 2012, often in the names of people whose identities had been stolen, including the elderly, people in assisted living facilities, drug addicts and incarcerated prisoners. Returns were also filed in the names of, and refunds were issued to, willing participants in the scheme. The returns filed listed more than 400 “taxpayer” addresses located in the District of Columbia, Maryland and Virginia. According to court documents, the overall case involved the filing of at least 12,000 fraudulent federal income tax returns that sought at least $42 million in refunds.

Conspirators played various roles in the scheme: stealing identifying information; allowing their personal identifying information to be used; creating and mailing fraudulent federal tax returns; allowing their addresses to be used for receipt of the refund checks; cashing the refund checks; providing bank accounts into which the refund checks were deposited and forging endorsements of identity theft victims on the refund checks. The false returns typically reported inflated or fictitious income from a sole proprietorship and claimed phony dependents to generate an Earned Income Tax Credit, a refundable federal income tax credit for working families with low to moderate incomes. To date, approximately two dozen participants in this scheme have pleaded guilty.

According to the evidence presented at trial, from approximately April 2010 through June 2012, Cooper and the Bryants participated in claiming $4,959,310 in fraudulent refunds, of which the IRS paid out approximately $2,285,717. Cooper agreed to allow her residence to be used for the delivery of tax refund checks, and was paid by a co-conspirator when she provided the tax refund checks to him. The Bryants deposited refund checks fraudulently obtained by others into accounts that they controlled.

In addition to the term of prison imposed, U.S. District Judge Rosemary M. Collyer ordered Cooper to serve three years of supervised release and to pay $1,926,958 in restitution to the IRS. She also ordered a forfeiture money judgment of $16,750.

U.S. Attorney Phillips, Acting Deputy Assistant Attorney General Goldberg, Special Agent in Charge Lappin, Inspector in Charge Wemyss, and Assistant Inspector General Phillips commended the special agents who conducted the investigation and acknowledged the efforts of those who worked on the case from the U.S. Attorney’s Office of the District of Columbia, including former Assistant U.S. Attorney Sherri L. Schornstein; Assistant U.S. Attorney Chrisellen Kolb; Paralegal Specialists Jessica Mundi, Aisha Keys, and Donna Galindo; former Paralegal Specialist Julie Dailey; Litigation Technology Specialist Ron Royal; Investigative Analysts William Hamann and Zachary McMenamin, and Victim/Witness Advocate Tonya Jones. They also expressed appreciation for the work of Trial Attorneys Jeffrey B. Bender, Thomas F. Koelbl, and Jessica Moran of the Tax Division, who worked on the case.

Finally, they commended the work of Assistant U.S. Attorneys Ellen Chubin Epstein and Michelle Bradford of the District of Columbia’s Fraud and Public Corruption Section and Trial Attorney Kimberly G. Ang of the Tax Division, who prosecuted the case, as well as Assistant U.S. Attorney Diane Lucas, who assisted with forfeiture issues.

Additional information about the Tax Division’s enforcement efforts can be found on the division’s website.

District Man Sentenced to Year in Prison For Carrying Out Bank Fraud Scheme

Monday, July 17, 2017

Admitted Filing Forged Documents, Leading to Nearly $340,000 in Ill-Gotten Gains

WASHINGTON – David Tyrone Johnson, 48, of Washington, D.C., was sentenced today to a year and a day in prison on federal charges arising from a real estate scheme involving forged mortgage satisfaction documents, announced U.S. Attorney Channing D. Phillips and Andrew Vale, Assistant Director in Charge of the FBI’s Washington Field Office.

Johnson pled guilty in April 2017, in the U.S. District Court for the District of Columbia, to charges of bank fraud and making false statements. He was sentenced by the Honorable Ketanji Brown Jackson. Following his prison term, Johnson will be placed on two years of supervised release. He also must pay $337,105 in restitution to Fidelity National Title Insurance Company, as well as a forfeiture money judgment of $170,688.

According to a statement of offense submitted at the time of the guilty plea, SunTrust Mortgage, Inc. loaned a friend of Johnson’s approximately $470,000 in 2008 to purchase residential real estate in the 100 block of 57th Street SE. By 2009, the friend had failed to repay the mortgage loans, and in 2010, SunTrust Mortgage filed a notice of foreclosure with the District of Columbia’s Recorder of Deeds. In April 2013, SunTrust Mortgage began the process of foreclosing on the mortgage and taking possession of the property, due to the friend’s failure to make good and timely payments on the mortgage loans.

