Author Archives: Brad Geyer

CCC’s: Kenneth Davidson: Enforcing Antitrust– Leniency, Consumer Redress, and Disgorgement

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With his permission, I am gladly reposting a very interesting commentary written by Kenneth M. Davidson, a Senior Fellow at the American Antitrust Institute on September 1, 2015

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Over the past 25 years “leniency” policies pioneered by the Antitrust Division of the US Department of Justice have been enormously successful in identifying and prosecuting unlawful cartel behavior.  That success has been replicated by competition agencies in the European Union and elsewhere.  The key to its success has been to offer immunity to the first cartel member that provides the competition agency with evidence that the cartel exists.  The leniency program has led to billions of dollars in fines and imprisonment in the United States of executives of corporations that participated in the cartel.  Notwithstanding these impressive results, I think the effectiveness of competition law needs to be enhanced by a general adoption of policies that require antitrust violators to disgorge all ill-gotten gains earned from anticompetitive actions.

The need for disgorgement is indicated by some perplexing results that have followed the implementation of leniency program.  Greater enforcement of the laws against cartels and other anticompetitive practices ought, in theory, result in the formation of fewer cartels.  Yet enforcement statistics indicate that the number of cartels identified appears to be rising and, even more surprisingly, cartels that have been successfully prosecuted appear to be reforming at an increasing rate.  Professor John Connor, my colleague at the American Antitrust Institute, probably the leading expert on cartel enforcement, published a study in 2010, Recidivism Revealed, which provides data indicating that the rate at which prosecuted violators recreate cartels has continued to rise.

Connor and another AAI colleague, Professor Robert Lande, who have together tracked antitrust penalties and recoveries from private antitrust actions, have suggested the answer to this seeming anomaly is that fines, imprisonment, and private recoveries are not high enough to deter the formation or reformation of cartels.  Their article, Cartels as Rational Business Strategy: Crime Pays, concludes that the formation of illegal cartels will be deterred only if the penalties exceed the anticompetitive profits times the chances of getting caught.  This “optimal deterrence” theory requires that if a company earns a million dollars in unlawful profits and calculates that it has a fifty percent chance of being caught the fine ought to be two million dollars.  Lande and Connor estimate that the total recoveries from public and private antitrust actions is less than 21 percent of the amount needed to deter violations.

I have argued in past Commentaries on the AAI website that I doubt that cartel members can or do make these kinds of calculations when secretly setting up their cartels.  More important, my reading of the history of law enforcement is that punishment alone is unlikely to suppress crime.  Even drastic actions like cutting off the hands of pickpockets do not appear to have been successful.  Even if higher civil and criminal penalties were more effective, they do nothing to compensate those who have suffered from antitrust violations.

A study published this summer by Professor Andreas Stephan, Public Attitudes to Price Fixing, surveyed attitudes about cartels in the US, UK, Germany and Italy indicates that public support for antitrust enforcement is less than optimal, at least in the US.  Price fixing between supposed competitors was an ideal object for this study.  A majority of those surveyed understood that the cartel agreement is likely to lead to higher prices than the individual companies would charge.  A substantial majority of the public in all four countries believed that price fixing is harmful to consumers on the grounds that it secretly raises prices to consumers, is dishonest and unethical.  Curiously, the majority view that price fixing is harmful was substantially higher in the three European countries than it was in the US.  Even stranger, was the finding that a majority of the public in Europe believed that price fixing is illegal whereas only forty percent of the American public believes that price fixing is unlawful.

Given that antitrust was invented in the US, the billions collected in fines by the Antitrust Division, and the imprisonment of corporate executives by US courts, it is hard to believe that only a minority of Americans believe that price fixing – the most blatant antitrust violation – is unlawful. How might this disparity be explained? One might guess that the higher rates of belief in Europe that antitrust law exists and outlaws price fixing is a fluke based on timing of high profile cases brought by the EU.  I suggest a different reason.  US antitrust law has become so complicated and so infused with law and economics jargon that it is more difficult for the American public to understand what the courts prohibit under a tangled web of laws that are written in arcane language.  The EU treaty adopts American antitrust principles but states them in shorter clearer language.

Two other factors may help explain why there seems to be greater awareness of competition law in Europe.  The first is that EU competition law is seen as a way for Europe to defend its industries from anticompetitive practices by American companies.  The second is that since 2010, the EU has passed a series of regulations that are designed to compensate individuals for anticompetitive overcharges and for losses of profits due to anticompetitive practices.  These regulations have been widely covered in the media.  The EU regulations are intended to make it easier for individuals and companies to prove they have been harmed by antitrust violations and to collect for the damages they have suffered. A person or group need not present separate proof of a violation of EU competition law if the EU or a national competition agency has found the company to have violated the law.  Injured parties need only show their harm.  Furthermore consumers can sue a manufacturing cartel even if they bought from retailers who charged higher prices because the manufactures sold to retailers at fixed higher prices.  In addition, injured parties are entitled to full payment for their losses plus interest on the amounts they were overcharged.

