Executives at Risk: Fall 2018

White Collar Alert
11.08.2018

Since our last publication, there has been significant activity in some of the most noteworthy government investigations impacting corporate executives. Key developments include:

On the cartel front, the government achieved mixed results in two major trials against foreign financial services executives in the London Interbank Offered Rate (LIBOR) and foreign currency exchange (FOREX) manipulation cases, resulting in convictions in the LIBOR trial but acquittals of all charges in the FOREX trial. The FOREX acquittals are noteworthy because the three former currency traders voluntarily came to the United States from the United Kingdom to face trial, even after the U.K. government declined to charge them for the same alleged misconduct. 

The government also suffered a setback in its efforts to pursue foreign executives located abroad. A U.K. court recently denied the U.S. government's attempt to extradite a British banking executive to face charges in the U.S. in the FOREX investigation. In addition, in August, the Second Circuit declined to expand Foreign Corrupt Practices Act (FCPA) liability for foreign nationals based on an aiding-and-abetting theory where foreign nationals are not otherwise within the jurisdictional reach of the statute.

We also discuss below noteworthy sentences and court rulings, including the Supreme Court's decision in Lucia v. Securities and Exchange Commission (SEC) requiring administrative law judges (ALJs) overseeing SEC cases to be formally appointed in line with the Appointments Clause of the U.S. Constitution. That ruling creates uncertainty for more than 125 SEC matters in which new hearings will be held before properly appointed and previously uninvolved ALJs.

Noteworthy Investigations

NCAA Investigation

Jury Convicts Three Executives in College Basketball Corruption Trial: Since we last reported on the NCAA investigation, a federal jury sitting in the Southern District of New York convicted former Adidas director Jim Gatto, former Adidas consultant Merl Code, Jr., and aspiring sports agent Christian Dawkins of wire fraud offenses. Prosecutors charged that Gatto, Code, and Dawkins funneled money from Adidas to college basketball prospects who signed on at three university teams sponsored by Adidas: the University of Louisville, North Carolina State University, and the University of Kansas. The defendants acknowledged that their conduct violated NCAA rules, but they denied breaking the law. The three defendants will be sentenced on March 5, 2019.

Volkswagen Investigation

Audi CEO Arrested, Agrees to Testify in Investigation Into Emissions Scandal: Since we last reported on the multijurisdictional Volkswagen emissions investigation, German police arrested Rupert Stadler, the former CEO of Audi, a subsidiary of Volkswagen Group. Stadler was denied bail after a judge accepted the Munich Public Prosecutor's allegations that Stadler had attempted to influence witnesses. Stadler has denied any wrongdoing and has agreed to cooperate with the investigation. At the beginning of October, Volkswagen AG terminated Stadler, stating, "[d]ue to his ongoing pretrial detention, he is unable to fulfill his duties as a member of the board of management and wishes to concentrate on his defense."

FIFA Investigation

Two FIFA Executives Sentenced to Nine and Four Years of Imprisonment and Ordered to Forfeit More than $6 Million: In August, Juan Ángel Napout, the former president of the South American soccer confederation Confederación Sudamericana de Fútbol (CONMEBOL), and José Maria Marin, a former Brazilian soccer federation president, were sentenced in the Eastern District of New York. As we previously reported, the men were convicted in 2017 on charges of conspiring to commit wire fraud conspiracy, racketeering conspiracy, and as to Marin, money laundering conspiracy. Napout was sentenced to nine years imprisonment, ordered to forfeit $3,374,025.88 in bribe receipts, and fined $1 million. The court sentenced Marin to four years in prison, ordered him to forfeit $3,335,593, and imposed a $1.2 million fine. 

In separate restitution proceedings, FIFA asked the court to hold Napout and Marin jointly liable for the costs FIFA incurred during its internal investigation and during trial. In its victim impact statement, CONMEBOL said it intended to seek more than $100 million in restitution from Marin to cover lost revenue, legal costs, and the tens of millions in bribes paid to Marin and his co-conspirators. The Eastern District of New York ordered the soccer organizations FIFA, CONMEBOL, and the Confederation of North, Central America and Caribbean Association Football (CONCACAF) to produce billing records and expense documentation supporting their claims. 