Sometime before Oct. 2, 2013, Johnson caused the creation of two phony and forged certificates of satisfaction, which falsely represented that the SunTrust Mortgage loans at the property on 57th Street SE had been paid and that his friend owned the property “free and clear.” According to the statement of offense, on Oct. 2, 2013, Johnson filed these two phony certificates of satisfaction with the Recorder of Deeds.

In or about December 2013, after the fake certificates of satisfaction allowed the friend to sell the property without paying the outstanding mortgages, the title and escrow company wired out the sales proceeds of $337,105, of which approximately $170,688 was obtained by Johnson.

In addition, in 2015, Johnson was required to submit a financial disclosure form to his government agency employer; however, on that form, Johnson failed to disclose the money he obtained from the sales proceeds of the property, knowing that he had obtained the money. This failure to inform his government agency employer was material or important to his employer, and one that resulted in a false statement on his financial disclosure form.

In announcing the sentence, U.S. Attorney Phillips and Assistant Director in Charge Vale expressed appreciation for the work performed by those who investigated the case and assisted in preparing it for trial from the FBI, including the Washington Field Office and the FBI Laboratory. They also acknowledged the efforts of those working on the case from the U.S. Attorney’s Office, including Paralegal Specialist Christopher Toms; former Paralegal Specialists Corinne Kleinman and Kaitlyn Krueger; Litigation Tech Specialist Ron Royal, and Assistant U.S. Attorney Thomas Swanton, who assisted with forfeiture issues. Finally, they commended the work of Assistant U.S. Attorney Virginia Cheatham, who prosecuted the case.

Two Former Employees of House Member Indicted On Federal Charges in Cyberstalking Case

Thursday, July 13, 2017

WASHINGTON – Two former staff employees of a member of the U.S. House of Representatives have been indicted following an investigation into the circulation of private, nude images and videos of the member and the member’s spouse, announced U.S. Attorney Channing D. Phillips and Matthew R. Verderosa, Chief of the United States Capitol Police.

Juan R. McCullum, 35, of Washington, D.C., was indicted by a grand jury on two counts of cyberstalking, and a co-worker, Dorene Browne-Louis, 45, of Upper Marlboro, Md., was indicted on two counts of obstruction of justice. The indictment, which was unsealed today, was returned on July 11, 2017, in the U.S. District Court for the District of Columbia.

According to the indictment, McCullum worked from April 2015 until June 2016 in the House member’s legislative office in Washington, D.C. Browne-Louis worked in the same office from January 2015 until April 2016.

The indictment alleges that, during the course of his employment, McCullum offered in March 2016 to assist the House member in repairing the member’s malfunctioning, password-protected cellular iPhone by taking the device to a local Apple store. According to the indictment, the House member provided McCullum with the device solely to have the iPhone repaired. McCullum was not given permission to take, copy, or distribute any of the contents of the iPhone. The iPhone contained the private, nude images and videos.

As alleged in the indictment, in July 2016, after McCullum left the House member’s staff, he engaged in a course of conduct that included creating a Hotmail account and a Facebook social media account, using a fictitious name, to distribute and post the private images and videos. Further, according to the indictment, he encouraged others on social media to redistribute the images and videos in the member’s congressional district. The indictment alleges that McCullum also sent text messages to Browne-Louis alerting her to his activities as early as July 2, 2016, as well as e-mail messages containing several of the images and videos.

On July 6, 2016, federal law enforcement initiated a criminal investigation into the unauthorized distribution and publication of the images and videos. The charges against Browne-Louis involve text messages from McCullum that she allegedly deleted from her cellular phone, as well as false, incomplete, and misleading statements that she allegedly made to law enforcement and a federal grand jury regarding her knowledge of the activities.

Browne-Louis made her first appearance today in the U.S. District Court for the District of Columbia. She pled not guilty to the charges and was released on personal recognizance pending a status hearing scheduled for July 19, 2017. McCullum’s first court appearance has not yet been scheduled.

The charge of cyberstalking carries a statutory maximum of five years in prison and potential financial penalties. The charge of obstruction of justice carries a statutory maximum of 20 years of incarceration and potential financial penalties.

An indictment is merely a formal charge that a defendant has committed a violation of criminal laws and every defendant is presumed innocent until, and unless, proven guilty.

