Monthly Archives: August 2015

Joint Statement by the Department of Justice and the Office of the Director of National Intelligence on the Declassification of the Renewal of Collection Under Section 215 of the USA Patriot Act as Amended by the USA Freedom Act

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On Aug. 27, 2015, the Foreign Intelligence Surveillance Court (FISC) issued a primary order approving the government’s application to renew the Section 215 bulk telephony program.  The USA FREEDOM Act of 2015 banned bulk collection under Section 215 of the USA PATRIOT Act, but provided a new mechanism to allow the government to obtain data held by the providers.  To ensure an orderly transition to this new mechanism, the USA FREEDOM Act provided for a 180-day transition period during which the existing National Security Agency (NSA) bulk telephony metadata program may continue.  After considering an application filed shortly after the passage of the USA FREEDOM Act, on June 29, 2015, the court held that the continuation of the NSA’s bulk telephony metadata program during the transition period remains consistent with both the statute and the Fourth Amendment.  The authority under the court’s June 29 order was set to expire today, Aug. 28, 2015.

The government recently filed an application to renew the authority to collect bulk telephony metadata.  On Aug. 27, 2015, the court authorized the continued collection of telephony metadata through Nov. 28, 2015, the end of the 180-day transition period contemplated by the USA FREEDOM Act.  As of Nov. 29, 2015, both the 180-day transition period and the court’s authorization will have expired and the bulk collection of telephony metadata pursuant to Section 215 will cease.

As previously stated in a July 27, 2015, Joint Statement, the NSA has determined that analytic access to the historical metadata collected under Section 215 (any data collected before Nov. 29, 2015) will also cease on Nov. 29, 2015.  However, solely for data integrity purposes to verify the records produced under the new targeted production mechanism authorized by the USA FREEDOM Act, the NSA, subject to court approval, plans to allow technical personnel to continue to have access to the historical metadata for an additional three months.  Separately, the NSA remains under a continuing legal obligation to preserve its bulk 215 telephony metadata collection until civil litigation regarding the program is resolved, or the relevant courts relieve NSA of such obligations.  The telephony metadata preserved solely because of preservation obligations in pending civil litigation will not be used or accessed for any other purpose, and, as soon as possible, the NSA will destroy the Section 215 bulk telephony metadata upon expiration of its litigation preservation obligations.

As background, in January 2014, early last year in a speech at the Department of Justice, President Obama announced that the intelligence community would end the Section 215 bulk telephony metadata program as it previously existed.  The President directed the intelligence community and the Attorney General to develop options for a new approach to match the capabilities and fill gaps that the Section 215 program was designed to address without the government holding this metadata.  After carefully considering the available options, the President announced in March 2014 that the government should not hold this data in bulk, and that the data should remain at the telephone companies with a legal mechanism in place that would allow the government to obtain data pursuant to individual orders from the FISC approving the use of specific numbers for such queries.

The President also noted, however, that legislation would be required to implement this new approach and the administration worked closely with Congress to enact the President’s proposal.  On June 2, 2015, Congress passed and President Obama signed the USA FREEDOM Act of 2015, which reauthorized several important national security authorities; banned bulk collection under Section 215 of the USA PATRIOT Act, under the pen register and trap and trace provisions found in Title IV of FISA, and pursuant to National Security Letters; and adopted the new legal mechanism proposed by the President.

As in past primary orders in effect since February 2014, and consistent with the President’s direction, the court’s new primary order requires that during the transition period, absent a true emergency, telephony metadata can only be queried after a judicial finding that there is a reasonable, articulable suspicion that the selection term is associated with an approved international terrorist organization.  In addition, the query results must be limited to metadata within two hops of the selection term instead of three.

The Office of the Director of National Intelligence will post the new primary order to its website and icontherecord.tumblr.com after it has undergone a classification review.

EDF Resources Capital Inc. and CEO Pay $6 Million for Alleged Violations Related to Small Business Administration Loan Program

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EDF Resource Capital Inc. and its CEO, Frank Dinsmore, have agreed to resolve allegations that they violated the False Claims Act and otherwise failed to remit payments owed to the Small Business Administration (SBA) under the 504 loan program, the Department of Justice announced today.  Under the settlement agreement, EDF and Dinsmore have agreed to make payments and turn over certain assets to the United States for a total settlement of approximately $6 million.

“Today’s settlement demonstrates our commitment to ensure that companies and individuals who elect to participate in federal programs live up to their statutory and contractual commitments, play by the rules, and deal honestly and openly with the federal government,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division.  “The Department of Justice will continue to work side-by-side with the Small Business Administration to ensure that fraud committed by SBA program participants is thoroughly investigated and, where appropriate, vigorously prosecuted.”

The SBA 504 loan program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.  Under the program, local lenders like EDF are responsible for arranging, servicing and collecting on these small business loans, which are guaranteed, in part, by the SBA.  In return for the authority to make determinations on 504 loans without prior SBA approval, EDF was required to bear a share of any losses suffered by the SBA on such loans and to maintain a loan loss reserve fund (LLRF) to help ensure payment of its loss-sharing obligations.

