Executives at Risk: Navigating Individual Exposure in Government Investigations - Fall 2016

White Collar Alert
11.01.2016

Welcome to the Fall 2016 edition of Executives at Risk: Navigating Individual Exposure in Government Investigations. Below, we highlight the third quarter’s most significant cases and government investigations impacting corporate executives.

Extradition and Extraterritoriality

Foreign Nationals' SEC Filings Give Jurisdictional Hook for FCPA Charges: In September, the Southern District of New York ruled that the Securities and Exchange Commission (SEC) could pursue civil Foreign Corrupt Practices Act (FCPA) claims against foreign nationals solely on the basis of the defendants' public SEC filings. The ruling came after the SEC sued former executives of Magyar Telekom, a Hungarian telecommunications corporation. The SEC alleged that Magyar executives bribed Macedonian officials to secure the company's market position in Macedonia, and that they misrepresented the company's books and records to circumvent suspicion. While the alleged conduct occurred outside of the United States, the court concluded that the defendants, who submitted falsified securities filings through the SEC's EDGAR website, fell within the court’s jurisdiction because they used "[a] means or instrumentality of interstate commerce" in connection with making a bribe. The ruling appears to be at the outer edge of personal jurisdiction analysis, and it may be subject to intense appellate review, should the case reach the Second Circuit. Nonetheless, it is a cautionary warning shot for executives operating overseas.

Criminal Actions Against Executives

Cartel

DOJ Antitrust Indicted No Executives for International Cartel Crimes in Q3: International cartel prosecutions continue to lose steam, as the third quarter of 2016 closed without a single indictment against a corporate executive on substantive antitrust charges. As we previously reported, the Department of Justice (DOJ) continues to struggle to prosecute individuals located abroad for cartel conduct. In the auto parts investigation, for example, DOJ has charged 65 executives, but has been able to secure guilty pleas from only 31 - approximately 48%. That percentage has declined annually since DOJ launched its investigation of the auto parts industry - from 100% in 2011 to 13% in the first three quarters of 2016.

In September, a grand jury indicted two Nishikawa Rubber executives on obstruction charges for allegedly directing company employees to destroy evidence related to the Japan-based auto parts company’s price-fixing scheme. One of the defendants had been charged with price-fixing in 2015.

Domestic Cartel Investigations Continue: DOJ's Antitrust Division has continued its trend of focusing its efforts on domestic cartel investigations, securing 11 sentences, eight guilty pleas, and two indictments of individuals in recent months. The matters involve public real estate foreclosure auctions, hazardous waste treatment contracts, and heir-location services.

In the public real estate foreclosure auction investigation, eight real estate investors pled guilty to bid-rigging and bank fraud conspiracies involving public real estate foreclosure auctions around Atlanta and in Alameda County, California. An additional 10 real estate investors were sentenced for their involvement in a public real estate foreclosure auction scheme in Eastern California. Those individuals received jail terms of up to eight months and were fined a total of $6 million. In the hazardous waste treatment investigation, the former CEO of a Canadian company was sentenced to 63 months in prison and ordered to pay $3.8 million in restitution for his involvement in paying kickbacks to obtain subcontracts at a New Jersey Superfund site. The Canadian national was extradited to the United States in 2014 and convicted after a three-week trial in March 2016. Finally, the co-owner of an heir-location firm and his company have pled not guilty to conspiring with another heir-location firm to divide up customers. With these indictments, three executives and two companies have been charged in the heir-location services investigation overall.

FOREX

First Executives Charged More Than a Year After Big Banks Plead Guilty: In July, two HSBC Holding Plc executives were charged with manipulating currency prices related to a 2011 $3.5 billion currency conversion. The U.K. nationals are the first two individuals to be charged in DOJ's foreign currency exchange (FOREX) investigation. One of them, the former head of currency trading in Europe, the Middle East, and Africa, was arrested when he landed at JFK Airport in New York. It remains to be seen whether the second executive will voluntarily appear in the United States. The charges come more than a year after five banks pled guilty to rigging currency benchmarks and were fined a collective $2.5 billion. DOJ has received significant criticism for failing to prosecute individuals in the financial sector probe, particularly after statements made in 2014 by then-Attorney General Eric Holder suggested that charges against individuals were imminent.

Government Contracts Fraud

Seven Individuals Indicted in $350 Government Construction Fraud Scheme: In July, seven individuals and two companies were charged in an 18-count indictment relating to an alleged conspiracy to obtain $350 million in government construction contracts through the Small Business Administration and the U.S. Department of Veterans Affairs (VA). The contracts at issue were earmarked for minority-, women-, veteran-, or disabled person-owned construction companies. The indictment alleges that the individual defendants misrepresented to the government that their businesses qualified for the minority-focused contracts and claims that they recruited qualifying businesses to act as front companies for them. All of the defendants have entered not guilty pleas.