This case is being investigated by the United States Capitol Police. It is being prosecuted by Assistant U.S. Attorneys Veronica Jennings and Tejpal S. Chawla of the U.S. Attorney’s Office for the District of Columbia. Assistance was provided by former Assistant U.S. Attorney Natalia Medina, Criminal Investigator John Marsh, Paralegal Specialists Bianca Evans and Matthew Ruggiero, and Litigation Technology Specialists Leif Hickling, Thomas Royal and Paul Howell, all of the U.S. Attorney’s Office.

Federal Contractors Eyak Technology LLC and Eyak Services LLC Resolve False Claims Act and Anti-Kickback Act Allegations

Alaska and Virginia-based technology contractors Eyak Technology LLC (EyakTek) and Eyak Services LLC (ESL) have agreed to pay $2.5 million and relinquish any rights to additional payments from the United States to resolve allegations that they submitted false claims to the U.S. Army Corps of Engineers, the Justice Department announced today.  EyakTek and its sister company, ESL, provide healthcare, information technology, communications and infrastructure services to the U.S. government.  Both are subsidiaries of The Eyak Corporation, headquartered in Anchorage, Alaska.

“Federal government contractors and their employees must adhere to high standards in their dealings with the government,” said Acting Assistant Attorney General Joyce R. Branda for the Justice Department’s Civil Division.  “We will vigorously pursue those who pay kickbacks or otherwise engage in conduct that undermines the integrity of the contracting process.”

From 2005 to 2011, EyakTek held a $1 billion prime contract with the U.S. Army Corps of Engineers known as the Technology for Infrastructure, Geospatial, and Environmental Requirements contract.

The government alleged that, between Sept. 12, 2007, and Oct. 4, 2011, EyakTek’s then-director of contracts, Harold Babb, accepted kickbacks from several subcontractors of EyakTek and ESL in return for using his position to direct subcontracts to them.  EyakTek and ESL allegedly submitted invoices to the Army Corps that included charges for work that was never performed by the subcontractors and lacked internal controls to detect the improper charges.

In March 2012, Babb pleaded guilty to bribery and kickback charges.  The U.S. District Court for the District of Columbia sentenced him to serve 87 months in prison, to be followed by 36 months of supervised release and more than $9 million in restitution for his role in the kickback scheme.

The Army Corps stopped payments to EyakTek and ESL when the alleged scheme came to light.  As part of the settlement, EyakTek and ESL will withdraw any appeals seeking the return of those funds, and relinquish all rights to any payments that have been withheld.

“This settlement demonstrates our willingness to use every tool of civil and criminal law in our arsenal to defend the American taxpayer from corruption in contracting,” said U.S. Attorney Ronald C. Machen Jr. for the District of Columbia.  “The criminal investigation into this wide-ranging bribery and kickback scheme has now resulted in the convictions of 20 individuals, including EyakTek’s former contracts director.  We have aggressively pursued asset forfeitures in the criminal proceedings to make the taxpayer whole and to deprive wrongdoers of their ill-gotten gains.  This civil settlement sends a message to contractors who try to cheat in the competition for government funds.”

“This is yet another prime example of our commitment, along with other fellow law enforcement agencies to hold people and companies accountable for each and every detail of their contracts with the U.S. government and the U.S. Army,” said Director Frank Robey of the U.S. Army Criminal Investigation Command’s Major Procurement Fraud Unit.  “Our agents will continue to aggressively investigate and identify any potential abuses that arise in regard to the contracting process.”

“Manipulations of the Department of Defense procurement process will not be tolerated,” said Special Agent in Charge Robert Craig for the Defense Criminal Investigative Service (DCIS) Mid-Atlantic Field Office.  “Today’s settlement demonstrates the commitment by DCIS and its partner agencies to hold accountable companies who attempt to bypass federal contracting laws.”

Today’s settlement is the result of a coordinated effort among the department’s Civil Division, the U.S. Attorney’s Office for the District of Columbia, the U.S. Army Corps of Engineers, DCIS, the Defense Contract Audit Agency, the Army’s Major Procurement Fraud Unit and the Small Business Administration.

The claims settled by this agreement are allegations only, and there has been no determination of liability.