None of this is available under US law.  Moreover, US courts have created numerous procedural hurdles over the past 30 years that make it considerable more difficult for individuals and groups of consumers to collect for damages they have suffered from antitrust violations.  The only significant recent US legislation designed to help those injured by antitrust violations is ACPERA.  This 2004 law helps plaintiffs prove their antitrust claims if the government has already established the violation.  The help to plaintiffs that are entitled to from violators who have obtained leniency comes at a cost to plaintiffs.  They must forgo their right to treble damages if the already proven violator cooperates with the plaintiffs in providing evidence of the violation.  So far this law has not provided much help to plaintiffs. As a result of procedural obstacles created by courts, there are a declining number of cases where US businesses, groups or individuals are able to collect when they are victims of antitrust violations.

The differences in recovery of damages for anticompetitive practices in the US and the EU should not be overstated.  Professors Lande and Connor estimate that, despite procedural hurdles, Americans recover more compensation through private actions than the government obtains from civil and criminal penalties.  Although European law that encourages member states to allow class actions, it does not require their member states to allow lawsuits that combine the claims of all persons harmed by anticompetitive practices.  Nor does European law allow lawyers to be paid contingency fees.  The effect of these two provisions severely undercuts the viability of lawsuits to compensate individuals who have been harmed by competitive violations.  American experience demonstrates that the large expenses of antitrust lawsuits are generally financed by American lawyers who expect to recover those expenses and be compensated by payment of a portion of the recovery of a successful lawsuit.  However due to court created barriers American consumer redress actions have ceased to be a formidable enforcement and consumer protection avenue.   Thus it seems that the European public has more grounds for optimism than do Americans.  The new rights to compensation for antitrust injuries promised by the EU provide hope that, despite clear flaws, their implementation will become effective in contrast to claims in American courts where decisions seem to promise only more difficulties in obtaining redress for those harmed by anticompetitive actions.

The procedural problems in the US and EU with recovery for damages through individual or class actions could be solved by aggressive implementation of disgorgement remedies.  Disgorgement is a long-established doctrine that empowers US courts to require violators of federal law, including the antitrust laws, to pay out all of the ill-gotten gains obtained from their violations.  Disgorgement focuses on the total amount of unlawful gains rather than proof by plaintiffs demonstrating their individual harms. Stripping the violators of their ill-gotten gains would be a substantial improvement in deterrence.  As noted above, Professors Connor and Lande’s extensive research indicates that under current US law the total of antitrust fines, imprisonment and private recovery is far less than the total antitrust harm created by violators whose actions have been shown to be anticompetitive.

After disgorgement, the funds can be distributed to those who can be identified as having been harmed by the violation.  This would alter the focus of public and private antitrust actions from theoretical mathematical models of “allocative efficiency” to putting money in the hands of those who have been harmed by antitrust violations.  Such payments, large and small, would make consumers and businesses aware of how much they have been harmed by anticompetitive behavior and provide the public with understandable reasons to support more vigorous antitrust enforcement.

Where the disgorgement fund exceeds the amounts that are claimed as damages, where the identities of the entities and individuals harmed cannot be fully ascertained, where the costs of distribution of damages exceeds the amounts to be distributed, disgorgement law provides a variety of ways to distribute the excess.  Under the Cy Pres doctrine the court may distribute the funds to non-profit organizations like the AAI or law school antitrust advocacy programs.  Or if it finds no suitable non-profit recipient, remaining funds can be turned over to the federal treasury.

In his law review article Disgorgement As An Antitrust Remedy, Professor Einer Elhauge asks “is it time for disgorgement to assume center stage as an antitrust remedy?”  He has a series of reasons why he believes in disgorgement.  His influential article led to broader acceptance of disgorgement remedies by the FTC in its 2012 statement on disgorgement and by the EU in its 2014 directive on Antitrust Damages.  I believe that it is time for further action to implement disgorgement in both public and private actions and to eliminate the rules that currently deny recovery for antitrust damages.  Routine recovery of full disgorgement can address much of the relative weakness of American public support for antitrust law and strengthen the EU system for compensating those damaged by antitrust violations.  Disgorgement will not eliminate the need for civil and criminal penalties for violations of antitrust law or the need for injunctions to remedy anticompetitive practices, but it will allow enforcement agencies to disentangle the questions of fairness to consumers from the kinds of penalties needed to deter antitrust violations.