Today’s settlement resolves claims that EDF and Dinsmore violated the False Claims Act in connection with EDF’s failure to maintain adequate reserves in its LLRF.  EDF allegedly was required to fund its LLRF at a level determined by the riskiness of its 504 loan program portfolio yet knowingly concealed from the SBA hundreds of troubled loans to avoid its obligation to fully fund its LLRF.

The settlement also resolves a lawsuit filed by the United States against EDF and a related entity, Redemption Reliance LLC, alleging that EDF failed to remit required payments to the SBA to satisfy its loss-sharing obligations.  The lawsuit also alleges that the SBA agreed to advance funds to EDF in connection with certain defaulted 504 loans but that, after EDF assigned the loan documents for these loans to Redemption Reliance, neither EDF nor Redemption Reliance remitted the monies owed on these loans to the SBA.

“The 504 Loan Program provides small businesses with access to the capital they need to start, grow and succeed,” said General Counsel Melvin F. Williams Jr. of the SBA.  “SBA has no tolerance for fraud, waste, or abuse by participants in the 504 Loan Program.  Working with the attorneys at the Department of Justice and SBA’s Office of Inspector General, this settlement marks the successful conclusion of a major enforcement action.”

“The defendants’ misrepresentations to SBA knowingly put the taxpayer’s money at risk,” said Inspector General Peggy E. Gustafson of the SBA.  “As stewards of the taxpayers’ money, the SBA must guard against losses within its loan portfolios.  In this instance, the actions of the defendants did not allow SBA to protect taxpayers from such losses.  I want to thank the Department of Justice and our investigative partners for achieving this settlement.”

The settlements were the result of a coordinated effort by the Civil Division’s Commercial Litigation Branch, the SBA’s Office of General Counsel and the SBA’s Office of Inspector General Los Angeles Field Office’s Counsel Division and Investigations Division.

The lawsuit is captioned United States v. EDF Resource Capital, Inc., et al., Case No. 13‑cv-389 (E.D. Cal.).  The claims resolved by the settlement are allegations only, and there has been no determination of liability.

Florida Businessman Sentenced to 17 Years in Prison for Conspiring to Defraud Investors

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Dozens of Investors Lost More Than $13 Million in Scheme

A Florida businessman was sentenced today to 17 years in prison for his role in an investment fraud scheme resulting in over $13 million in losses to dozens of investors.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, Acting U.S. Attorney Vincent H. Cohen Jr. of the District of Columbia and Special Agent in Charge Kimberly A. Lappin of the IRS-Criminal Investigation’s Tampa Field Office made the announcement.

Donovan G. Davis Jr., 34, of Palm Bay, Florida, was found guilty by a jury on May 14, 2015, of one count of conspiracy to commit mail/wire fraud, one count of mail fraud, six counts of wire fraud and eight counts of money laundering.  He was sentenced by U.S. District Judge Carlos E. Mendoza of the Middle District of Florida, who ordered him to pay $10,520,005 in restitution jointly and severally with his co-defendants.

“Donovan Davis Jr. and his co-conspirators lied to persuade victims to invest their retirement savings and children’s college funds, and then concealed the investment fund’s extreme losses so that the victims would stay invested,” said Assistant Attorney General Caldwell.  “The investors lost everything, while Davis and others running the scam looted the fund to pay their own six-figure salaries, purchase luxury cars and travel in private planes.  This sentence will help hold Davis accountable for his crimes, but the investors he deceived will suffer for decades because of his greed and deceit.”

“Dozens of investors and their families lost millions of dollars because they put their trust in an investment firm that lied about its performance,” said Acting U.S. Attorney Cohen.  “The deception of Donovan Davis Jr. and the others involved in this scheme caused great personal and financial harm to people, including many who lost their retirement savings.  Today’s sentence reflects the seriousness of the defendant’s greedy, deceptive conduct and underscores our commitment to prosecuting those who commit financial crimes.  I commend the prosecutors from here in D.C. who held these criminals accountable for their deception in a Florida courthouse.”

“Today’s sentencing demonstrates how federal law enforcement will band together to help put an end to the criminal behavior of those who prey on investors to unjustly enrich themselves,” said Special Agent in Charge Lappin.  “IRS Criminal investigation and our law enforcement partners will relentlessly pursue those who mastermind and perpetrate investment fraud schemes.”

According to evidence presented at trial, Davis was the managing member of Capital Blu Management LLC, a Florida-based corporation that purported to offer investment and managed account services for investors in the off-exchange foreign currency, or “forex,” marketplace.  In 2007 and 2008, Davis solicited relatives, friends and associates to invest in Capital Blu.

In or about September 2007, according to evidence presented at trial, Davis and his co-conspirators formed the CBM FX Fund LP, which pooled investors’ money into a common fund to be traded by Capital Blu Management.  Many of Capital Blu’s managed-account investors transferred their investments into the CBM FX Fund.

