Executives at Risk: Winter 2022/2023
White Collar Alert
Executive Summary & Key Takeaways
The prosecution of individuals by the Department of Justice (DOJ) Fraud Section exceeded pre-pandemic levels during the last quarter of 2022. DOJ announced 342 convictions of individuals, including 56 after trial. In 2018, the Fraud Section logged 38 trial convictions and just 16 in 2020.
These convictions reflect DOJ's aggressive pursuit of white collar investigations across many enforcement areas, including criminal antitrust, Foreign Corrupt Practices Act (FCPA), and securities. In this edition, we highlight some of the significant prosecutions and policy developments that impact corporate executives, including:
- DOJ revised its Corporate Enforcement Policy and Voluntary Self-Disclosure Policy (CEP) to further incentivize voluntary self-disclosure and implemented related policies that call for clawbacks of compensation for executives involved in corporate wrongdoing.
- The Antitrust Division continued to pursue multiple labor market enforcement cases – despite recent losses – and obtained its first criminal monopolization conviction in decades. Likewise, the Federal Trade Commission (FTC) is flexing its regulatory muscles by seeking to ban nearly all non-compete agreements for employees.
- DOJ's FCPA unit convicted 15 individuals in 2022, including a president of a non-governmental organization (NGO) and a former executive director of Goldman Sachs' investment banking division.
- More than two-thirds of the SEC's standalone enforcement actions included charges against individuals, including against FTX Trading Ltd. (FTX) executives.
Noteworthy Policy Developments
DOJ Revises CEP, Continuing Focus on Holding Individuals Accountable: In early 2023, the DOJ's Criminal Division revised its CEP to: (1) establish a path to a declination and other enhanced incentives for companies with aggravating circumstances, including recidivism; (2) increase incentives for companies that fail to voluntarily self-disclose, but fully cooperate and timely and appropriately remediate, including up to a 50 percent reduction off the lower end of the Sentencing Guidelines range (increased from 25 percent); and (3) maintain a presumption of a declination with voluntary self-disclosure, full cooperation, and timely and appropriate remediation, but with new requirements for disclosure and cooperation to be adequate. Like its predecessor policies, the CEP emphasizes that companies seeking full cooperation credit must prioritize holding individuals accountable by disclosing "all relevant, non-privileged facts and evidence" about individuals involved in the misconduct, including those "inside and outside of the company regardless of their position, status, or seniority."
The Criminal Division also announced a new, three-year "Compensation Incentives and Clawbacks Pilot Program," which requires companies entering into criminal resolutions to implement compliance-related criteria into compensation and bonus structure. These criteria include: restrictions on bonuses to employees who do not satisfy compliance performance requirements; disciplinary measures for employees who violate laws or had supervisory authority and knew of, or were willfully blind to, misconduct; and incentives for employees who demonstrate full commitment to compliance. The new program directs prosecutors to consider fine reductions where companies claw back compensation from culpable employees with supervisory authority and who knew of or were willfully blind to misconduct.
FTC Proposes Near-Total Ban on Employee Non-Compete Agreements: In January 2023, the FTC proposed a sweeping new rule that would ban employers from imposing non-compete clauses on employees and contractors and rescind nearly all existing non-compete agreements. The proposed rule contains a narrow exception for non-compete agreements related to the sale of certain businesses. The FTC voted along party lines 3-to-1 in favor of the proposed rule, with Commissioner Christine S. Wilson voting against it. The vote came the day after the FTC's announcement of a trio of settlements with three companies — Prudential Security, Inc., O-I Glass, Inc., and Ardagh Group S.A. — for purportedly entering into non-compete agreements that harmed their employees in violation of Section 5 of the Federal Trade Act. Commissioner Wilson dissented from the decisions and announced her retirement from the FTC in February in protest of the FTC's leadership. While it remains to be seen whether the proposed non-compete ban will go into effect, the FTC's aggressive stance on labor issues should serve as a wake-up call to companies considering non-compete agreements going forward.
SEC Revises Insider Trading Safe Harbor Policies: In December 2022, the SEC adopted amendments to Rule 10b5-1, which provides a safe harbor for corporate insiders to buy and sell company stock so long as they do so according to pre-establish trading plans that were adopted in good faith. The amendments impose updated conditions for the affirmative defense, including requiring officers and directors to certify their lack of awareness of material non-public information and their good faith in adopting the plan. The amendments further restrict the use of multiple overlapping trading plans, require a "cooling off" period before trading can begin under the plan, and impose additional disclosure requirements on issuers.