Indictment Charges Three People with Running $54 Million “Green Energy” Ponzi Scheme

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An indictment was unsealed today charging three people in an investment scheme, involving a Bala Cynwyd, Pennsylvania-based company, that defrauded more than 300 investors from around the country.  Troy Wragg, 34, a former resident of Philadelphia, Pennsylvania, Amanda Knorr, 32, of Hellertown, Pennsylvania, and Wayde McKelvy, 52, of Colorado, are charged with conspiracy to commit wire fraud, conspiracy to commit securities fraud, securities fraud and seven counts of wire fraud, announced U.S. Attorney Zane David Memeger of the Eastern District of Pennsylvania and Special Agent in Charge William F. Sweeney Jr of the FBI’s Philadelphia Division.

As the founders of the Mantria Corporation, Wragg and Knorr allegedly promised investors huge returns for investments in supposedly profitable business ventures in real estate and “green energy.”  According to the indictment, Mantria was a Ponzi scheme in which new investor money was used to pay “earnings” to prior investors since the businesses actually generated meager revenues and no profits.  To induce investors to invest funds, it is alleged that Wragg and Knorr repeatedly made false representations and material omissions about the economic state of their businesses.

Between 2005 and 2009, Wragg, Knorr and McKelvy, through Mantria, intended to raise over $100 million from investors through Private Placement Memorandums (PPMs).  In actuality, they raised $54.5 million.  Wragg and Knorr were allegedly able to raise such a large sum of money through the efforts of McKelvy.  McKelvy operated what he called “Speed of Wealth” clubs which advertised on television, radio and the internet, held seminars for prospective investors and promised to make them rich.  According to the indictment, McKelvy taught investors to liquidate all their assets such as mutual funds and 401k plans, to take out as many loans out as possible, such as home mortgages and credit card debt and invest all those funds in Mantria.  During those seminars and other programs, Wragg, Knorr and McKelvy allegedly lied to prospective investors to dupe them into investing in Mantria and promised investment returns as high as 484 percent.

It is further alleged that Wragg, Knorr and McKelvy spent a considerable amount of the investor money on projects to give investors the impression that they were operating wildly profitable businesses.  Wragg, Knorr and McKelvy allegedly used the remainder of the funds raised for their own personal enrichment.  Wragg, Knorr and McKelvy allegedly continued to defraud investors until November 2009 when the SEC initiated civil securities fraud proceedings against Mantria in Colorado, shut down the company, and obtained an injunction to prevent them from raising any new funds.  A receiver was appointed by the court to liquidate what few assets Mantria owned.

In order to lure prospective investors, it is alleged that Wragg, Knorr and McKelvy lied and omitted material facts to mislead investors as to the true financial status of Mantria, including grossly overstating the financial success of Mantria and promising excessive returns.

“The scheme alleged in this indictment offered investors the best of both worlds – investing in sustainable and clean energy products while also making a profit,” said U.S. Attorney Memeger.  “Unfortunately for the investors, it was all a hoax and they lost precious savings.  These defendants preyed on the emotions of their victims and sold them a scam.  This office will continue to make every effort to deter criminals from engaging in these incredibly damaging financial crimes.”

“As alleged, these defendants lied about their intentions regarding investors’ money, pocketing a substantial portion for personal use,” said Special Agent in Charge Sweeney Jr.  “So long as there are people with money to invest, there will likely be investment swindlers eager to take their money under false pretenses.  The FBI will continue to work with its law enforcement and private sector partners to investigate those whose greed-based schemes rob individuals of their hard-earned money.”

If convicted of all charges, the defendants each face possible prison terms, fines, up to five years of supervised release and a $1,000 special assessment.

The criminal case was investigated by the FBI and is being prosecuted by Assistant U.S. Attorney Robert J. Livermore.  The SEC in Colorado investigated and litigated the civil securities fraud charges which formed the basis of the criminal prosecution.

An indictment is an accusation.  A defendant is presumed innocent unless and until proven guilty.

Schroder & Co. Bank AG Reaches Resolution under Justice Department’s Swiss Bank Program and Agrees to Pay $10.3 Million Penalty

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The Department of Justice announced today that Schroder & Co. Bank AG has reached a resolution under the department’s Swiss Bank Program.

“As today’s agreement reflects, Swiss banks continue to lift the veil of secrecy surrounding bank accounts opened and maintained for U.S. individuals in the names of sham structures such as trusts, foundations and foreign corporations,” said Acting Deputy Assistant Attorney General Larry J. Wszalek of the Department of Justice’s Tax Division.  “The department’s prosecutors and the IRS are actively following these leads to criminally investigate and prosecute those individuals who willfully evaded or assisted in the evasion of U.S. income tax obligations.”