According to the evidence presented at trial, CBM FX Fund had sustained significant trading losses, resulting in large losses for its investors.  Nevertheless, the evidence demonstrated that Davis and his co-conspirators made a series of misrepresentations to the investors about Capital Blu’s trading performance, the value of the fund and the risks of the fund.

For example, according to the evidence presented at trial, the Davis and his co-conspirators informed CBM FX Fund’s investors of positive monthly returns from January through August of 2008, even though the fund and its investors had sustained net losses of millions of dollars.  In addition, they diverted investors’ money from the fund to pay for Capital Blu’s operational expenses and personal expenses, including their own six-figure salaries and payments for the use of private airplanes and luxury cars.

In or about September 2008, the National Futures Association, an independent self-regulatory organization that oversees commodities and futures trading in the United States, conducted a surprise audit of Capital Blu and suspended its operations.  As of September 2008, investors had invested over $16.9 million into the CBM FX Fund and lost over $13 million.

Co-defendant  Blayne S. Davis (no relation to Donovan Davis Jr.), 34, formerly of Naples, Florida, pleaded guilty in July 2014 to conspiracy to commit mail and wire fraud, and was sentenced to nine years in prison and ordered to pay $13,215,874 in restitution.  Co-defendant Damien L. Bromfield, 39, of Ocoee, Florida, pleaded guilty in November 2013 to conspiracy to commit wire fraud and is awaiting sentencing.

The case was investigated by a task force consisting of agents from the Internal Revenue Service-Criminal Investigation; U.S. Secret Service; Florida Department of Law Enforcement; and Brevard County, Florida, Sherriff’s Office.  Attorneys, agents and accountants from the U.S. Commodity Futures Trading Commission (CFTC), National Futures Association, Bureau of Prisons and U.S. Immigration and Customs Enforcement also provided assistance to the investigation.  A related civil litigation was pursued by the CFTC, which resulted in a civil judgment against the defendants after a trial in 2011.

The case was prosecuted by Trial Attorneys David M. Fuhr and Ephraim Wernick of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Jonathan P. Hooks of the District of Columbia.  Assistant U.S. Attorneys Catherine K. Connelly and Anthony Saler of the District of Columbia provided invaluable assistance on asset forfeiture matters.

Four Individuals Sentenced for Biodiesel Production Fraud

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Dean Daniels, 52, Richard Smith, 57, Brenda Daniels, 45 and William Bradley, 58, all of Florida, pleaded guilty and were sentenced today in U.S. district court for charges related to a scheme involving the false production of biodiesel.

Dean Daniels was sentenced to 63 months incarceration, Bradley was sentenced to 51 months incarceration, Smith was sentenced to 41 months incarceration and Brenda Daniels was sentenced to 366 days incarceration. In addition, the court sentenced the defendants to pay $23 million in restitution.

Assistant Attorney General John C. Cruden for the Department of Justice’s Environment and Natural Resources Division, U.S. Attorney Carter M. Stewart for the Southern District of Ohio, Acting Special Agent in Charge Troy N. Stemen for the Internal Revenue Service Criminal Investigation (IRS) and Acting Special Agent in Charge Jeffrey Martinez of  the Environmental Protection Agency’s (EPA) Criminal Enforcement Program in Ohio and Regional Special Agent in Charge Max D. Smith of the Department of Transportation’s Office of Inspector General announced the sentences handed down today by Senior U.S. District Court Judge James L. Graham.

According to court documents, the defendants profited by unjustly generating and selling biodiesel credits (RINs) and unjustly claiming biodiesel tax credits for the production and blending of fuel that was not actually biodiesel.

“Congress enacted incentives for the production of biofuels to make the United States stronger and more energy independent and to move our energy economy into the 21st century,” said Assistant Attorney General Cruden.  “The fraud perpetrated by the defendants threatens these important public policies.  The Justice Department will vigorously prosecute those seeking to line their pockets using scams like this one.”

The defendants were all employees and officers of New Energy Fuels LLC, a business in Waller, Texas, that claimed to process animal fats and vegetable oils into biodiesel.  The defendants subsequently relocated, operating a similar scheme at Chieftain Biofuels LLC in Logan, Ohio.

The defendants would purchase low-grade feedstock and perform minimal processing to produce a low-grade fuel.  The fuel was not biodiesel, however, the defendants would represent to the EPA that they had produced biodiesel.  They would generate fraudulent biodiesel RINs and sell them to various third parties.  Biodiesel RINs cannot be generated unless the biodiesel produced meets industry standards.  In total, the defendants sold over $15 million worth of fraudulent biodiesel RINs.