Washington Gas Energy Systems Agrees to Pay $2.5 Million in Fines and Penalties for Conspiring to Obtain Federal Contracts

Washington Gas Energy Systems (WGESystems) has agreed to pay more than $2.5 million in fines and monetary penalties for conspiring to commit fraud on the United States by illegally obtaining contracts that were meant for small, disadvantaged businesses.

The court agreement was announced today by William J. Baer, Assistant Attorney General of the Antitrust Division; Principal Assistant U.S. Attorney Vincent H. Cohen Jr. of the U.S. Attorney’s Office for the District of Columbia; Robert C. Erickson, Acting Inspector General of the U.S. General Services Administration (GSA); Peggy E. Gustafson, Inspector General for the Small Business Administration (SBA), and Andrew G. McCabe, Assistant Director in Charge of the FBI’s Washington Field Office.

WGESystems, based in Virginia, is a wholly owned subsidiary of WGL Holdings Inc. (WGL).  WGL is the parent company for all of the corporations within the Washington Gas family.  WGESystems plays no direct role in the delivery of natural gas, and it is not a utility.  It is a design-build firm that specializes in providing energy efficiency and sustainability solutions to clients.

A criminal information was filed today in the U.S. District Court for the District of Columbia charging WGESystems with one count of knowingly and willfully conspiring to commit major fraud on the United States.  WGESystems waived the requirement of being charged by way of federal indictment, agreed to the filing of the information, and has accepted responsibility for its criminal conduct and that of its employees.

In addition, as part of a deferred prosecution agreement reached with the U.S. Attorney’s Office for the District of Columbia and the Antitrust Division, WGESystems agreed to pay a fine of $1,560,000 and a monetary penalty of $1,027,261 within five days of the approval of the agreement by the court.

According to court documents filed today, WGESystems conspired with a company that was eligible to receive federal government contracts set aside for small, disadvantaged businesses with the understanding that the business would illegally subcontract all of the work on the projects to WGESystems.  In this way, WGESystems was able to capture a total of eight contracts worth $17,711,405 that should have gone to an eligible company. These contracts, awarded in 2010, were focused on making federal buildings in the Washington, D.C., area more energy efficient.

Under the illegal agreement, the company that was awarded these government contracts was allowed to keep 5.8 percent of the value of the contracts for allowing WGESystems to use the company’s small business status to win these contracts.

“Conspiracies to violate federal procurement laws will not be tolerated,” said Assistant Attorney General Bill Baer for the Antitrust Division.  “Taxpayers deserve to have contracting processes that are fair and competitive, and fully comply with applicable laws and regulations.”

“Time and time again, we have seen government contractors abuse and exploit programs designed to help minority and socially disadvantaged small businesses,” said Principal Assistant U.S. Attorney Cohen.  “This Washington Gas subsidiary obtained millions of dollars in federal contracts by using a small business that had no ability to actually complete the contract as a front company.  Even though the subsidiary lost money on these contracts, it is required to pay $2.5 million in fines and penalties under this agreement.  This resolution should cause other contractors to think twice about playing fast and loose with federal contracting rules.”

“Cases like this are important for us to maintain the integrity of the federal contracting process,” said GSA Acting Inspector General Erickson.  “Companies cannot cheat to win federal contracts and expect to get away with their ill-gotten gains.”

“SBA’s 8(a) Business Development Program assists eligible socially and economically disadvantaged individuals in developing and growing their businesses,” said SBA Inspector General Gustafson.  “Large businesses that fraudulently seek to gain access to contracts set aside for small businesses erode the public’s trust in this important program.  I want to thank the U.S. Attorney’s Office and our law enforcement partners for their professionalism and commitment to justice in this investigation.”

“Federal government contracting laws are in place to create a level playing field for small disadvantaged businesses whose work supports our country’s diverse financial infrastructure,” said Assistant Director in Charge McCabe.  “The FBI with our law enforcement partners will investigate those companies who fraudulently abuse federal contracting laws with the purpose of increasing their company’s bottom line.”

According to the court documents, until 2010, GSA had an area-wide contract with WGESystems.  This contract enabled GSA, without competition, to enter into contracts with WGESystems so that WGESystems could provide energy management services for federal buildings.

However, starting in 2010, the federal government changed its practices.  The American Reinvestment and Recovery Act appropriated funds to make buildings in the District of Columbia and the surrounding area more energy efficient.  These funds were to be awarded through the 8(a) program, which is administered by the SBA and which was created to help small, disadvantaged businesses access the federal procurement market.