Extradition and Extraterritoriality

Second Circuit Declines to Expand FCPA Liability for Foreign Nationals: In August, the Second Circuit held in United States v. Hoskins that the U.S. government cannot use theories of complicity or conspiracy to charge a foreign national with violating the FCPA where the foreign national is not otherwise within the FCPA's jurisdiction. The Second Circuit upheld a lower court's decision dismissing charges against a former Alstom S.A. executive, Lawrence Hoskins, for conspiracy to violate the FCPA and aiding and abetting in connection with in a scheme to bribe Indonesian officials in return for a $118 million power station construction contract in Indonesia. The district court dismissed the charges against Hoskins, ruling that conspiracy and aiding-and-abetting liability cannot extend to a party not covered by the underlying FCPA statute. As we reported in our Winter 2016/2017 edition, the U.S. Department of Justice (DOJ) appealed the ruling to the Second Circuit in September 2016, arguing that Hoskins could be held liable on conspiracy and aiding-and-abetting charges based on what the government characterized as the "well-established rule" that conspirator and accomplice liability are not limited to those individuals expressly enumerated in the underlying statute. The Second Circuit disagreed.

Former HSBC Executive Defeats Extradition to United States: In July, a United Kingdom appellate court overturned an extradition order for a former HSBC executive, Stuart Scott, to face charges of currency manipulation in the United States. Scott was first charged in the U.S. in July 2016 as part of DOJ's FOREX investigation, as discussed in our Fall 2016 edition. A U.K. trial court approved his extradition to the U.S. in October 2017, but an appellate court found that his extradition would not be in the interests of justice. The appellate court explained that there "were two powerful factors against extradition, namely the fact that most of the harm took place in this jurisdiction and the appellant's strong connection with the United Kingdom and absence of any significant connection with the United States." In October, the U.K.'s highest court denied the U.S. government's appeal of the decision, thereby foreclosing any chance that the U.K. would extradite Scott to the U.S.

Actions Against Executives

Cartel

Former British Currency Traders Acquitted of FOREX Rigging Charges: In October, three former British currency traders were acquitted of charges that they conspired to manipulate the FOREX market. According to the indictment, the former traders – Richard Usher (a former JPMorgan Chase & Co. trader), Chris Ashton (a former Barclays plc trader), and Rohan Ramchandani (a former Citigroup Inc. trader) – participated in almost daily conversations in a private chatroom dubbed "The Cartel" or "The Mafia." There, the former traders allegedly coordinated their trades and bids as part of an effort to rig FOREX rates. (All three traders had waived extradition and pleaded not guilty, as we previously reported.) At trial, the defendants argued that they had not violated antitrust law by merely sharing information, pointing to the lack of evidence of any specific agreement to rig rates. The acquittal was a significant blow to U.S. prosecutors, who received significant criticism for charging the three foreign nationals after the U.K.'s Serious Fraud Office declined to pursue charges over the same alleged conduct, which occurred on U.K. soil. 

Ex-Deutsche Bank Traders Convicted of LIBOR Manipulation: In October, Matthew Connolly and Gavin Black, former Deutsche Bank traders, were convicted in federal court for their roles in manipulating LIBOR. LIBOR is an averaged interest rate, calculated based on submissions from lending banks around the world, reflecting the rates those banks believed they would be charged if borrowing from other banks. Evidence at trial showed that both Connolly and Black were involved in soliciting inaccurate LIBOR contributions (i.e., the estimated expected interest rate). To increase Deutsche Bank's profits on certain derivatives contracts. Connolly directed his subordinates to contact submitters to ask them to submit false LIBOR contributions consistent with his traders' or the banks' financial interests; Black asked Deutsche Bank's cash traders who were responsible for submitting the bank's LIBOR rates to adjust their submissions to favor his derivative trading positions. After a month-long trial, a jury found the men guilty of conspiracy and wire fraud. They await sentencing.  

Brazilian Authorities Arrest GE Latin America Executive for Role in Medical Equipment Cartel: In July, Brazilian authorities arrested Daurio Speranzini, Jr., the head of General Electric (GE) Latin America, for his alleged role while employed by Philips Medical Systems in a decades-long price-fixing scheme of medical equipment and later by GE. The Brazilian government alleges that several multinational companies, including GE, Philips, and Johnson & Johnson, bribed government officials in exchange for help in fixing prices of medical equipment. Although Speranzini was reportedly terminated from Philips after a whistleblower came forward about the scheme, he allegedly continued the scheme when he moved to GE.   