The defendants also made false claims to the IRS in order to obtain the biodiesel tax credit that they were not eligible to receive.  Throughout 2009, 2010 and 2011, refundable tax credits were available for renewable fuel producers.  If companies complied with IRS regulations, they could earn one dollar per gallon of biodiesel.  It was illegal to claim this tax credit unless the biodiesel was produced, blended and sold in compliance with rules and regulations.  Among other requirements, the biodiesel had to meet industry standards, which the defendant’s fuel did not.  In total, the defendants claimed over $7 million in false biodiesel tax credits.

In addition, New Energy Fuels’ production process generated substantial hazardous by-products.  Defendant Dean Daniels arranged for an employee of New Energy Fuels to transport the wastes off-site at night.  That employee, Lonnie Perkins, previously pleaded no-contest in Texas to several charges related to the dumping of hazardous waste in and around the city of Houston.

“The Renewable Fuel Standard helps reduce the climate impact of transportation fuel sold in this country,” said Acting Special Agent in Charge Martinez.  “The criminal activity by these defendants has real consequences.  The defendants manipulated and utilized federal governmental programs to line their pockets by fraud.  These guilty pleas demonstrate EPA’s commitment, working closely with our partners at the Department of Justice, to pursue these criminal cases vigorously.  Companies and their managers need to understand there are serious consequences to skirting the rules and undermining the integrity of an EPA program.”

“Today’s sentencings mark the successful end of an investigation that uncovered a complicated fraudulent scheme that generated millions of dollars through false biodiesel tax credits,” said Acting Special Agent in Charge Stemen.  “We want everyone to take advantage of the deductions and credits to which they are entitled by law; however, no one is entitled to defraud the government.”

“The Office of Inspector General is committed to investigating and seeking prosecution of those who choose to endanger the public by illegally transporting, distributing, or disposing of hazardous materials,” said Regional Special Agent in Charge Smith.  “Today’s sentencing should send a clear warning that these fraudulent actions and illegal hazmat violations will not be tolerated.”

Each of the defendants pleaded guilty to conspiracy to commit wire fraud and to defraud the United States.  Dean Daniels also pleaded guilty to offering a hazardous material for transport without providing or affixing proper placards.

Assistant Attorney General Cruden and U.S. Attorney Stewart commended the cooperative investigation by law enforcement, including the Houston Police Department, as well as Department of Justice Trial Attorney Adam Cullman and Assistant U.S. Attorney J. Michael Marous, who represented the United States in this case.

Former Investment Banking Analyst and Two Friends Charged in Insider Trading Scheme

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An analyst with J.P. Morgan Securities and two longtime friends were taken into custody this morning after being charged in a federal grand jury indictment that alleges they participated in an insider trading scheme that netted more than $600,000 in illicit profits.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Eileen M. Decker of the Central District of California and Assistant Director in Charge David Bowdich of the FBI’s Los Angeles Division made the announcement.

Ashish Aggarwal, 27, of San Francisco; Shahriyar Bolandian, 26, of Los Angeles; and Kevan Sadigh, 28, of Los Angeles, are named in an indictment that was unsealed this morning and charges each defendant with one count of conspiracy to commit securities and tender offer fraud, 13 substantive counts of securities fraud, 13 substantive counts of tender offer fraud and three substantive counts of wire fraud.  Bolandian also is charged with one count of money laundering.

The defendants surrendered to the FBI this morning, and are scheduled to be arraigned this afternoon before U.S. Magistrate Judge Patrick J. Walsh of the Central District of California.

Between June 2011 and June 2013, Aggarwal was employed by J.P. Morgan Securities, LLC (JPMS) as an investment banking analyst in its San Francisco office.  According to the indictment, through his employment, Aggarwal allegedly obtained material, non-public (inside) information about upcoming mergers and acquisitions involving publicly-traded companies.  The indictment alleges that Aggarwal disclosed this information to his friend Bolandian who, in turn, shared the information with Sadigh, who is also a friend of Bolandian.  Bolandian and Sadigh then allegedly used the inside information to trade in advance of the public announcements of Integrated Device Technology Inc.’s April 2012 planned acquisition of PLX Technology Inc., and Salesforce.com Inc.’s June 2013 acquisition of ExactTarget Inc.  According to the indictment, through this scheme, Aggarwal, Bolandian and Sadigh netted more than $600,000 in illicit profits, which the defendants allegedly used to, among other things, cover previous trading losses and to repay liabilities incurred by Aggarwal and Bolandian.

The case was investigated by the FBI.  The case is being prosecuted by Trial Attorneys Thomas B.W. Hall and Alexander F. Porter of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Paul Stern of the Central District of California.  The Securities and Exchange Commission provided valuable assistance.

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

Medical Director and Three Therapists Convicted in $63 Million Health Care Fraud Scheme

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A federal jury in Miami late yesterday convicted the former medical director of, and three therapists employed by, a now-defunct health care provider of conspiracy to commit health care fraud and related charges for their roles in a scheme to fraudulently bill Medicare and Florida Medicaid more than $63 million.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Wifredo A. Ferrer of the Southern District of Florida, Special Agent in Charge George L. Piro of the FBI’s Miami Field Office and Special Agent in Charge Shimon Richmond of the U.S. Department of Health and Human Services-Office of Inspector General’s (HHS-OIG) Miami Regional Office made the announcement.