Other Fraud

Senate Investigates Wells Fargo; CEO Resigns: After several U.S. senators urged the federal government to investigate Wells Fargo executives for their role in the bank's scheme to open scores of sham accounts without consumer consent, the banking giant's CEO, John Stumpf, has stepped down. Stumpf's September resignation comes after the Consumer Financial Protection Bureau (CFPB) ordered the bank to pay nearly $200 million in civil fines and penalties as a result of the scheme. The civil fine alone, totaling $100 million, represents the largest fine the CFPB has levied in its five-year existence. DOJ has reportedly launched a criminal investigation into the bank's conduct.

Volkswagen Engineer Pleads Guilty: In September, Volkswagen engineer James Robert Liang admitted his role in what the government contends was the automobile giant's emissions cheating scandal. Liang pled guilty to conspiring to create a so-called "defeat device," an algorithm that could allegedly recognize when a vehicle was undergoing emissions testing. Vehicles equipped with the device allegedly emitted fewer pollutants during emissions analyses, whereas on the road, the vehicles' engines allegedly emitted pollutants in much greater quantities. As part of his plea agreement, Liang has agreed to cooperate with the U.S. government in its continuing investigation of the scandal.

Executives Acquitted of Felony Charges, but Convicted of Misdemeanors Relating to Medical Device Sales: Following a six-week trial and three days of deliberations, a federal jury acquitted the former CEO and the former Vice President of Sales of Acclarent, Inc., a medical device company, of felony charges relating to their alleged promotion of an off-label medical device in violation of the Federal Food, Drug, and Cosmetic Act (FDCA). The two men, William Facteau and Patrick Fabian, were nonetheless convicted on 20 misdemeanor charges of misbranding and adulteration under the strict liability provisions of the FDCA, which do not require proof of criminal intent. Prosecutors claimed that the executives engaged in a scheme to fraudulently inflate company revenues and stock valuation by marketing a medical device for uses not approved by the Federal Drug Administration. Sentencing is scheduled for January 1, 2017.

Tool Company Executive Sentenced to 63 Months for Bank Fraud: In August, a former Vice President at Eastern Tools & Equipment Inc., an Ontario-based wholesale equipment company, admitted his role in fraudulently inducing East West Bank to lend his company millions of dollars and pled guilty to bank fraud-related charges. As part of the sophisticated scheme, Chung Yu Yeung and his co-conspirators created a number of fictitious shell corporations purportedly doing business with Eastern Tools, allowing Yeung to misrepresent his company’s financial health and procure a bank loan. Yeung then transferred the loan proceeds to his personal bank account. Yeung was sentenced to a 63-month prison term and was ordered to pay more than $9 million in restitution to East West Bank.

Foreign Corrupt Practices Act (FCPA)

SEC Settles FCPA Case Against CEO for Improper Gifts to Chinese Officials: In September, the SEC announced a settlement with Jun Ping Zhang (Ping), the former chairman and CEO of Harris Corporation's Chinese subsidiary, Hunan CareFx Information Technology, LLC. The settlement stemmed from Ping's alleged violations of the FCPA's anti-bribery, books and records, and internal controls provisions. The SEC alleged that Ping authorized the giving of gifts to officials of state-owned hospitals in China. Moreover, the company's sales staff, with Ping's knowledge, allegedly created bogus expense receipts to generate cash to pay for the gifts. Ping consented to the entry of a Cease-and-Desist Order without admitting liability. He must pay $46,000 in civil penalties.

Tax

DOJ Employment Tax Enforcement Initiative Progresses: DOJ's Tax Division continues its push on civil and criminal employment tax enforcement. In August, the President and CEO of Software Earnings, Inc. and First Touch Payment Solutions, LLC, two check and credit card processing companies, was sentenced to a year in prison and ordered to pay $10 million in restitution for failing to pay employment taxes to the IRS. Larry Thornton allegedly withheld employment taxes from his employees' paychecks but failed to turn the money over to the IRS between 2007 and 2011. Instead, he used $6.2 million in corporate funds for condo payments, yacht and motorcycle payments, travel, and start-up funding for his wife's beauty boutique. During that time, two of the executive's full-time accountants resigned due to Thornton's unwillingness to comply with his employment tax obligations.

Franchisor Pleads Guilty to Wire Fraud and Tax Evasion After Defrauding Investors: In September, the owner and franchisor of numerous New York restaurants, including more than 40 Jreck Subs outlets, pled guilty to charges of wire fraud and tax evasion after admitting that he ran a 10-year-long scheme to defraud investors and lenders. Christopher Swartz induced investors with promises of high interest rates and equity stakes in his restaurant empire but misappropriated funds for his own personal benefit. In addition, the executive filed false tax returns, understating his personal income, and attempted to conceal his gains by transacting in cash and using nominee owners of businesses he controlled. He faces a statutory maximum sentence of 20 years for the wire fraud count and five years for the tax evasion count. His sentencing is scheduled for January 19, 2017.