FCPA

Invoking Kokesh, Federal Judge Dismisses SEC's Untimely Civil Suit Against Former Och-Ziff Executives: In July, a New York federal judge dismissed the SEC's civil suit against two former Och-Ziff Capital Management LLC executives accused of directing a "sprawling [bribery] scheme" in Africa. As we previously reported, Michael Cohen, a former executive managing director of the New York-based hedge fund, was indicted on multiple criminal charges of conspiracy relating to alleged material misrepresentations in connection with a proposed investment in an African mining company and by funneling millions of dollars in bribes to African officials in exchange for investment opportunities and preferential treatment. In parallel civil proceedings, the SEC sought fines, restitution, and injunctive relief against Cohen and Vanja Baros, a former Och-Ziff executive for African-related business, as part of a suit claiming that their conduct violated both the anti-bribery and the internal accounting controls provisions of the FCPA.

The court concluded, however, that the SEC's claims were barred by the FCPA's five-year statute of limitations. The dismissal is one of the first to apply the Supreme Court's opinion in Kokesh v. SEC, which held that disgorgement is subject to the five-year statute of limitations typically used in SEC enforcement actions. The court also rejected the SEC's alternative arguments that tolling agreements signed by Cohen and Baros extended the statute of limitations. Cohen's criminal case remains pending.

Former SBM Executives Sentenced to Prison for Payments to Officials: In September, two former executives of SBM Offshore, N.V., a Dutch oil services company, were sentenced to prison for bribing officials in Brazil, Angola, and Equatorial Guinea. Anthony Mace, the former CEO of SBM, was sentenced to three years in prison; Robert Zubiate, a former sales and marketing executive at SBM's U.S. subsidiary, received a 30-month sentence. As we previously reported, the pair pled guilty in November 2017 to conspiring to violate the FCPA in connection with millions of dollars of bribes paid to officials of state-run oil companies in exchange for oil services contracts. Mace's lengthier sentence reflects his admission that although he inherited the bribery scheme from other SBM employees, he engaged in "willful blindness." Mace maintained a spreadsheet of the $16 million in payments he authorized, yet deliberately avoided learning that the recipients were government officials. Mace is one of only a few defendants to ever be prosecuted under the FCPA on a theory of willful blindness.  

Additional Pleas and Charges in Ongoing PDVSA Investigation: Since we last reported on the government's long-standing investigation into bribery at Venezuela's state-owned-and-controlled oil company, Petróleos de Venezuela S.A. (PDVSA), three more individuals have pled guilty and another defendant faces criminal charges. To date, 18 defendants have been charged in the bribery probe, of whom 14 have pled guilty. Most recently, Luis Carlos De Leon-Perez, a dual citizen of the U.S. and Venezuela and former PDVSA official, pled guilty to conspiring to violate the FCPA and to commit money laundering. De Leon admitted that he solicited bribes from U.S.-based PDVSA vendors in exchange for contracts and preferential treatment, and that he conspired with the vendors to conceal the payments. He awaits sentencing.

Juan Carlos Castillo Rincon, a U.S. citizen and the former manager of a Texas logistics and freight forwarding company, pled guilty to charges that he and others conspired to bribe a PDVSA official in return for lucrative logistics contracts, inside information on tender processes, and advantages in purchasing decisions. The official who received the bribes, Jose Orlando Camacho, pled guilty to conspiracy to commit money laundering. Both Rincon and Camacho are scheduled to be sentenced on February 21, 2019. 

DOJ's latest allegations were lodged against Miami businessman Jose Manuel Gonzalez Testino. According to the criminal complaint, Gonzalez and others conspired to bribe a former PDVSA official in exchange for contracts and priority in receiving payment on existing invoices. 

Sanctions

Three Execs Indicted for Evading U.S. Sanctions against Iran: Three U.S. citizens, all executives of Iranian manufacturing company Ghare Sabz Company, were arrested in California and charged with conspiring to evade U.S. export control laws. According to the indictment, Sadr Emad-Vaez, Pouran Aazad, and Hassan Ali Moshir-Fatemi purchased automobile components from companies both inside and outside the United States and shipped the items to Iran from 2012 to 2018 without having first obtained a license from the U.S. Treasury's Office of Foreign Assets Control (OFAC). The government also alleges that the men used elaborate systems of international wire transfers – including through prohibited financial institutions – to fund the effort. The defendants await trial.   

Securities Fraud 

Former Brokerage Company CEO Pleads Guilty, Leaving Novel Brady Issue Unresolved: In August, Anthony Blumberg, former CEO of ConvergEx Global Markets Limited (CGM Limited), pled guilty to one count of conspiracy to commit securities and wire fraud. Blumberg admitted that traders at CGM Limited added a "spread" to security prices, such that an additional amount was added to the purchase price or a reduction was taken from the sale, but the mark-ups and mark-downs were not disclosed to the clients. In a novel motion to compel discovery, Blumberg had argued that the government was obligated to search for Brady material in the company's files, because company attorneys had purportedly become part of the prosecution team during the company's cooperation with the government. By pleading guilty, Blumberg left this evidentiary issue unresolved. Sentencing is scheduled for December 5, 2018.