The Swiss Bank Program, which was announced on Aug. 29, 2013, provides a path for Swiss banks to resolve potential criminal liabilities in the United States.  Swiss banks eligible to enter the program were required to advise the department by Dec. 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts.  Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program.

Under the program, banks are required to:

  • Make a complete disclosure of their cross-border activities;
  • Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
  • Cooperate in treaty requests for account information;
  • Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
  • Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and
  • Pay appropriate penalties.

Swiss banks meeting all of the above requirements are eligible for a non-prosecution agreement.

According to the terms of the non-prosecution agreement signed today, Schroder Bank agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the department’s agreement not to prosecute the bank for tax-related criminal offenses.

Schroder Bank was founded in 1967 and received its Swiss banking license in 1970.  Since 1984, Schroder Bank has had a branch in Geneva.  The bank has two wholly owned subsidiaries, Schroder Trust AG (domiciled in Geneva) and Schroder Cayman Bank & Trust Company Ltd. (domiciled in George Town, Grand Cayman).  Schroder Cayman Bank & Trust Company Ltd. provides services to clients such as the creation and support of trusts, foundations and other corporate bodies.  Both subsidiaries also acted in some cases as an account signatory for entities holding an account with the bank.  Schroder Bank is in the process of closing the operations of Schroder Trust AG and Schroder Cayman Bank & Trust Company Ltd.

Schroder Bank opened accounts for trusts and companies owned by trusts, foundations and other corporate bodies established and incorporated under the laws of the British Virgin Islands, the Cayman Islands, Panama, Liechtenstein and other non-U.S. jurisdictions, where the beneficiary or beneficial owner named on the Form A was a U.S. citizen or resident.  In addition, a small number of accounts were opened for U.S. limited liability companies (LLCs) with U.S. citizens or residents as members, as well as for U.S. LLCs with non-U.S. persons as members.  Schroder Bank communicated directly with the beneficial owners of some accounts of trusts, foundations or corporate bodies, and it arranged for the issuance of credit cards to the beneficial owners of some such accounts that appear in some cases to have been used for personal expenses.

Schroder Bank also processed cash withdrawals in amounts exceeding $100,000 or the Swiss franc equivalent.  For at least three U.S.-related accounts, a series of withdrawals that in aggregate exceeded $1 million were made.  In addition, at least 26 U.S.-related accountholders received cash or checks in amounts exceeding $100,000 on closure of their accounts, including in at least three cases cash or checks in excess of $1 million.

Between 2004 and 2008, four Schroder Bank employees traveled to the U.S. in connection with the bank’s business with respect to U.S.-related accounts.  In 2008, Swiss bank UBS AG publicly announced that it was the target of a criminal investigation by the Internal Revenue Service (IRS) and the department, and that it would be exiting and no longer accepting certain U.S. clients.  In a later deferred prosecution agreement, UBS admitted that its cross-border banking business used Swiss privacy law to aid and assist U.S. clients in opening accounts and maintaining undeclared assets and income from the IRS.  Between Aug. 1, 2008, and June 30, 2009, Schroder Bank opened eight U.S.-related accounts with funds received from UBS, which was then under investigation by the U.S. government.

Since Aug. 1, 2008, Schroder Bank had 243 U.S.-related accounts with approximately $506 million in assets under management.  Schroder Bank will pay a $10.354 million penalty.

In accordance with the terms of the Swiss Bank Program, Schroder Bank mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.  While U.S. accountholders at Schroder Bank who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased.

Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts.  On Aug. 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement.  With today’s announcement of this non-prosecution agreement, noncompliant U.S. accountholders at Schroder Bank must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

“The cumulative penalties the Swiss Bank Program has generated to date are extraordinary,” said Chief Richard Weber of IRS-Criminal Investigation (CI).  “However, a significant element of the program is the highly-detailed account and transactional data that has been provided to IRS specifically for law enforcement purposes.  We will continue to use this information to vigorously pursue U.S. taxpayers who may still be trying to illegally conceal offshore accounts, ensuring we are all playing by the same rules.”

Acting Deputy Assistant Attorney General Wszalek thanked the IRS, and in particular, IRS-CI and the IRS Large Business and International Division for their substantial assistance.  Wszalek also thanked Sean P. Beaty and Gregory S. Seador, who served as counsel on this matter, as well as Senior Counsel for International Tax Matters and Coordinator of the Swiss Bank Program Thomas J. Sawyer and Senior Litigation Counsel Nanette L. Davis of the Tax Division.