To qualify for the 8(a) program, a business must be at least 51 percent-owned and controlled by a U.S. citizen (or citizens) of good character who meet the SBA’s definition of socially and economically disadvantaged.  The firm also must be a small business (as defined by the SBA) and show a reasonable potential for success.  Participants in the 8(a) program are subject to regulatory and contractual limits on subcontracting work from 8(a) set-aside contracts.  The SBA regulations require, among other things, the 8(a) concern to agree that on construction contracts it “will perform at least 15 percent of the cost of the contract with its own employees (not including the costs of materials).”

As a result of this change, WGESystems – which was not certified to participate in the 8(a) program – faced the prospect of losing millions of dollars in revenue.

WGESystems, along with an 8(a) company it used to obtain these contracts, and others, engaged in and executed a scheme to defraud the SBA and GSA by, among other things: concealing that WGESystems, which was not eligible for the aforementioned SBA contracting preferences, exercised impermissible control over the 8(a) company’s bidding for and performance on GSA contracts; and misrepresenting that the 8(a) company was in compliance with SBA regulations pertaining to work on these contracts, including that the company’s employees had performed the required percentage of work on these contracts.  Through these unlawful efforts, WGESystems and the 8(a) company with which it conspired obtained, at least, approximately $17,711,405 in U.S. government contracts related to work at eight different federal buildings.  When these contracts were awarded, the 8(a) company’s registered place of business was the president of the company’s home, and the company had no employees who could provide design-build or contracting services.

WGESystems assisted the 8(a) company with identifying a project manager for the work at the eight buildings who was nominally an employee of the 8(a) company, but who, in actuality, took direction from WGESystems employees.  For much of the relevant period, this project manager was the only employee of the 8(a) company performing work for any of the eight projects.

Under the agreement with WGESystems, the 8(a) company was entitled to 5.8 percent of the $17,711,405 total value of the contracts, which equals $1,027,261.  To date, with all but one of the eight contracts completed or suspended, WGESystems has lost approximately $1,122,581 on the projects.  WGESystems initially anticipated a profit margin that would have equaled about $1,560,000.

Since being informed of this investigation by the Justice Department, WGESystems has taken steps to enhance and optimize its internal controls, policies and procedures.

In light of the company’s remedial actions to date and its willingness to acknowledge responsibility for its actions, the U.S. Attorney’s Office for the District of Columbia and the Antitrust Division will recommend the dismissal of the Information in two years, provided WGESystems fully cooperates with, and abides by, the terms of the deferred prosecution agreement.

This investigation was conducted by the Inspector General’s Offices of the U.S. General Services Administration and the Small Business Administration and the FBI’s Washington Field Office.  The prosecution is being handled by Assistant U.S. Attorney Matt Graves of the Fraud and Public Corruption Section of the U.S. Attorney’s Office for the District of Columbia, and Assistant Chief Craig Y. Lee and Trial Attorney Diana Kane, both of the Antitrust Division’s Washington Criminal I Section.

Justice Department Files Antitrust Lawsuit Challenging Proposed Merger Between US Airways and American Airlines Merger Would Result in U.S. Consumers Paying Higher Airfares and Receiving Less Service; Lawsuit Seeks to Maintain Competition in the Airline Industry

The Department of Justice, six state attorneys general and the District of Columbia filed a civil antitrust lawsuit today challenging the proposed $11 billion merger between US Airways Group Inc. and American Airlines’ parent corporation, AMR Corp.  The department said that the merger, which would result in the creation of the world’s largest airline, would substantially lessen competition for commercial air travel in local markets throughout the United States and result in passengers paying higher airfares and receiving less service.

The Department of Justice’s Antitrust Division, along with the attorneys general, filed a lawsuit in the U.S. District Court for the District of Columbia, which seeks to prevent the companies from merging and to preserve the existing head-to-head competition between the firms that the transaction would eliminate.   The participating attorneys general are:   Texas, where American Airlines is headquartered; Arizona, where US Airways is headquartered; Florida; the District of Columbia; Pennsylvania; Tennessee; and Virginia.

“Airline travel is vital to millions of American consumers who fly regularly for either business or pleasure,” said Attorney General Eric Holder.   “By challenging this merger, the Department of Justice is saying that the American people deserve better.   This transaction would result in consumers paying the price – in higher airfares, higher fees and fewer choices.   Today’s action proves our determination to fight for the best interests of consumers by ensuring robust competition in the marketplace.”