Jury Convicts One Defendant, Acquits Another in FIFA Bribe Case: In March 2023, a federal jury in Brooklyn returned a mixed verdict following the long-awaited trial of two former 21st Century Fox executives charged with bribing South American soccer officials as part of the Fédération Internationale De Football Association (FIFA) bribery scandal, which we covered most recently here. The jury found one executive guilty but acquitted the lower-ranking executive of the same charges. A key factor in the trial had been the credibility of the government's star witness, an Argentine media executive who allegedly conspired with the defendants and was cooperating with the government. His 11-day testimony was hotly contested, but following the trial, jurors revealed that they did not credit his testimony. Instead, they reportedly focused on the documentary record. In the end, the jury credited the higher-ranking executive's position and authority in finding him guilty.
Actions Against Individuals
Cartel & Government Contracts Fraud
Antitrust Division Secures First Criminal Monopolization Conviction in Decades: In September 2022, the Antitrust Division secured its first criminal conviction under Section 2 of the Sherman Act in 40 years in United States v. Zito (D. Mont. Sept. 19, 2022) when the president of a Montana paving and asphalt contractor pled guilty to attempted monopolization. The scheme involved a failed market allocation scheme that the Antitrust Division could not charge under Section 1 of the Sherman Act. In addition, in December 2022, the Division unsealed a Section 2 monopolization indictment against 12 individuals charged with allegedly conspiring to monopolize the transmigrante industry, which transports used vehicles and other goods across the border and through Mexico for resale in Central America. The indictment alleges that the defendants conspired to implement price-fixing agreements and punished those who did not participate in the scheme with threats and violence. Trial is scheduled for August 28, 2023.
The criminal charges in these two Section 2 monopolization cases come on the heels of a March 2022 statement by then-Deputy Assistant Attorney General (AAG) for Criminal Enforcement Richard Powers that, "[i]f the facts and the law lead us to the conclusion that a criminal charge based on a Section 2 violation is warranted, then that's what we'll do, we'll charge it." It remains to be seen whether these two cases represent factual anomalies or criminal enforcement of Section 2 will become a trend.
Antitrust Division Continues to Pursue No-Poach and Wage-Fixing Cases Despite Murky Record: In January 2023, the manager of a healthcare staffing company agreed to a pretrial diversion agreement to resolve charges that he entered into an illegal agreement with a competitor not to hire each other's nurses or raise their wages. As discussed previously, the manager's employer, healthcare staffing company VDA OC LLC, pled guilty to engaging in the "no-poach" scheme in October 2022. The pretrial diversion agreement imposes no jail time and only requires the manager to complete 180 hours of community service in the healthcare or education field. While the Antitrust Division touts this resolution as the first criminal penalty secured against an individual in a no-poach case, the highly unusual no-jail resolution can hardly be viewed as a victory.
As previously reported, the Antitrust Division suffered losses in the only two of its no-poach and wage-fixing cases to go to trial, challenging the Division's untested policy of pursuing these cases criminally. The Division's ability to successfully prosecute labor collusion cases will be tested further this March as two no-poach and wage-fixing cases head to trial. In United States v. Manahe, DOJ must prove to a Maine federal jury that four home healthcare agency managers illegally suppressed wages for essential workers during the COVID-19 pandemic and should be held criminally liable. The trial was scheduled for March 6-17 but has been on pause, due to four jurors contracting COVID. Starting March 27, in United States v. Patel, a Connecticut federal jury will consider whether to convict a former aerospace engineering company manager and five staffing company executives for entering into an illegal agreement not to hire each other's employees. In both cases, the judges denied the defendants' motions to dismiss arguing that labor-related collusion cases should not be subjected to the per se criminal standard.