Eight Indicted in Fraud Case That Alleges $50 Million in Bogus Claims for Student Substance Abuse Counseling

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Six Linked to Long Beach Treatment Program Taken into Custody Today

Eight people have been indicted for allegedly participating in a scheme that submitted more than $50 million in fraudulent bills to a California state program for alcohol and drug treatment services for high school and middle school students that, in many instances, were not provided or were provided to students who did not have substance abuse problems.

Six of the defendants who worked at the Long Beach-based Atlantic Health Services, formerly known as Atlantic Recovery Services (ARS), were arrested this morning by federal authorities.

The indictment, which charges the defendants with health care fraud and aggravated identity theft, alleges that ARS received more than $46 million from California’s Drug Medi-Cal program after ARS submitted false and fraudulent claims for group and individual substance abuse counseling services.

“The defendants named in the indictment are accused of exploiting a program that was set up to help a particularly vulnerable population – young people who are confronting drug and alcohol abuse,” said U.S. Attorney Eileen M. Decker for the Central District of California.  “According to the indictment, ARS and its employees engaged in a long-running fraud scheme to steal tens of millions of dollars from a program with limited resources that was designed to help underprivileged youth in recovery.  In the process, the defendants and ARS branded many innocent young people as substance abusers and addicts in order to boost enrollment numbers and billings.”

The defendants named in the indictment are:

  • Lori Renee Miller, 54, of Lakewood, California, the program manager at ARS who supervised substance abuse recovery managers and counselors;
  • Nguyet Galaz, 41, of Montclair, California, who oversaw services provided at approximately 11 schools in Los Angeles County;
  • Angela Frances Micklo, 56, of Palmdale, California, who managed counselors at approximately nine schools in Los Angeles County, including several in the Antelope Valley;
  • Maribel Navarro, 48, of Pico Rivera, California, who managed counselors at approximately ten schools in Los Angeles County;
  • Carrenda Jeffery, 64, of the Mid-City District of Los Angeles, who managed counselors at approximately three schools;
  • LaLonnie Egans, 57, of Bellflower, California, who managed counselors at three schools;
  • Tina Lynn St. Julian, 51, of Compton, California, who worked as a counselor at two schools; and
  • Shyrie Womack, 33, Egans’ daughter, also of Bellflower, who worked as a counselor at three schools.

Galaz and Micklo are expected to self-surrender in the coming weeks.  The six other defendants were taken into custody without incident this morning and are scheduled to be arraigned on the indictment this afternoon in U.S. District Court.

Today’s arrests are the result of a 40-count indictment that was returned by a federal grand jury on August 26 and unsealed this morning.

The eight defendants are all former employees of ARS, which received contracts to provide substance abuse treatment services through the Drug Medi-Cal program to students in schools in Los Angeles County.  The schools included various sites operated by Soledad Enrichment Action and public schools in Montebello, California, Bell Gardens,
Californina, Lakewood, and the Antelope Valley.

ARS allegedly submitted bogus claims for payment to the Drug Medi-Cal program for a decade, according to the indictment.  ARS shut down in April 2013, when California suspended payments to the company.

According to the indictment, the claims submitted to the Drug Medi-Cal program were false and fraudulent for a number of reasons, including:

  • ARS billed for services provided to students who did not have substance abuse disorders or addictions and therefore did not qualify to receive Drug Medi-Cal services;
  • ARS billed for counseling sessions that were not conducted at all;
  • ARS billed for counseling services that were not conducted in accordance with Drug Medi-Cal regulations regarding length, number of students, content and setting;
  • ARS personnel falsified documents, including treatment plans, group counseling sign-in sheets, progress notes and update logs (which listed the dates and times of counseling sessions); and
  • ARS personnel forged student signatures on documents.

“For counselors and supervisors to risk stigmatizing students as substance abusers, as alleged in this case, just to enrich themselves at taxpayer expense is outrageous,” said Special Agent in Charge Christian Schrank for the Office of the Inspector General of the Department of Health and Human Services. “This decade-long conspiracy to defraud Medi-Cal while disregarding the true health care needs of children will not be tolerated.”

Previously, 11 other defendants pleaded guilty to health care fraud charges stemming from the ARS scheme.  Those defendants are former ARS managers Cathy Fernandez, 53, of Downey, California; Erin Hoover, 37, of Long Beach, California; Elizabeth Black, 51, of Long Beach; Helsa Casillas, 44, of El Sereno, California; and Sandra Lopez, 41, of Huntington Park, California; and former ARS counselors Tamara Diaz, 45 of East Los Angeles, California; Margarita Lopez, 40, of Paramount, California; Irma Talavera, 27, of Paramount; Laura Vasquez, 52, of Pico Rivera; Cindy Leticia Ortiz, 29, of Norwalk, California; and Arthur Dominguez, 63, of Glendale, California.