Last year, business and leisure airline travelers spent more than $70 billion on airfare for travel throughout the United States.    In recent years, major airlines have, in tandem, raised fares, imposed new and higher fees and reduced service, the department said.

“The department sued to block this merger because it would eliminate competition between US Airways and American and put consumers at risk of higher prices and reduced service,” said Bill Baer, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “If this merger goes forward, even a small increase in the price of airline tickets, checked bags or flight change fees would result in hundreds of millions of dollars of harm to American consumers.   Both airlines have stated they can succeed on a standalone basis and consumers deserve the benefit of that continuing competitive dynamic.”

American and US Airways compete directly on more than a thousand routes where one or both offer connecting service, representing tens of billions of dollars in annual revenues.   They engage in head-to-head competition with nonstop service on routes worth about $2 billion in annual route-wide revenues.   Eliminating this head-to-head competition would give the merged airline the incentive and ability to raise airfares, the department said in its complaint.

According to the department’s complaint, the vast majority of domestic airline routes are already highly concentrated.  The merger would create the largest airline in the world and result in four airlines controlling more than 80 percent of the United States commercial air travel market.
The merger would also entrench the merged airline as the dominant carrier at Washington Reagan National Airport, with control of 69 percent of the take-off and landing slots.   The merged airline would have a monopoly on 63 percent of the nonstop routes served out of Reagan National airport.   As a result, Washington, D.C., area passengers would likely see higher prices and fewer choices if the merger is allowed, the department said in its complaint.   Blocking the merger will preserve current competition and service, including flights that US Airways currently offers from Washington’s Reagan National Airport.

The complaint also describes how, in recent years, the major airlines have succeeded in raising prices, imposing new fees and reducing service.  The complaint quotes several public statements by senior US Airways executives directly attributing this trend to a reduction in the number of competitors in the U.S. market:

  • President Scott Kirby said, “Three successful fare increases – [we are] able to pass along to customers because of consolidation.”
  • At an industry conference in 2012, Kirby said, “Consolidation has also…allowed the industry to do things like ancillary revenues…. That is a structural permanent change to the industry and one that’s impossible to overstate the benefit from it.”
  • As US Airways CEO Parker stated in February 2013, combining US Airways and American would be “ the last major piece needed to fully rationalize the industry.”
  • A US Airways document said that capacity reductions have “enabled” fare increases.

“The merger of these two important competitors will just make things worse –exacerbating current airline industry trends toward reduced service, increasing fares and increasing passenger fees,” added Baer.

As the complaint describes, absent the merger, US Airways and American will continue to provide important competitive constraints on each other and on other airlines.   Today, US Airways competes vigorously for price-conscious travelers by offering discounts of up to 40 percent for connecting flights on other airlines’ nonstop routes under its Advantage Fares program. The other legacy airlines – American, Delta and United – routinely match the nonstop fares where they offer connecting service in order to avoid inciting costly fare wars.   The Advantage Fares strategy has been successful for US Airways because its network is different from the networks of the larger carriers. If the proposed merger is completed, the combined airline’s network will look more like the existing American, Delta and United networks, and as a result, the Advantage Fares program will likely be eliminated, resulting in higher prices and less services for consumers. An internal analysis at American in October 2012, concluded, “The [Advantage Fares] program would have to be eliminated in a merger with American, as American’s large, nonstop markets would now be susceptible to reactionary pricing from Delta and United.”   And, another American executive said that same month, “The industry will force alignment to a single approach–one that aligns with the large legacy carriers as it is revenue maximizing.”   By ending the Advantage Fares program, the merger would eliminate lower fares for millions of consumers, the department said.

The complaint also alleges that the merger is likely to result in higher ancillary fees, such as fees charged for checked bags and flight changes.   In recent years, the airlines have introduced fees for those services, which were previously included in the price of a ticket. These fees have become huge profit centers for the airlines.   In 2012, domestic airlines generated more than $6 billion in fees from checked bags and flight changes alone.   The legacy carriers often match each other when one introduces or increases a fee, and if others do not match the initiating carrier tends to withdraw the change.   By reducing the number of airlines, the merger will likely make it easier for the remaining carriers to coordinate fee increases, resulting in higher fees for consumers.