DOJ Continues to Crack Down on Procurement Bid Rigging by Small Companies: In the past quarter, the Procurement Collusion Strike Force (PCSF) has continued to bring charges in existing domestic bid-rigging investigations focused on construction and military contracts with small companies. In November 2022, a construction company owner pled guilty for his role in a bid-rigging and bribery scheme involving California Department of Transportation (Caltrans) improvement and repair contracts. It is the third guilty plea of the investigation, following the guilty plea of a co-conspirator and a former Caltrans contract manager who accepted more than $800,000 in bribes as part of the scheme. In January, following his indictment (previously covered here), a Texas military contractor pled guilty to rigging bids for six refurbishment procurements, including work performed at Red River Army Depot in Texas. His co-conspirator previously pled guilty in July 2022. The PCSF, entering its fourth year, also announced partnerships with four law enforcement agencies focused on combatting potential collusion stemming from the influx of hundreds of billions of dollars in federal spending from several major Biden-backed economic recovery bills. Those agencies – the Offices of Inspectors General (OIG) for the U.S. Departments of Energy, the Interior, Transportation, and the Environmental Protection Agency (EPA) – will monitor investments the spending bills will make in the infrastructure, semiconductor, and clean energy sectors and could lead to new bid-rigging investigations in those areas.
Beyond the PCSF's bid-rigging prosecutions, in November 2022, DOJ's OIG announced that the owner and president of a security and surveillance system provider, 2M Solutions, Inc. (2M), pled guilty to lying to the federal government about where his company's products were manufactured. To secure contracts that required compliance with the Buy American Act (BAA), the executive represented that 2M was a "USA Manufacturing Company" and that its products were BAA-compliant, when in fact, 2M sourced products from China. Several other federal agencies, including the Defense Criminal Investigative Service, the Federal Bureau of Investigation's (FBI) Dallas Field Office, the U.S. Department of Commerce Bureau of Industry and Security (BIS), Office of Export Enforcement, and the General Services Administration's (GSA) OIG, Homeland Security Investigations, assisted in the investigation.
Former Goldman Sachs Executive Arrested for Involvement in Ghanaian Bribery Scheme: In November 2022, Asante Berko, a former executive director in the Investment Banking Division at Goldman Sachs, was arrested in London in connection with his involvement in a Ghanaian bribery scheme. Berko's arrest comes over a year after he settled charges related to the same scheme with the U.S. Securities and Exchange Commission (SEC), in June 2021. Berko was indicted in August 2020 and the indictment was unsealed on the day of his arrest. The indictment alleges that between 2014 and 2017, Berko participated in a scheme to pay bribes to government officials in Ghana in order to help a Goldman Sachs client, an unnamed Turkish energy company — in which Goldman Sachs held a 16 percent interest — win a bid for an electrical power plant project. In total, over $700,000 was paid to Ghanian officials in exchange for obtaining the necessary approvals for the project. It is alleged that Berko and his unnamed co-conspirators subsequently sought reimbursement for the bribe payments from the Turkish energy company by issuing fake invoices for "consultancy services."
NGO President and His Assistant Plead Guilty in Bribery Case: In December 2022, the DOJ announced that Cary Yan, the president of a New York-based NGO, and his assistant, Gina Zhou, pled guilty to conspiring to violate the anti-bribery provisions of the FCPA. As previously reported, Yan and Zhou were indicted based on allegations that they bribed government officials in the Marshall Islands in exchange for those officials supporting legislation to create a semi-autonomous region within the Marshall Islands. Yan and Zhou allegedly intended to benefit by using the semi-autonomous region to attract investors for business and development projects. In February, the Court sentenced Zhou to time served. Zhou's sentencing submission emphasized the brutal conditions Zhou was subjected to for 21 months in a Thai prison and the government's submission acknowledged those harsh conditions and Zhou's relative culpability to her co-conspirator in agreeing that a time served sentence was appropriate. Yan's sentencing has been scheduled for March 28. We cover the individuals' extraditions below.
Securities and Accounting Fraud
SEC's Enforcement Results for 2022 Reflect Focus on Individual Accountability: In November 2022, the SEC released its Enforcement Results for Fiscal Year 2022, which showed that two-thirds of the SEC's stand-alone enforcement actions filed that fiscal year involved at least one individual (as opposed to corporate) defendant or respondent, including senior executives at public companies. Even where executives were not alleged to be personally involved in misconduct, the SEC sought to claw back bonuses and compensation based on misconduct at the company level per statutory authority under Sarbanes-Oxley 304. Another major trend was the extraordinarily high level of penalties imposed in 2022 – $4.2 billion – which is more than 2019-2021 combined. Director Gurbir stated that the SEC sought to "re-calibrate" penalties to increase deterrence and encourage companies to move away from thinking of penalties as "just another business expense." Although his comments focused on companies, we have seen the same insistence on higher penalties and more severe sanctions being sought with respect to individuals as well.