Another defendant, Dr. Leland Whitson, 75, of Redondo Beach, California, the former Medical/Clinical Director of ARS, previously pleaded guilty to making a false statement affecting a health care program.

The dozen defendants who have already pleaded guilty are pending sentencing by U.S. District Judge Philip S. Gutierrez.

Each of the eight defendants named in the indictment unsealed today potentially faces decades in federal prison if convicted.  For example, if convicted, Miller faces a statutory maximum sentence of 324 years in federal prison.

An indictment contains allegations that a defendant has committed a crime.  Every defendant is presumed innocent until and unless proven guilty in court.

The cases against the 20 defendants are the result of an investigation by the Office of Inspector General of the Department of Health and Human Services; the California Department of Justice, Bureau of Medi-Cal Fraud and Elder Abuse; and IRS – Criminal Investigation.

Former Silk Road Task Force Agent Pleads Guilty to Money Laundering and Obstruction

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Ex-Secret Service Agent Used Status to Pocket $820,000 Worth of Bitcoin 

A former U.S. Secret Service special agent pleaded guilty today to money laundering and obstruction of justice in connection with his theft of digital currency during the federal investigation of Silk Road, an online marketplace used to facilitate the purchase and sale of illegal drugs and other contraband.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Melinda Haag of the Northern District of California, Chief Richard Weber of the IRS-Criminal Investigation (IRS-CI), Special Agent in Charge David J. Johnson of the FBI’s San Francisco Division, Special Agent in Charge Michael P. Tompkins of the Justice Department’s Office of the Inspector General’s Washington, D.C. Field Office, and Special Agent in Charge Lori Hazenstab of the Department of Homeland Security’s Office of the Inspector General in Washington D.C. made the announcement.

Shaun W. Bridges, 32, of Laurel, Maryland, had been a special agent with the U.S. Secret Service for approximately six years in the Baltimore Field Office and was assigned to the Electronic Crimes Task Force.  He pleaded guilty before the U.S. District Judge Richard Seeborg of the Northern District of California and a sentencing hearing is scheduled for Dec. 7, 2015.

“There is a bright line between enforcing the law and breaking it,” said Assistant Attorney General Caldwell.  “Law enforcement officers who cross that line not only harm their immediate victims but also betray the public trust.  This case shows we will act quickly to hold wrongdoers accountable, no matter who they are.”

“Mr. Bridges has now admitted that he brazenly stole $820,000 worth of digital currency while working as a U.S. Secret Service special agent, a move that completely violated the public’s trust,” said U.S. Attorney Haag.  “We depend on those in federal law enforcement having the highest integrity and unshakeable honor, and Mr. Bridges has demonstrated that he utterly lacks those qualities.  We appreciate the hard work of our federal partners that went into bringing Mr. Bridges to justice.”

“Through a series of complex transactions, the defendant stole bitcoins worth hundreds of thousands of dollars,” said Chief Weber.  “This case is an excellent example of the financial expertise of our special agents. Through the analysis of both the block chain and data from the Silk Road servers, we were able to trace the flow of funds, which eventually led to the defendant.”

Between 2012 and 2014, Bridges was assigned to the Baltimore Silk Road Task Force, a multi-agency group investigating illegal activity on Silk Road.  Bridges’ responsibilities included, among other things, conducting forensic computer investigations in an effort to locate, identify and prosecute targets, including Ross Ulbricht, aka Dread Pirate Roberts, who ran Silk Road.

According to his plea agreement, Bridges admitted that in January 2013 he used an administrator account on the Silk Road website that belonged to another individual to fraudulently obtain access to that website, reset passwords of various accounts and to move bitcoin from those accounts into a bitcoin “wallet” that Bridges controlled.  Bridges admitted that he moved and stole approximately 20,000 bitcoin, which at that time was worth approximately $350,000.

Bridges admitted that he moved the stolen bitcoin into an account at Mt. Gox, an online digital currency exchange based in Japan.  According to his admissions, he liquidated the bitcoin into $820,000 of U.S. currency between March and May 2013, and had the funds transferred to personal investment accounts in the United States.

Bridges’ plea agreement also established that he obstructed the Baltimore federal grand jury’s investigations of Silk Road and Ulbricht in a number of ways, including by impeding the ability of the investigation to fully utilize a cooperator’s access to Silk Road.  In addition, Bridges admitted that he made multiple false and misleading statements to investigators in connection with the San Francisco federal grand jury’s investigation into his own illegal acts, and that he encouraged another government employee to lie to investigators.