Roger Rousseau, 73, of Miami; Doris Crabtree, 62, of Miami; Angela Salafia, 68, of Miami Beach, Florida; and Liliana Marks, 48, of Homestead, Florida, were found guilty of conspiracy to commit health care fraud.  In addition, Rousseau was convicted of two counts of health care fraud.  Sentencing is scheduled for Nov. 6, 2015, before U.S. District Judge Robert N. Scola Jr. of the Southern District of Florida.

Rousseau was the former medical director of Health Care Solutions Network Inc. (HCSN), a now-defunct partial hospitalization program (PHP) that purported to provide intensive treatment for mental illness.  Crabtree, Salafia and Marks were therapists who worked for HCSN.

According to the evidence presented at trial, from approximately 2004 through 2011, HCSN billed Medicare and Medicaid for mental health services that were not medically necessary or never provided, and that HCSN paid kickbacks to assisted living facility owners and operators in Miami who, in exchange, referred beneficiaries to HCSN.

The trial evidence showed that Rousseau routinely signed what he knew to be fabricated and altered medical records without reviewing the substance of the records and, in most instances, without ever meeting with the patients.  The evidence at trial also demonstrated that Crabtree, Salafia and Marks fabricated medical records to support HCSN’s false and fraudulent claims for reimbursement for PHP services.

In total, HCSN submitted approximately $63.7 million in false and fraudulent claims to Medicare and Medicaid.  Medicare and Medicaid paid approximately $28 million on those claims.

In November 2014, following a jury trial, co-defendants Blanca Ruiz and Alina Fonts were convicted of conspiracy to commit health care fraud, and Fonts also was convicted of health care fraud.  In February 2015, both Ruiz and Fonts were sentenced to serve six years in prison.

The case was investigated by the FBI and HHS-OIG, and was brought as part of the Medicare Fraud Strike Force, under the supervision of the Criminal Division’s Fraud Section and the U.S. Attorney’s Office of the Southern District of Florida.  The case was prosecuted by Trial Attorneys Allan J. Medina, Lisa H. Miller and Bryan D. Fields of the Criminal Division’s Fraud Section.

Since its inception in March 2007, the Medicare Fraud Strike Force, now operating in nine cities across the country, has charged over 2,300 defendants who collectively have billed the Medicare program for over $7 billion.  In addition, HHS’s Centers for Medicare & Medicaid Services, working in conjunction with HHS-OIG, are taking steps to increase accountability and decrease the presence of fraudulent providers.

Former President of Bay Area Home Builder Pleads Guilty to Mortgage Fraud Conspiracy

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Ayman Shahid Admits to Participation in Builder Bailout Scheme to Inflate Home Prices during Peak of Mortgage Crisis

Ayman Shahid, 39, of Danville, California, the former president of Discovery Sales Inc. (DSI), pleaded guilty in federal court in Oakland, California, to conspiracy to commit bank fraud announced U.S. Attorney Melinda Haag for the Northern District of California, Special Agent in Charge David J. Johnson of the FBI’s San Francisco Division, Acting Special Agent in Charge Thomas McMahon of the Internal Revenue Service-Criminal Investigation (IRS-CI) and Special Agent in Charge Leslie DeMarco for the Federal Housing Finance Agency’s Office of Inspector General (FHFA-OIG).   Shahid is the most recent and highest placed individual charged by the U.S. Attorney’s Office of the Northern District of California as a result of a wide-ranging investigation by the FBI into mortgage fraud in connection with the sale of homes by DSI and its affiliates.

Shahid was the president of DSI, which was the sales arm of affiliated residential construction companies, including Discovery Home Builders and Albert D. Seeno Construction Co.  According to Shahid’s plea agreement that was unsealed today, DSI was created to sell new homes built by Discovery Builders Inc. (DBI), Albert D. Seeno Construction Co. Inc. (AD Seeno) and other entities affiliated with Albert Seeno III and the Seeno family.  The homes were built in developments throughout the East Bay Area, including in Contra Costa and Alameda Counties.

In connection with his plea agreement, Shahid admitted that he conspired with others to fraudulently cause bank underwriters to approve mortgage loans for unqualified buyers during the height of the financial crisis.  From 2006 to 2008, when Shahid was DSI’s vice president, buyers with little or no money of their own were induced to purchase homes at prices that were inflated through the use of financial incentives.  The buyers were not required to possess or post any of their own money when buying a home; DSI, the builders and their affiliates provided money to buyers to make down payments.  Further, DSI inflated the sale price of the new homes by offering significant cash and other incentives to new home buyers.  The primary purpose of the price inflation was to support a large line of credit maintained by the builders; the new homes and the property on which the homes would be built collateralized the line of credit.