New York AG Takes on "Risky" Crypto Investments: In January 2023, the New York Attorney General (AG) sued the former Chief Executive Officer (CEO) and co-founder of Celsius Network LLC (Celsius), a bankrupt cryptocurrency trading platform, accusing the executive of defrauding investors (including more than 26,000 New Yorkers) by promising a safe place to store their crypto assets while making "risky" investments that Celsius hid from them. After cryptocurrency markets lost significant value in spring 2022, Celsius' business unraveled. The company responded by freezing customer withdrawals in June 2022 and filing for bankruptcy a month later. The suit demands that the CEO reimburse customers and seeks an order enjoining him from serving as a director or selling securities within the State of New York. The CEO has not yet had to file a responsive pleading.
SEC Brings Charges Against Former FTX Executives: Some of the most high-profile cases of the quarter were actions against FTX's founders and executives, including Samuel Bankman-Fried, Caroline Ellison, Gary Wang, and Nishaad Singh. In December 2022, the SEC charged Bankman-Friend and his alleged co-conspirators Ellison and Wang for their alleged roles in a scheme to defraud FTX equity investors and customers. In February 2023, the SEC charged Singh, the former co-lead engineer of FTX, for his alleged role in the scheme. We cover Bankman-Fried's extradition in connection with a parallel action by the DOJ below. Ellison and Wang are cooperating with the SEC's ongoing investigation and have agreed to settle the charges against them. In a parallel action by the DOJ, Ellison pled guilty to conspiracy and wire fraud charges and Wang pled guilty to conspiracy charges. Neither have been sentenced. Singh is also cooperating with the SEC's ongoing investigation and has agreed to a settlement that is subject to court approval. In a parallel action by the DOJ, Singh pled guilty to conspiracy charges. He has not been sentenced.
SEC Doubles Down on Individuals for Disclosure Failures: In January 2023, the SEC charged a BlackRock Advisors portfolio manager with failing to disclose a conflict of interest resulting from his relationship with a film distribution company in which the publicly traded fund he managed invested millions of dollars. Specifically, the portfolio manager asked the company to help his daughter obtain a small role in a film in 2018 but failed to disclose to either the fund's board of trustees or BlackRock's legal or compliance teams that he asked for assistance on behalf of his daughter. The advisor consented to an SEC order finding that he violated Section 206(2) of the Investment Advisers Act of 1940. He also agreed to a Cease-and-Desist Order, a censure, and a $250,000 penalty, but was not required to admit to the SEC's findings.
In December 2022, the SEC charged the former CEO of CytoDyn Inc. in an insider trading scheme. According to the SEC's complaint, the former CEO repeatedly made statements exaggerating the company's progress on its main therapy under development, including falsely announcing the submission of a completed biologics license application to the FDA in April 2020. According to the SEC, the announced submission of the license application was a key milestone in the therapy's development that triggered an increase in the company's stock price, but in actuality, the application was deficient. Without informing shareholders of these deficiencies, the former CEO allegedly sold his stock in the company generating gains of nearly $4.7 million.
Keeping After the Kardashians – Social Media Influencers are On the SEC's Radar: In the October 2022 enforcement action against Kim Kardashian, in which the SEC made clear that "#AD" is not adequate disclosure of a paid endorsement for cryptocurrencies, the SEC put social media influencers on notice that it is monitoring their industry. Kardashian settled the charges for $1.26 million in penalties, disgorgement, and interest, as well as a three-year bar from advertising cryptocurrencies, for failing to disclose that she was paid to promote a particular token on social media. Continuing its focus on celebrity endorsers, on February 17, 2023, the SEC charged former NBA player Paul Pierce with failing to disclose that he received $244,000 in EMAX tokens for endorsing the tokens from EthereumMax. In addition to failing to disclose the paid endorsement, the SEC order also found that he tweeted misleading statements including a screenshot of an account showing large holdings and profits, without clarifying that, in reality, his own personal holdings were much smaller. Without admitting or denying the findings, Pierce paid a $1.115 million penalty, disgorgement, and prejudgment interest and agreed not to promote crypto asset securities for three years.