Bridges is one of two federal agents to plead guilty in connection with illegal activity during the investigation of Silk Road.  Carl M. Force, 46, of Baltimore, was a special agent with the Drug Enforcement Administration and was also assigned to the Baltimore Silk Road Task Force.  On July 1, 2015, Force pleaded guilty to a three-count information charging him with money laundering related to his theft of over $700,000 in digital currency while acting as an undercover agent on the Task Force.  Force is scheduled to be sentenced by Judge Seeborg on Oct. 19, 2015.

The case was investigated by the FBI’s San Francisco Division, the IRS-CI’s San Francisco Division, the Justice Department’s Office of the Inspector General and the Department of Homeland Security’s Office of the Inspector General in Washington, D.C.  The case is being prosecuted by Assistant U.S. Attorneys Kathryn Haun and William Frentzen of the Northern District of California and Trial Attorney Richard B. Evans of the Criminal Division’s Public Integrity Section, with assistance from Assistant U.S. Attorney Arvon Perteet.

Detroit-Area Physician Pleads Guilty for Role in $5.7 Million Fraud Scheme

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A Detroit-area medical doctor who prescribed unnecessary controlled substances and billed for unperformed office visits and diagnostic testing pleaded guilty today for his role in a $5.7 million health care fraud scheme.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Barbara L. McQuade of the Eastern District of Michigan, Special Agent in Charge Paul M. Abbate of the FBI’s Detroit Field Office, Special Agent in Charge Lamont Pugh III of the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG) Chicago Regional Office and Special Agent in Charge Jarod J. Koopman of Internal Revenue Service-Criminal Investigation (IRS-CI) made the announcement.

Laran Lerner, 59, of Northville, Michigan, pleaded guilty before U.S. District Judge Victoria A. Roberts of the Eastern District of Michigan to one count of health care fraud and one count of structuring cash transactions to avoid bank reporting requirements, as charged in a two-count information filed on Aug. 21, 2015.  Sentencing is set for Jan. 24, 2015.

According to admissions made as part of his plea agreement, Lerner lured patients into his clinic with prescriptions for unnecessary controlled substances.  Lerner admitted that he billed and caused Medicare to be billed for a variety of unnecessary prescriptions, tests and office visits to make it appear as though he was providing legitimate medical services instead of medically unnecessary controlled substances.  According to admissions made as part of his plea agreement, Medicare was billed $5,748,237.31, as a result of Lerner’s unnecessary prescriptions, office visits and diagnostic testing.

As part of the plea agreement, Lerner agreed to permanently surrender his Drug Enforcement Administration controlled substance registration and agreed not to re-apply in the future.

Lerner also pleaded guilty to structuring cash deposits he received as a result of his scheme to avoid triggering the requirement under federal law that domestic banks file a report – called a Currency Transaction Report – with the Secretary of Treasury for all transactions in currency over $10,000.  Lerner admitted that he knew about this requirement and caused his cash deposits to be structured in $5,000 increments on consecutive days at various branch locations in the Detroit area to avoid detection.  According to court documents, Lerner deposited $70,000 in cash in April 2013 alone by making deposits of $5,000 on fourteen different days.

The case was investigated by the FBI, HHS-OIG and IRS-CI, and was brought as part of the Medicare Fraud Strike Force, supervised by the Criminal Division’s Fraud Section and the U.S. Attorney’s Office of the Eastern District of Michigan.  The case is being prosecuted by Trial Attorney Elizabeth Young of the 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, the HHS Centers for Medicare & Medicaid Services, working in conjunction with the HHS-OIG, are taking steps to increase accountability and decrease the presence of fraudulent providers.

Justice Department Settles Housing Discrimination Lawsuit Against Owners of Marion, Illinois, Mobile Home Park

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The Justice Department announced today that the owners and operators of the Williams Trailer Court mobile home park in Marion, Illinois, had agreed to pay $75,000 to settle allegations that they discriminated against African Americans and families with children, in violation of the federal Fair Housing Act.  The settlement was approved today by the U. S. District Court for the Southern District of Illinois.

The settlement agreement resolves a lawsuit alleging that the owners and operators of the park, located at 200 East Patrick Street in Marion, Illinois, violated the Fair Housing Act by refusing to rent mobile homes to African Americans and families with children.  The lawsuit is based on the results of testing conducted by the department’s fair housing testing program.  Testing is a simulation of a housing transaction that compares responses given by housing providers to different types of home-seekers to determine whether illegal discrimination is occurring.  The testing conducted by the department revealed that the manager and part owner of the park, Lyle Williams, falsely told African Americans inquiring about renting mobile homes that no homes were available, while telling white home-seekers that such mobile homes were available.  The testing also revealed that Williams unlawfully discouraged families with children from living there.  In addition to Lyle Williams, the lawsuit also names as defendants the park’s other two owners, Kyle Williams and David Williams.