Shahid’s plea agreement explained that it was important to the scheme to maintain inflated property values because if the home and property values dropped, the value of the collateral would drop and the line of credit would be put at risk.  Specifically, the line of credit could be reduced or terminated, or additional collateral would be required to secure the line of credit.  This is what has become known as a “builder bailout” scheme.

Shahid’s plea agreement also explains that DSI made loans that were secured by homes that were in some cases worth less than the loan amount and that DSI did not make an effort to determine the true value of these homes.  Shahid admitted he and others took steps to ensure information that would reflect poorly on the value of the homes was kept out of bank loan files.  Specifically, Shahid ensured the details of the incentives that were being given to specific buyers would not appear in the bank loan files because the loan-to-value ratio would not support the requested loan on the inflated sales price of the home.  If the incentives appeared in the bank loan files, Shahid explained, the loan underwriters would likely reject the loans.  Accordingly, Shahid instructed DSI employees not to inform appraisers of the incentives being given to buyers.

Over 325 Seeno and Discovery homes during the period of 2006 to 2008 involved the use of incentives, amounting to sales in excess of $200 million.  Shahid agreed that the losses that resulted from foreclosures or short sales on these homes were approximately $75 million; Fannie Mae and Freddie Mac, which purchased mortgage loans used to pay for Seeno and Discovery Homes, lost almost $3.5 million.

Shahid was charged in April 2014 with one count of bank fraud conspiracy and 17 individual counts of bank fraud.  Pursuant to the plea agreement, he pleaded guilty to the lead conspiracy count, which encompassed the conduct alleged in the remaining counts.

“Shahid and his coconspirators were responsible for saddling the banking system with dozens of fraudulent mortgage loans without regard for the damage those loans would cause to individual home buyers, downstream investors, and, ultimately, the U.S. economy as a whole,” said U.S. Attorney Haag.  “Shahid fraudulently inflated the price of homes purchased by individuals who were unable to pay their mortgages in the long run.  By doing this to serve their own narrow economic interests, Shahid, and actors like him, contributed to the housing bubble.”

“The actions of Ayman Shahid, certain sales managers and others directly contributed to one of the most significant housing and financial crises of recent memory,” said Special Agent in Charge Johnson.  “While this case was extremely complex, the FBI and Department of Justice built this case, brick by brick, from low-level employees all the way up to the president of the company.  We will continue to pursue executives and corporations who fraudulently took advantage of the country’s financial turmoil for their own corporate gain.”

“Shahid participated in a fraudulent scheme involving over $230 million in mortgage loans, many of which ultimately defaulted, to the detriment of Fannie Mae, Freddie Mac and the American taxpayers,” said Special Agent in Charge DeMarco.  “We are proud to support our law enforcement partners in investigating and prosecuting this case.”

Carey Hendrickson and Jason Sterlino, sales managers for Seeno properties, were previously charged.  Former Bank of America loan officer Jennifer Xiao, Homecomings Financial underwriter Tony Phan and independent brokers Sharon Wang, Heather Yin, Miguel Arenas, George Zevada and Chang Park were also charged as participants in the scheme.  All of these defendants have pleaded guilty pursuant to cooperation agreements with the government, except Xiao, who is a fugitive.

Because Shahid is cooperating with the ongoing FBI investigation, a sentencing date has not yet been scheduled.  Shahid is next scheduled to appear in court for a status hearing on Dec. 10, 2015, at 3:00 p.m. PST before U.S. District Judge Yvonne Gonzalez-Rogers of the Northern District of California.  The maximum penalty for conspiracy to commit bank fraud is 30 years in prison, a fine of $1 million or twice the gain or loss and restitution to be decided by the court.  However, any sentence would be imposed by the court only after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence.

The case is being prosecuted by the U.S. Attorney’s Office in San Francisco’s Special Prosecutions Unit.  The prosecution is the result of an investigation by the FBI, with assistance from IRS-CI and FHFA-OIG.

CCC’s: If Everyone Else Jumped Off A Bridge, Would You Do That Too?

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The “Everybody Was Doing It” defense didn’t work when I was a kid and it didn’t work for Tom Hayes as his defense in the first Libor rate rigging trial.  But, the most I got upon conviction (summary–without trial) was 14 days grounded.  Mr. Hayes got 14 years in prison.  Ouch!

After a nine-week trial in London and seven days of deliberations, Hayes, a 35-year-old former UBS and Citigroup trader, was found guilty on eight counts of conspiracy to defraud. He was immediately sentenced to 14 years in prison.  Hayes was the first Libor rate rigging individual to face trial (here).

Hayes was charged in the UK with being the “ringleader” of the Libor rate rigging scheme.  Hayes claimed that the rate rigging was industry wide. He also claimed he was “confused about everything,” including what rules may have been broken. He added: “As far as I was concerned, any rules I’d broke were retrospectively being applied. And I wasn’t sure … Libor wasn’t a regulated product. We had no compliance training. No rules were outlined to us.” Hayes didn’t deny he knew he was engaging in “dodgy” activity but pleaded “I knew I was operating in a grey area.  I knew that I probably shouldn’t do it but like I said I was participating in an industry wide practice at UBS that pre-dated my arrival and post-dated my departure.  A full story is here in The Telegraph.