Clothing Manufacturer Admits to Hiding More Than $20 Million in Untaxed Business Income Offshore: In August, the owner of clothing manufacturer Apparel Limited Inc. pled guilty to federal charges for his involvement in funneling more than $20 million in untaxed and unreported business income to several Israeli bank accounts between 2006 and 2009. Masud Sarshar admitted that he failed to disclose his interests in these accounts to the IRS, and to report interest generated on the accounts as income. To avoid detection, bank representatives traveled to the United States to hand deliver Sarshar his bank statements. In addition, Sarshar concocted a loan scheme in which the offshore bank loaned money to his company in the United States, with the loan collateralized by Sarshar's offshore accounts. This allowed Sarshar to avoid having to repatriate his offshore money and prevented a paper trail that could lead to his accounts. If the court accepts the parties' Rule 11(c)(1)*(C) plea agreement, Sarshar will pay more than $8.3 million in restitution and will serve 24 months in prison.

FIFA Corruption Scandal

Former President of Guatemalan Football Federation Pleads Guilty: In July, Brayan Jiménez, former president of the Guatemalan Football Federation and former member of Fédération Internationale de Football Association's (FIFA) Committee for Fair Play and Social Responsibility, pled guilty to racketeering and wire fraud conspiracies in connection with the FIFA corruption scandal. Each charge could result in a sentence of up to 20 years. Jiménez allegedly accepted thousands of dollars in bribes for media and marketing rights to World Cup qualifier matches. As we previously reported, more than 40 individuals and entities have been charged in the FIFA scandal. Jiménez is the latest to enter a guilty plea. His sentencing is scheduled for April 28, 2017.

Sentencings of Executives

Executive Sentenced to Half of Guidelines Range for Small Business Fraud: In July, David Gorski, owner of Legion Construction, was sentenced to 30 months in prison and was ordered to pay a $1 million fine for his role in fraudulently obtaining more than $113 million in government contracts set aside as part of the Service Disabled Veteran Owned Small Business program. The court sentenced Gorski to a below-Guidelines sentence (half of the minimum 57 months), in part because he consulted attorneys regarding the conduct. The sentencing judge noted that Gorski's discussions with counsel did not negate his intent but did mitigate the sentence because the fraud continued longer than it would have otherwise. Gorski argued unsuccessfully that the sentencing calculation should be based on the amount the government was willing to pay to a legitimate veteran-owned business, as demonstrated by the difference between the face market value of the contract and the next-highest qualified bid.

CEO Sentenced to 15 Months for Hiding Money From the SEC: In August, Jaymes Meyer, the former CEO of financial services company Preferred Merchants LLC, was sentenced to 15 months in prison after he pled guilty to obstruction of justice. Meyer was initially part of an SEC securities fraud investigation of a separate company, Rex Ventures Group (RVG), some of whose assets were held by Preferred Merchants. The SEC moved to freeze the RVG assets held by Preferred Merchants, but Meyer misled the SEC about Preferred Merchants' control over the assets. He then used $4.8 million of those assets to purchase vacation homes in Napa, California, and Turks and Caicos, and then tried to cover his tracks by making misleading statements in civil depositions. As part of his plea agreement, Meyer also admitted to making fraudulent and misleading statements during depositions in civil litigation surrounding the RVG scheme.

Business Owner Gets Health-Related Downward Departures, Sentenced to More Than Two Years in Prison: In September, the owner of a beauty products wholesaler, Emanuel Cohen, was sentenced to 27 months in prison after his conviction for a bank fraud scheme that cost lenders $4.8 million. For seven years, Cohen issued false audit reports to banks, which falsely certified his company's "strong" financial position, in order to obtain millions of dollars in loans from two New York banks. Cohen's 27-month sentence is nonetheless a downward departure from a possible eight years in prison, in part because he is 73 years old and uses a wheelchair. In separate proceedings, the company's COO was sentenced to 16 months in prison, and a sales manager was sentenced to just 21 days.

Nigerian Oil Investment Scheme Nets 25-Year Sentence: In July, Anton Paul Drago was sentenced to 25 years in prison for engaging in a scheme to defraud investors out of more than $2 million. Drago led investors to believe that he was an engineer, oil industry expert, and the grandson of the founder of Shell Oil. Drago told investors that they were funding the production, refinement, and shipment of crude oil from Nigeria to the Bahamas, but he actually spent investor funds on personal expenses, country club memberships, luxury items, and transferred approximately $1 million to unknown bank accounts in China. In addition to his Nigerian oil scheme, Drago also falsely claimed to have suffered a debilitating knee injury during his military service with the United States Marines, and received monthly VA benefits to which he was not entitled. Drago's received a hefty sentence for the 10 wire fraud and theft-related charges because of the $10 million fraud loss amount, the sophisticated means with which Drago deceived his victims, and the substantial financial hardship caused by his scheme.