“The right of people to live in the housing of their choice regardless of their race or whether they have children is fundamental,” said Principal Deputy Assistant Attorney General Vanita Gupta, head of the Civil Rights Division.  “The Justice Department will continue its vigorous enforcement of the Fair Housing Act, which seeks to protect that right.”

“It is both shocking and sad that in this day and age any person would try to discriminate against a fellow citizen on the basis of race,” said U.S. Attorney Stephen R. Wigginton of the Southern District of Illinois.  “Neither the Department of Justice nor my office will tolerate such behavior.  Opportunity and justice must remain equal for all.”

Under the terms of the settlement, defendants will establish a settlement fund in the amount of $45,000 to compensate victims of the discriminatory practices.  Defendants also will pay $30,000 in civil penalties to the United States.  In addition, the agreement requires defendants to implement a nondiscrimination policy, establish new nondiscriminatory application and rental procedures, and undergo training on the Fair Housing Act.  Persons who believe they may have been discriminated against at Williams Trailer Court should contact the department at 1-800-896-7743, extension 3, or by email at [email protected]

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The federal Fair Housing Act prohibits discrimination in housing on the basis of race, color, religion, sex, familial status, national origin and disability.  More information about the Civil Rights Division and the laws it enforces is available at www.usdoj.gov/crt.  Individuals who believe that they have been victims of housing discrimination can call the Housing Discrimination Tip Line at 1-800-896-7743, e-mail the Justice Department at [email protected]

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or contact HUD at 1-800-669-9777.

Russian Nuclear Energy Official Pleads Guilty to Money Laundering Conspiracy Involving Violations of the Foreign Corrupt Practices Act

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U.S. Conspirators Paid Over $2 Million to Influence Russian Nuclear Energy Official and to Secure Business with State-Owned Russian Nuclear Energy Company

A Russian official residing in Maryland pleaded guilty today to conspiracy to commit money laundering in connection with his role in arranging over $2 million in corrupt payments to influence the awarding of contracts with the Russian state-owned nuclear energy corporation.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Rod J. Rosenstein of the District of Maryland, Deputy Inspector General John R. Hartman of the U.S. Department of Energy-Office of Inspector General (DOE-OIG) and Assistant Director in Charge Andrew G. McCabe of the FBI’s Washington, D.C., Field Office made the announcement.

Vadim Mikerin, 56, of Chevy Chase, Maryland, pleaded guilty before U.S. District Judge Theodore D. Chuang of the District of Maryland.  Sentencing is scheduled before Judge Chuang on Dec. 8, 2015.

According to court documents, Mikerin was the president of TENAM Corporation and a director of the Pan American Department of JSC Techsnabexport (TENEX).  TENAM, based in Bethesda, Maryland, is a wholly-owned subsidiary and the official representative of TENEX in the United States.  TENEX, based in Moscow, acts as the sole supplier and exporter of Russian Federation uranium and uranium enrichment services to nuclear power companies worldwide.  TENEX is a subsidiary of Russia’s State Atomic Energy Corporation.

In connection with the scheme, Daren Condrey, 50, of Glenwood, Maryland, pleaded guilty on June 17, 2015, to conspiring to violate the Foreign Corrupt Practices Act (FCPA) and conspiring to commit wire fraud, and will be sentenced on Nov. 2, 2015.  Boris Rubizhevsky, 64, of Closter, New Jersey, pleaded guilty on June 15, 2015, to conspiracy to commit money laundering and will be sentenced on Oct. 19, 2015.

According to court documents, between 2004 and October 2014, Mikerin conspired with Condrey, Rubizhevsky and others to transmit funds from Maryland and elsewhere in the United States to offshore shell company bank accounts located in Cyprus, Latvia and Switzerland.  Mikerin admitted the funds were transmitted with the intent to promote a corrupt payment scheme that violated the FCPA.  Specifically, he admitted that the corrupt payments were made by conspirators to influence Mikerin and to secure improper business advantages for U.S. companies that did business with TENEX.  Mikerin further admitted that he and others used consulting agreements and code words such as “lucky figure,” “LF,” “cake” and “remuneration” to disguise the corrupt payments.

According to court documents, over the course of the scheme, Mikerin conspired with Condrey, Rubizhevsky and others to transfer approximately $2,126,622 from the United States to offshore shell company bank accounts.  As part of his plea agreement, Mikerin has agreed to the entry of a forfeiture money judgment in that amount.

The case was investigated by DOE-OIG and the FBI.  The case is being prosecuted by Trial Attorneys Christopher Cestaro, Ephraim Wernick and Derek Ettinger of the Criminal Division’s Fraud Section and Assistant U.S. Attorneys David I. Salem and Michael T. Packard of the District of Maryland.

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.