The department also said that the merger will make coordination easier among the legacy carriers.   Although low-cost carriers such as Southwest and JetBlue offer consumers many benefits, they fly to fewer locations and are unlikely to be able to constrain the coordinated behavior among those carriers.

American Airlines is currently operating in bankruptcy.   Absent the merger, American is likely to exit bankruptcy as a vigorous competitor, with strong incentives to grow to better compete with Delta and United, the department said. American recently made the largest aircraft order in industry history, and its post-bankruptcy standalone plan called for increasing both the number of flights and the number of destinations served by those flights at each of its hubs.

The department’s complaint describes US Airways executives’ fear of American’s standalone growth plan as “industry destabilizing.”   The complaint states that US Airways worries that American’s growth plan would cause “others” to react “with their own enhanced growth plans…,” and that the resulting effect would increase competitive pressures throughout the industry.   The department said the merger will allow US Airways’ management to abandon these aggressive growth plans and continue the industry’s current trend toward higher prices and less service.

The department’s complaint states that executives of both airlines have repeatedly said that they do not need the merger to succeed.   The complaint states that US Airways’ CEO observed in December 2011, that “A[merican] is not going away, they will be stronger post-bankruptcy because they will have less debt and reduced labor costs.”   US Airways’ executive vice president wrote in July 2012, that, “There is NO question about AMR’s ability to survive on a standalone basis.”   And, as recently as January 2013, American’s management presented plans that would increase the destinations it serves in the United States and the frequency of its flights, and would position American to compete independently as a profitable airline with aggressive plans for growth.

AMR is a Delaware corporation with its principal place of business in Fort Worth, Texas.   AMR is the parent company of American Airlines.   Last year American flew more than 80 million passengers to more than 250 destinations worldwide and took in more than $24 billion in revenue.   In November 2011, American filed for bankruptcy reorganization.

US Airways is a Delaware corporation with its principal place of business in Tempe, Ariz.   Last year US Airways flew more than 50 million passengers to more than 200 destinations worldwide and took in more than $13 billion in revenue.

Former Corporate Officers of China-Based Oil and Gas Company Charged with Fraud and False Statements

WASHINGTON – The former president and CEO, and the former vice president of corporate finance of China North East Petroleum Holdings Limited (CNEP), an oil and gas company whose stock is traded in the United States, have been charged with defrauding investors in connection with public offerings of stock.

Acting Assistant Attorney General Mythili Raman of the Criminal Division; U.S. Attorney for the District of Columbia Ronald C. Machen Jr.; Assistant Director in Charge George Venizelos of the FBI’s New York Field Office; and Chief Richard Weber of the Internal Revenue Service’s Criminal Investigation (IRS-CI), made the announcement.

Wang Hongjun, 41, and Chao Jiang, 32, both Chinese citizens residing in California and New York, respectively, were indicted on May 23, 2013, with one count of conspiracy to commit wire and securities fraud and four counts of securities fraud, which each carry a maximum penalty of 25 years in prison. Jiang is also charged with two counts of false statements to the U.S. Securities and Exchange Commission (SEC) during sworn testimony, which each carry a maximum penalty of five years in prison. The indictment was made public today.

According to the indictment, Hongjun served as the president and CEO of CNEP from 2009 to 2010, and as the chairman of the Board of Directors beginning in 2010.  Jiang served as the vice president of corporate finance and corporate secretary of CNEP from 2008 until approximately 2011.  The charges allege that in June of 2009, CNEP registered a shelf offering with the SEC proposing to sell up to $40 million of CNEP common stock in the United States on the New York Stock Exchange.  In September and December of 2009, CNEP made two separate offerings pursuant to the June registration.  In documents filed with the SEC related to the offerings, and in other public statements to investors, Hongjun and Jiang informed investors that CNEP intended to use the funds raised from the securities offerings for general corporate purposes and to repay a prior corporate debt.

The indictment alleges that, instead of using the offering proceeds as represented to CNEP’s investors, Hongjun and Jiang misappropriated approximately $1,265,000 of the proceeds by wiring the money to bank accounts in the name of their family members – approximately $965,000 to Jiang’s father and approximately $300,000 to Hongjun’s wife – which was used, in part, to purchase a home in California, jewelry and a Mercedes-Benz.