Money Laundering and Fraud
Former Resort Executive Convicted in Mortgage Fraud Scheme for the Second Time: In October 2022, a jury in the Southern District of Florida convicted David Schwarz, Chief Financial Officer (CFO) of Cay Clubs Resort and Marinas, on two counts of bank fraud for setting up fake buyers to get loans for properties at the resort. Schwartz was previously convicted on similar charges in 2017, but his conviction and his 40-year prison sentence were vacated in September 2020 by the Eleventh Circuit, which found that the district court had effectively prevented Schwarz from receiving a fair trial by denying requests from his attorney for more time to prepare. In the second trial, prosecutors alleged that Schwarz and Davis Clark Jr., the former CEO of Cay Clubs, raised $300 million from investors, used new investor funds to pay earlier investors in a Ponzi scheme structure, and created the false impression of demand by using straw buyers to sell properties back and forth. Clark was previously convicted in 2015, but his sentence was commuted by President Trump in January 2021.
Cryptocurrency Co-founder Pleads Guilty to Wire Fraud and Money Laundering in $4B Scheme: In December 2022, Karl Sebastian Greenwood, co-founder of the Bulgaria-based cryptocurrency OneCoin, pled guilty in the Southern District of New York (SDNY) to wire fraud and money laundering charges. Prosecutors have alleged that misrepresentations made by Greenwood and his cofounder, Ruja Ignatova, led victims to invest over $4 billion in OneCoin. OneCoin allegedly operated as a multilevel marketing (MLM) network, leading investors to recruit even more investors to buy OneCoin cryptocurrency packages. The prosecutors' evidence included private communications between Greenwood and Ignatova, in which they allegedly describe their intent to defraud investors and develop an "exit strategy." Although the company was founded in Bulgaria, OneCoin entered the U.S. market in 2015 and prosecutors allege that many Americans became victims of the pyramid scheme. Greenwood was arrested in Thailand in 2018 and has been detained since then; Ignatova is at large and was added to the FBI's Top 10 Most Wanted List in June 2022. She is rumored to have been chopped up and fed to sharks at sea.
Former Hollywood Executive Sentenced to More than Eight Years in Prison for Two Separate Fraud Schemes: In October 2022, William Sadleir, the former chairman and CEO of Aviron Pictures, was sentenced in the Central District of California to 41 months in federal prison after pleading guilty to bank fraud and money laundering in connection with the federal Paycheck Protection Program (PPP). Prosecutors alleged that Sadleir applied for and received $1.7 million in forgivable PPP loans, falsely representing that the funds would be used to support expenses for Aviron employees. At that time, the Aviron entities were no longer operational. Sadleir did not use the funds on employee expenses and transferred nearly $1 million to his personal checking account. Meanwhile, just one month before his sentencing in California, Sadleir was sentenced to 72 months in a separate case before the SDNY for defrauding the investment fund BlackRock. Sadleir pled guilty to two separate schemes that prosecutors said defrauded BlackRock out of approximately $30 million. Sadleir told the fund that Aviron had invested BlackRock funding in advertising when in fact Sadleir had created a sham company to transfer $25 million out of Aviron for his personal benefit, including the purchase of a $14 million home in Beverly Hills. The two prison sentences will run concurrently.
Laboratories Executives Charged for Healthcare Kickback Scheme: In December 2022, prosecutors filed a superseding indictment against the CEO, CFO, and owners of Trinity Clinical Laboratories (TCL) alleging that they conspired to unlawfully submit false and fraudulent claims to federal healthcare programs including Medicare and Medicare Advantage (Medicare), for cancer, genetic, and pharmacogenomic tests that were ineligible for reimbursement. According to the superseding indictment, the defendants received approximately $44 million in payments from Medicare from their false claims. The defendants allegedly paid kickbacks for the improper claims.
Former Head of a Payroll Processing Company Charged in $150 Million Check-Kiting Scheme: In January 2023, Najeeb Khan, the owner of a now-defunct payroll processing company, pled guilty to a long-running fraudulent check-kiting scheme from 2014 to 2019 that resulted in losses of nearly $150 million to various financial institutions. Khan allegedly wrote checks from company accounts in order to inflate account balances and deceive banks into honoring checks written with insufficient funds. As part of the scheme, Khan is also accused of diverting money to personal and other business accounts to support a lavish lifestyle and was accused of failing to report the income gained from the scheme on his annual tax return for the tax years 2014-2017. Khan pled guilty to both counts and sentencing is set for May 8, 2023.