Financial Services Executive Convicted in Secret Commissions Scheme: After a three-week trial, a federal jury in Boston found Ross McLellan, former executive vice president and global head of the Portfolio Solutions Group for State Street Corporation, guilty of conspiracy, securities fraud, and wire fraud. McLellan and alleged co-conspirator Edward Pennings were indicted on charges that they defrauded six large institutional clients through the practice of charging secret commissions on securities trades and actively concealing those commissions from clients and bank employees alike. Pennings, who testified at McLellan's trial, pled guilty to one count of conspiracy in June 2017 and is scheduled to be sentenced on November 6. A third co-conspirator, Richard Boomgaardt, was charged separately, pled guilty to conspiracy, and was sentenced to probation for one year. In October, McLellan was sentenced to 18 months in prison and two years of supervised release. 

Tax

Former Mexican Bank Executive Sentenced to Six Years in Prison for Wire Fraud: Carlos Djemal Nehmad, a former partner in Mexican bank InvestaBank SA, was recently sentenced to six years in prison and ordered to pay $21 million in restitution after pleading guilty to wire fraud charges in the Southern District of New York. The charges stemmed from a scheme to defraud the Mexican government of tax revenue relating to Mexico's value added tax (VAT) by transferring more than $100 million through dozens of shell companies in the U.S. and Mexico. As part of the scheme, Djemal exported outdated cell phones from Mexican shell companies to U.S. shell companies, then created export documents that falsely inflated the value of the phones being exported, enabling him to fraudulently seek inflated VAT refunds from the Mexican tax authority. 

Money Laundering

Former Swiss Bank Executive Pleads Guilty to Conspiracy to Commit Money Laundering: In August, Matthias Krull, former managing director and vice chairman at a private investment bank, Julius Baer, pled guilty to conspiracy to commit money laundering. Mr. Krull admitted to laundering $1.2 billion of funds that he embezzled from PDVSA, the state-owned Venezuelan oil company, using real estate and false-investment schemes. As part of his plea, Mr. Krull admitted that U.S. and foreign money managers, brokerage firms, and real estate investment firms were complicit in the false-investment laundering schemes. 

SEC Sanctions Chief Compliance Officer for Money Laundering Violations: In May, the SEC charged Jerard Basmagy, the CCO and anti-money laundering officer for Chardan Capital Markets LLC, with willfully aiding and abetting and causing Chardan's securities laws violations. Chardan was charged in a separate action for failing to file Suspicious Activity Reports (SARs) relating to the fraudulent liquidation of 12.5 billion penny stock shares. As the CCO and chief anti-money laundering officer, Basmagy was responsible for monitoring suspicious trading activity, investigating any potential red flags, and filing SARs where necessary. According to the SEC's order, from October 2013 to June 2014 Basmagy failed to recognize red flags in Chardan's heavy trading in low-priced securities and did not review reports for suspicious customer activity. As a result, he did not file any SARs relating to the penny stock share sales, which directly contributed to Chardan's violation of securities laws. Basmagy did not admit or deny the SEC's findings and agreed to a $15,000 penalty and a ban from the securities and penny stock industries for three years. 

Accounting Fraud

Former Transportation Company Executives Charged in Accounting Fraud Scheme: In June, a federal grand jury indicted two former executives of publicly-traded Roadrunner Transportation Systems, Inc. on charges of conspiracy, securities fraud, and wire fraud for allegedly engaging in a complex scheme to allow misstated accounts to remain on the company's books, mislead investors and regulators about Roadrunner's true financial condition, and boost Roadrunner's stock price. CPAs Bret Naggs and Mark Wogsland both served as Controller for Roadrunner's Truckload segment, with Wogsland later serving as Director of Accounting for that segment. In early 2017, Roadrunner announced the potential accounting discrepancies and errors, resulting in a restatement of the company's financial results and a drop in stock price from over $11 to less than $5 a share. DOJ alleges that the accounting and securities fraud scheme led to a loss of greater than $245 million in shareholder value. No trial date has been set for the two executives. 