Hayes initially agreed to plead guilty and cooperate in return for a lighter sentence. He gave a full confession to Britain’s Serious Fraud Office.  During 82 hours of interviews with SFO investigators in the months following his arrest in December 2012, Hayes admitted the conduct he was charged with. But he told the court he had only confessed because he was desperate to be charged in Britain to avoid extradition to the United States, where he also faces fraud-related charges. [Hayes was charged in the United States on December 12, 2012 with fraud and antitrust counts (here)].  Hayes subsequently withdrew from a cooperation agreement with the SFO and pleaded not guilty in December 2013.

At trial, Hayes appealed to the jury arguing that: a) he was being singled out for an industry wide practice; and b) he had no training on the rules.

“The practice was tried and tested, it was so endemic within the bank (UBS), I just thought … this can’t be a big issue because everybody knows about it … (it was) such an open secret.”  “Senior management were keen to use Libor to effectively lie about their cost of borrowing by 50 to 100 [basis] points and portray a sense of strength,” Mr Hayes told investigators after his arrest in 2012. (here).

Going to trial was the last in a string of poor decisions made by Mr. Hayes–the jury convicted him on 8 counts of fraud and the 14 year sentence immediately followed.

I have to confess, I feel sorry for Mr. Hayes.  A sentence of 14 years seems excessive–although to many I’m sure it seems appropriate for such a widespread financial scandal.  The sentencing poses a dilemma for a Judge and I am glad I am not one.  From my perspective, it seems unfair for one guy to be punished so harshly for an industry wide practice.   Maybe five years would have been sufficient.  I don’t think anyone disputed Hayes characterization that the Libor rigging practice preceded his participation and continued after he left.  But, Hayes wrote everything down  [“(I was) either the stupidest fraudster ever because I wrote everything down, or there was an element of me that genuinely didn’t think about it,” Hayes has said in documents shown to the court.].  And there were tapes–lots of tapes.

There have been other Libor defendants charged so Hayes likely will not be the only individual convicted.  But, it is unlikely any superiors who were aware of the practice will ever be charged.  I don’t have any inside knowledge of this case, but as a general rule there is often little evidence other than the testimony of a subordinate that superiors knew of and approved of the conduct.  But, a subordinate testifying against a superior is subject to legitimate attack on credibility grounds that the defendant would implicate anyone to try to save their own skin.  Those that actively engage in the illegal conduct, like Hayes, often leave a paper (or electronic) trail of evidence.  An assertion that a boss knew of the illegal conduct is generally a one on one credibility test, and a compromised witness is rarely enough to provide proof beyond a reasonable doubt.

A judge, of course can only sentence the individual defendant that has been convicted.  In some ways, the fact that so few involved in the crime may eventually be convicted argues for a higher sentence–like that imposed by the Court here.  If the chance of conviction is small, for sufficient deterrence, the penalty must be high.

Even as a prosecutor, I was saddened by how much an otherwise industrious and law-abiding person could screw up their lives–and adversely affect their families–by not thinking through the consequences of what they were doing.  There are many “bottom-line” reasons why companies ought to have serious ethics and compliance programs, but to me there is no more compelling reason than it is something every company owes their employees.  Yes, work hard and make money for the shareholders–but don’t sacrifice yourself and family in the process.   It ain’t worth it and you’re not going to get a medal if you get caught.  You may get 14 years.

Thanks for reading.

CCC’s: An Update On the Airlines Price Fixing Civil Suits

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A while back I posted “They Said What?:  Some Compliance Thoughts on the Airline Price Fixing Investigation.”  The post examined how some loose talk by airline executives had led to a federal price-fixing investigation–followed immediately by an avalanche of civil treble damage price-fixing suits.  At a recent trade association meeting, multiple airline executives spoke publicly about their plans to be “disciplined” in their approach to pricing and adding extra flights on popular routes.  Cue up an Antitrust Division investigation, followed in nano seconds by a torrent of private class action treble damage price-fixing cases.  The airline executives may have gotten by unnoticed with their ill-advised comments, except they spoke at a time when the flying public was less than enchanted with the flying experience, including ticket prices that seemed sky-high while the price of fuel was nose diving.  My sense was that it was this environment–a disgruntled public and therefore unhappy Congress folks rather than any hard evidence of price-fixing–that caused the Antitrust Division to decide it was a good idea to at least open an investigation.