Economic Sanctions and Export Controls
Yacht-Related Sanctions Evasion: In January 2023, DOJ charged Russian national Vladislav Osipov and U.K. national Richard Masters with sanctions violations and money laundering related to the pair's efforts to mask the ownership of the $90 million superyacht "Tango" by sanctioned Russian oligarch Viktor Vekselberg. The Tango was seized by Spanish authorities in April 2022 at the request of U.S. authorities as part of the DOJ's Task Force KleptoCapture effort. The Department of the Treasury's Office of Foreign Assets Control (OFAC) designated Vekselberg as a "specially designated national" (SDN) subject to U.S. sanctions in April 2018. According to the indictment, Osipov and Masters conspired to use Masters' yacht management company to obscure Vekselberg's interest in the Tango so that the vessel could continue to operate. Masters used a variety of workarounds, including creating a false name for the yacht to hide payments and routing payments through third parties and alternative currencies to procure U.S.-origin services. As a result of their efforts, U.S. financial institutions processed hundreds of thousands of dollars in related payments in violation of U.S. sanctions and the yacht was able to operate with the support of illicitly obtained U.S. services. Masters is currently awaiting extradition from Spain, while Osipov remains at large.
Former Senior FBI Official Charged with Money Laundering, Sanctions Violations: In January 2023, a former special agent in charge of the FBI's counterintelligence division in New York was indicted for violating economic sanctions as a result of his dealings with sanctioned Russian oligarch Oleg Deripaska. The indictment alleges that Charles McGonigal received tens of thousands of dollars in exchange for investigating a business rival of Deripaska's. McGonigal had previously worked with a U.S. law firm retained by Deripaska in an unsuccessful attempt to have Deripaska removed from the SDN List maintained by OFAC. While such delisting-related work was authorized pursuant to applicable regulations, McGonigal's subsequent investigation of another Russian oligarch on behalf of Deripaska exceeded the scope of the relevant OFAC authorization. According to the FBI, McGonigal actively concealed Deripaska's involvement in his activity by using shell companies and avoiding naming Deripaska in electronic communications. McGonigal is charged with four counts of conspiracy and violations of the International Emergency Economic Powers Act (IEEPA) and money laundering, each of which carries a maximum sentence of 20 years in prison.
Russian Oligarch Indicted for Sanctions Evasion, Obstruction of Justice: In September 2022, DOJ charged Russian oligarch Oleg Deripaska and two associates with conspiracy to violate IEEPA. Deripaska, who founded the aluminum company Rusal and was sanctioned by the U.S. in 2018, is accused of conspiring to evade these sanctions "through an international network of enablers and facilitators" over a several year period to continue his operations in the U.S. These activities include payments related to the maintenance of luxury properties and the $3 million sale of a music studio in California. Deripaska's associates are also accused of assisting Deripaska's girlfriend in traveling to the U.S. so that she could give birth to Deripaska's child and obtain U.S. citizenship for the child. While Deripaska remains at large, one of his co-conspirators, Olga Shriki, was arrested in September 2022.
BIS Issues TDO Targeting Russian Procurement Network: In December 2022, BIS issued a Temporary Denial Order (TDO) against three individuals in Russia and two U.S. companies related to the unauthorized export of controlled items to Russia, including to certain Russian companies identified on BIS' Entity List. Boris Livshits, Svetlana Skvortsova, and Aleksey Ippolitov and their companies Advanced Web Services and Strandway, LLC were hit with the TDO due to their efforts to procure and export controlled electronics components, including advanced semiconductors. According to BIS' press release, the three individuals sought to evade export controls by "creating shell companies . . . and associated bank accounts in the United States, to route shipments and layer financial transactions in order to obscure the true Russian end users." As a result of the TDO, the export control privileges of the targeted persons are suspended for a renewable 180-day period. In addition to the TDO, DOJ, under the auspices of the Task Force KleptoCapture initiative, indicted Livshits, Skvortsova, and Ippolitov, along with a number of co-conspirators, in December for violations of the Export Control Reform Act and IEEPA, among other charges.
Former Healthcare CEO Pleads Guilty to Tax Fraud for Concealing Corporate Income: In November 2022, the former CEO of healthcare management firm Automated Health Systems Inc. pled guilty in the Western District of Pennsylvania for claiming personal expenses as business expenses and concealing taxable corporate income totaling approximately $15 million dollars. According to a 2018 indictment, from 2006 to 2012, the CEO concealed funds from the IRS by claiming costs related to the construction of a personal home, including electrical and plumbing work and the construction of a pool, tennis court, and bocce court, and other personal expenses, including the cost of luxury vehicles, personal fitness, and tuition for his grandchildren's private schools. Additionally, the CEO concealed company profits through fraudulent payments designated as management or administrative fees, data processing, or rent costs. He agreed to pay $15.8 million in restitution as part of his guilty plea.