Noteworthy Sentencing

CEO Receives Jail Term Significantly Below Guidelines Range in Scheme to Defraud Bank: In August, a federal judge sentenced the CEO of a cocoa trading company, Peter G. Johnson, to 36 months in prison after pleading guilty to participating in a scheme to convince banks to extend $400 million in credit to the company based on fraudulent financial reports, resulting in the company's bankruptcy and unpaid debt of more than $350 million. The sentence was significantly below the Sentencing Guidelines range of 188-235 months, as stipulated by the parties in the plea agreement. The government agreed that sentencing below the Guidelines range was appropriate, citing the low likelihood that Johnson would reoffend and the ongoing collection efforts by the defrauded bank. Johnson's son, Peter B. Johnson, received 30 months for his role in the offense. 

Former Bankrate CFO Receives 10-Year Statutory Max for Manipulating Financials Resulting in $25 Million Shareholder Loss: In September, a federal court sentenced Edward DiMaria, the CFO of publicly traded financial services company Bankrate, to the statutory maximum of 10 years' incarceration for his role in organizing an accounting and securities fraud scheme that resulted in $25 million in shareholder losses. Even though the Guidelines recommended a sentencing nearly twice the statutory maximum, Edward DiMaria asked for a downward variance, citing his religious faith and charitable works. The government, in its press release, praised the significant sentence as "underscor[ing] the serious nature of corporate fraud and the damage it causes to shareholders and to the public's trust in our financial markets." As previously reported, Hyunjin Lerner, Bankrate's former vice president of finance, was sentenced in January to five years for his involvement in the scheme.

Whistleblower Issues 

SEC Proposes Amendments to Whistleblower Program: In June 2018, the U.S. Securities and Exchange Commission (SEC) proposed new rules modifying its Whistleblower Program to conform to the Supreme Court's February 2018 ruling in Digital Realty Trust, Inc. v. Somers, which held that a whistleblower who reports misconduct internally rather than to the SEC is not entitled to the heightened anti-retaliation protections of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The proposed rules establish a uniform definition for "whistleblower" that would require a purported whistleblower to report violations of federal securities laws in writing to the SEC. Miller & Chevalier attorneys William Barry and Jonathan Kossak provide more detail here

The SEC's proposed rules would also grant the SEC discretion to adjust to a maximum of $2 million (subject to the 30 percent statutory maximum) awards that would otherwise yield a payout less than $2 million; and would grant the SEC discretion to adjust downwards (but no less than $30 million and subject to the 10 percent statutory minimum) an award that would otherwise yield a payout over $100 million. The purpose of these proposed rules is purportedly to provide greater incentives to whistleblowers reporting on low-award matters, and to ensure that "the Commission is a responsible steward of the public trust" for high-value awards. The SEC will review the comments it has received on the proposal, but there is no formal timetable for final approval of the rule.  

SEC Whistleblower Awards Increase in Q2 2018: After issuing no whistleblower awards since April 2018, the SEC's Office of the Whistleblower issued four significant awards in September. This includes the second-largest individual award in the history of the program of $39 million and a $15 million for another whistleblower's reporting in the same case. The SEC also awarded $1.5 million to an unnamed whistleblower whose payout was reduced because the whistleblower delayed in reporting the misconduct for over a year during which time, according to the SEC, "investors were being harmed," and the whistleblower benefitted financially. Finally, the SEC awarded $4 million to an unnamed overseas whistleblower "whose tip led [the SEC] to open an investigation and whose extensive assistance helped it bring a successful enforcement action."  

Noteworthy Court Rulings

Supreme Court Deems SEC Administrative Law Judges "Officers" Under the Appointments Clause, Paves Way for New Hearings: In June, the Supreme Court held in Lucia v. SEC that the SEC's ALJs constitute "officers" under the Appointments Clause of the Constitution, requiring appointment by the president, a court of law, or a head of a department (see FCPA Summer Review 2018). Previously, ALJs had been selected by SEC staff pursuant to hiring rules for federal employees. As we reported in Executives at Risk: Winter 2018, the SEC attempted to avoid future appointments clause challenges by ratifying the appointments of existing ALJs. In light of the Supreme Court's decision, in July, President Trump signed an executive order placing the authority to select ALJs in the hands of the agency itself and exempting ALJs from certain federal hiring rules. In August, the SEC remanded all proceedings currently pending before the Commission and vacated any existing opinions by the Commission, leaving respondents to face hearings before an ALJ who had not heard the original case. The order sets the stage for new hearings in over 125 matters. 


EditorsDawn E. Murphy-JohnsonLauren E. BriggermanKirby D. Behre

ContributorsSarah A. DowdNina C. GuptaAmelia Hairston-PorterIan A. HerbertAiysha S. HussainJonathan D. Kossak, Nicholas R. MetcalfKatherine E. PappasDwight B. N. Pope


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