I’ve been reading the public news about this investigation and the civil cases and a couple of things caught my eye.  First, a recent report stated that 75 civil suits have now been filed against American, Delta, Southwest and United since July.  The suits tend to be copy cat suits filed by different law firms seeking a good seat (with extra leg room for a fee) at the litigation table when the suits are consolidated.  In the first suit “Plaintiffs allege that defendants illegally signaled to each other how quickly they would add new flights, routes, and extra seats. To keep prices high on fares, it was undesirable for the defendants to increase capacity.”  Other suits are similar.

This avalanche of civil suits doesn’t speak highly of our current class action system.  The airlines have not been convicted of anything, nor have they even been charged by the Antitrust Division.  It is not illegal for a company to try to boost profits by restricting capacity.  Or raising prices.  The key question is whether the action was taken unilaterally (legal) or in collusion with competitors (illegal).  Parallel prices alone are not enough to prove an agreement.  There has to be more.  See  “Getting the Judge to Budge from Conceivable to Plausible Under Twombly.”  But, even if a company is exonerated, the litigation is very expensive; much more so than a good antitrust education/compliance program.

Another interesting fact just out is that airline ticket prices last month saw the largest monthly decline on 20 years.   “Airline fares recorded their steepest monthly decline in 20 years, falling 5.6 percent last month, according to the Bureau of Labor Statistics.”  Does this mean the airlines can can get out from under all the civil suits?  Not likely.  The plaintiffs may spin this as the inevitable collapse of a cartel that couldn’t prop up prices forever in the face of sharply decreased costs.  The airlines will point out that capacity increases that led to the lower prices were in the works for months–at the very time the plaintiffs allege there was collusion.  Both sides will have experts armed with other arguments, analysis and data to support their side.  Whatever the experts say, it won’t come cheaply.  But, right now airfares may, so time to book a flight.

Thanks for reading.

U.S. Investigations Services Agrees to Forego at Least $30 Million to Settle False Claims Act Allegations

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Contractor Allegedly Failed to Perform Required Quality Control Reviews on Contracts for Background Investigations with the U.S. Office of Personnel Management

The Justice Department announced today that U.S. Investigations Services Inc. (USIS) and its parent company, Altegrity, have agreed to settle allegations that USIS violated the False Claims Act (FCA) for conduct involving a contract for background investigations that USIS held with the U.S. Office of Personnel Management (OPM).  The companies have agreed to forgo their right to collect payments that they claim were owed by OPM, valued at least at $30 million, in exchange for a release of liability under the FCA.  USIS and Altegrity are headquartered in Northern Virginia.

From its privatization in 1996 until September 2014, USIS provided background investigations services for OPM under various fieldwork contracts.  The government alleged that beginning in at least March 2008 and continuing through at least September 2012, USIS deliberately circumvented contractually required quality reviews of completed background investigations in order to increase the company’s revenues and profits.  Specifically, USIS allegedly devised a practice referred to internally as “dumping” or “flushing,” which involved releasing cases to OPM and representing them as complete when, in fact, not all the reports of investigations comprising those cases had received a contractually-required quality review.  The government contended that, relying upon USIS’ false representations, OPM issued payments and contract incentives to USIS that it would not otherwise have issued had OPM been aware that the background investigations had not gone through the quality review process required by the contracts.

“Shortcuts taken by any company that we have entrusted to conduct background investigations of future and current federal employees are unacceptable,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division.  “The Justice Department will ensure that those who do business with the government provide all of the services for which we bargained.”

“Contractors who do business for the federal government have a responsibility to provide the goods and services that they promise,” said Acting U.S. Attorney Vincent H. Cohen Jr. of the District of Columbia.  “This particular company failed to meet its obligations of comprehensively reviewing the backgrounds of current and prospective federal employees.  This settlement demonstrates our commitment to holding government contractors accountable.”

“This case demonstrates my office’s dedication to protecting tax payers’ money,” said U.S. Attorney George L. Beck Jr. of the Middle District of Alabama.  “We will continue to vigorously pursue all fraud against the government in order to restore and safeguard funds paid by our citizens.”

In February 2015, Altegrity, USIS and their affiliates filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code in Delaware.  The settlement of USIS’ FCA liability is part of a broader settlement that also resolves other matters between the United States and USIS/Altegrity that were part of the bankruptcy proceeding.

The FCA lawsuit against USIS was originally filed under the whistleblower provisions of the act by Blake Percival, a former executive at USIS.  The FCA prohibits the submission of false claims for government money or property and, under the act’s whistleblower provisions, a private party may file suit on behalf of the United States and share in any recovery.  The United States may elect to intervene and take over the case, as it did here.  Mr. Percival’s share of the settlement has not yet been determined.

The settlement was the result of a coordinated effort by the Civil Division’s Commercial Litigation Branch, the U.S. Attorney’s Office of the District of Columbia, the U.S. Attorney’s Office of the Middle District of Alabama, OPM and OPM’s Office of Inspector General.

The claims resolved by the settlement agreement are allegations only and there has been no determination of liability.  The case is United States of America, ex rel., Blake Percival, v. U.S. Investigations Services, LLC, No. 14-cv-00726-RMC (D.D.C.).