In addition, the indictment alleges that Jiang testified falsely under oath to the SEC in Washington, D.C., about these transactions.  In that testimony, Jiang stated that none of his family members had received anything of value over $500 from CNEP, despite having wired $965,000 from CNEP’s bank account to the account of his father.  Jiang also testified falsely regarding the use of proceeds from the securities offerings.

An indictment is merely an accusation, and defendants are presumed innocent until proven guilty in a court of law.

In a related action, the SEC had previously filed a civil enforcement action against Hongjun, Jiang and others in the Southern District of New York.

The case was investigated by the FBI’s New York Field Office and IRS-CI.  The department wishes to thank the SEC for its significant assistance in this case. The investigation is continuing.

This case is being prosecuted by Trial Attorneys Daniel Kahn and Kevin Muhlendorf of the Criminal Division’s Fraud Section and Assistant U.S. Attorney David Johnson for the District of Columbia.

 

California Man Sentenced to 15 Months in Prison For Conspiracy to Defraud USAID of $386,279 – Admitted Scheme to Embezzle Agency Funds Meant for Global Health

PRESS RELEASE
FOR IMMEDIATE RELEASE For Information Contact:
Tuesday, November 6, 2012 Public Affairs
(202) 252-6933

WASHINGTON – Everett Lipscomb Jr., 42, of Aliso Viejo, Calif., has been sentenced
to 15 months in prison on a charge stemming from his role in a conspiracy to embezzle more than $386,000 from a federal program meant to address global health problems.
The sentence was announced by Ronald C. Machen Jr., U.S. Attorney for the District of
Columbia, and Michael G. Carroll, Deputy Inspector General for the U.S. Agency for
International Development (USAID).
Lipscomb pled guilty in March 2012 to one count of conspiracy to commit wire and mail
fraud, a federal felony. He was sentenced on Nov. 5, 2012 by the Honorable Beryl A. Howell in the U.S. District Court for the District of Columbia. As part of his sentence, Lipscomb was ordered to pay full restitution of $386,279 to USAID. Lipscomb also consented to an order forfeiting any property he owned up to that amount. As indicated in court filings, the government has already seized about $49,000 in proceeds from the scheme from other coconspirators. Upon completion of his prison term, Lipscomb will be placed on two years of supervised release.
As part of his plea, Lipscomb admitted that he conspired together with Mark Adams, a
former deputy director at a private contractor that did business with USAID, and Adams’s wife, Latasha Bell. Lipscomb admitted that Adams used his position at the contracting company to submit and approve false and fraudulent invoices and thereby obtain money.
In Lipscomb’s case, the bogus invoices claimed amounts due for services from Octopus
Limited Audio and Visual, a company controlled by Lipscomb. However, neither Lipscomb nor Octopus – or anyone else – performed the work and services claimed on the invoices. Lipscomb admitted that between April 2008 and August 2010, he received payments from the USAID contracting company totaling $386,279. Of that amount, Lipscomb kept $157,372 for himself and passed the remainder, $228,907, back to Adams and Bell.
Lipscomb further admitted that the fraudulent bills were paid with money that should
have been used for USAID’s global health program. The program addresses major global issues, including HIV/AIDS. At sentencing, Judge Howell noted that the company that employed Adams was seriously impacted by the crime. The company lost its contract with USAID and several employees lost their jobs as a result.
Adams, 44, and Bell, 36, of Fort Washington, Md., pled guilty last month to their roles in
the conspiracy. Adams admitted that the scheme involved more than $1.084 million in
fraudulent payments through such fake invoices between 2006 and 2010. Adams and Bell used the payments to complete an extensive renovation of their home and to buy luxury automobiles.
Adams and Bell are scheduled to be sentenced on Dec. 14, 2012, also before Judge
Howell. Under federal sentencing guidelines, Adams faces a sentence of up to 51 to 63 months of incarceration. Under the plea agreement, Bell agreed to a sentence of home confinement.
In announcing the sentence, U.S. Attorney Machen and Deputy Inspector General Carroll
commended the work of the special agents from the USAID Office of Inspector General, which investigated the case. They also thanked those who worked on the case from the U.S. Attorney’s Office, including Paralegal Specialists Krishawn Graham and Nicole Wattelet, Forensic Accountant Crystal Boodoo, Assistant U.S. Attorney Anthony Saler, who handled forfeiture issues, and Assistant U.S. Attorney Jonathan Hooks, who is prosecuting the case.