Civil Litigation

Louis Berger Settles Civil Suit With Former Executive Over FCPA Charges: In August, Louis Berger, an infrastructure development firm, reached a settlement with Richard Hirsch, a former Executive Vice President of the company, in a civil suit related to bribery of foreign officials. As we previously reported, the company sued Hirsch and another former executive, James McClung, alleging that they had breached their fiduciary duties and embezzled company funds to pay bribes. This conduct was the basis for the company's $17.1 million FCPA settlement with DOJ and the related guilty pleas by both executives.

After Former Louis Berger Executives Plead Guilty to Conspiracy Charges, DOJ Joins Civil False Claims Act Suit Against Them: Years have passed since Louis Berger's former CFO and former CEO pled guilty to charges that they conspired to overbill the federal government on reconstruction contracts for Iraq and Afghanistan. Salvatore Pepe, the former CFO, was sentenced to a year of probation, and Derish Wolff, the company's former President and CEO, was sentenced to a year of home confinement and ordered to pay a $4.5 million fine. Now they are defendants in a civil suit brought by a qui tam relator related to the reconstruction contracts overbilling scheme. The suit, which DOJ joined in July, alleges that Pepe and Wolff directed employees to fraudulently overbill the federal government for certain costs related to infrastructure projects. DOJ's intervention represents one of the first times the federal government has pursued high level executives under the False Claims Act.

Director and Officer Issues

Former Freddie Mac Executive Denied "Golden Parachute" Compensation on Appeal: In August, the Federal Circuit affirmed that federal regulations preclude Anthony Piszel, the former CFO of Freddie Mac, from recovering more than $7 million in executive compensation. After Freddie Mac was placed in conservatorship in 2008, the director of the Federal Housing Finance Agency terminated Piszel without cause and denied him severance payments under newly enacted golden parachute regulations - even though Piszel's contract with Freddie Mac provided for more than $7 million in golden parachute payments if he was terminated without cause. In 2014, Piszel took the matter to court, alleging that the denial of compensation was a "taking" in violation of the Fifth Amendment to the United States constitution. The Federal Circuit held that the United States did not exact a taking because Piszel could still sue Freddie Mac for breach of contract.

Goldman Sachs Settles with Former Managing Director Over Legal Fees: In September, Goldman Sachs settled a fee dispute with the company's former Managing Director Joseph Jiampietro. In 2014, Jiampietro allegedly asked a subordinate to obtain confidential New York Federal Reserve documents from an analyst, which he then used in his work. Goldman Sachs fired Jiampietro after an internal probe revealed the misconduct, and the company agreed to pay a $50 million penalty to New York State regulators. In July, Jiampietro sued his former employer in Delaware state court to cover $350,000-$450,000 of his legal expenses related to various government investigations that stemmed from the 2014 incident. Soon thereafter, the Federal Reserve settled with Goldman Sachs for $36.3 million and announced an enforcement action against Jiampietro. The terms of the settlement are not public.

Fourth Amendment Cases

Courts Disagree on Admissibility of Warrantless Recordings of Bid-Riggers: In July, the Northern District of California denied a motion to suppress warrantless audio recordings of real estate investors who have been charged with engaging in bid-rigging at real estate foreclosure auctions. The Federal Bureau of Investigation (FBI) had secretly installed microphones outside of two courthouses where the auctions occurred. The court reasoned that the real estate investors did not have a reasonable expectation of privacy in their conversations because they were speaking in a public space - on the steps of a courthouse - at an audible volume. The court also noted that the FBI used ordinary microphones to record the conversations, not special technology. The decision came only a few days before another federal court in the same district barred the FBI from using recordings against real estate investors charged in a separate bid-rigging case, concluding that the FBI's surreptitious, warrantless recordings violated the Fourth Amendment. In that case, the court criticized the FBI for "utterly fail[ing] to justify a warrantless electronic surveillance program that recorded private conversations spoken in hushed tones by judges, attorn[ies], and court staff."  


Editors: Lauren E. Briggerman, Dawn E. Murphy Johnson, Kirby D. Behre

Contributors: Theresa A. Androff,* Sarah A. Dowd,* Jonathan D. Kossak,* Dwight B. N. Pope,* Katherine E. Pappas, Andrew C. Strelka*

*Former Miller & Chevalier attorney


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