Tax Professionals Indicted as Part of Ongoing $1 Billion Tax Shelter Scheme: In November 2022, an attorney and certified public accountant (CPA), a second CPA, and a tax manager from accounting firm McDonnell Richardson, P.C. were indicted related to an ongoing tax shelter scheme resulting in over $1 billion in unreported income and over $200 million in unpaid taxes. The organizer of the scheme, attorney Joseph Garza, was previously indicted on fraudulent income tax return charges. The co-conspirators allegedly created shell companies that claimed to provide services or serve as investment vehicles for their clients to help clients avoid paying taxes, through fabricated agreements and invoices and improper business deductions.
Former Uber Executive Convicted of Obstructing Federal Trade Commission Proceedings: In October 2022, a federal jury in the Northern District of California convicted Joseph Sullivan, the former Chief Security Officer (CSO) of Uber Technologies, Inc. (Uber), of obstructing an FTC proceeding and of misprision of felony for attempting to cover up a 2016 hack of Uber user data. According to the DOJ press release, during the FTC's investigation of a 2014 Uber data breach, Sullivan provided testimony and specific representations about Uber's data security practices. The press release also states that Sullivan later executed a scheme to hide a second data breach of the records of approximately 57 million Uber users that occurred shortly after his testimony to the FTC in 2016. To perpetuate this scheme, the press release states that Sullivan tightly controlled the internal spread of information related to the second breach and arranged to pay a ransom to hackers in exchange for their agreement not to publicize the breach and to falsely represent that they did not take or store any Uber user data in their hack. Sullivan also concealed the second data breach from Uber attorneys overseeing the FTC inquiry of the first data breach and misled Uber leadership and government investigators about the breach and ransom payments. Sullivan is set to be sentenced on March 30, 2023.
Extradition & Extraterritoriality
Bankman-Fried Secures Unusual Bail Package in Extradition Waiver Negotiations: In December 2022, defunct cryptocurrency exchange FTX founder Samuel Bankman-Fried was arraigned in the SDNY after being extradited from the Bahamas to face criminal charges in the U.S. Bankman-Fried was charged a week earlier with counts of securities fraud, money laundering, and conspiracy arising from a scheme to misappropriate billions of customer deposits held by FTX and to mislead investors in FTX and the cryptocurrency hedge fund Alameda Research, which he also founded.
Bankman-Fried ultimately waived formal extradition proceedings in the Bahamas as part of negotiations with federal prosecutors on a bail arrangement. In a package designed to ultimately secure Bankman-Fried's appearance at trial, Bankman-Fried was released on a $250 million bond secured against his parents' property, the surrender of his passport, and electronic monitoring of his whereabouts. Facts unique to U.S. national Bankman-Fried that supported pre-trial release included the government's access to assets within the U.S. like his family's California home that could be used to secure Bankman-Fried's appearance, assets not necessarily available to a foreign national extradited to face charges in the U.S.
Bankman-Fried's extradition is the latest example of the U.S.'s successful extradition of individuals located abroad to face charges stemming from cryptocurrency fraud, as covered in our previous issue. In August 2022, Latvia extradited Ivars Auzins, a Latvian national, to face wire fraud, securities, fraud, and conspiracy charges in the Eastern District of New York (EDNY) for allegedly defrauding investors into funneling millions into a fraudulent cryptocurrency. That same month, Greece extradited Russian national and cryptocurrency exchange operator Alexander Vinnick to the Northern District of California in response to a July 2017 indictment charging him with cryptocurrency fraud-related offenses. In addition, the Netherlands extradited Denis Mihaqlovic Dubnikov to the U.S. to face charges that he laundered ransomware attack proceeds using cryptocurrency on behalf of individual hackers and hacking organizations. While each extradition is fact-specific, it is noteworthy that the extraditions follow statements by DOJ earlier this year announcing crackdowns on cybercrime and abuse of cryptocurrency.
Ten-Month Sentence in First Cryptocurrency Insider Trading Case: In January 2023, Nikhil Wahi was sentenced to 10 months in prison after pleading guilty to conspiracy to commit wire fraud, in what prosecutors called the "first ever insider trading case involving cryptocurrency markets." Wahi's brother, Ishan Wahi, is a former product manager at Coinbase Global, Inc. (Coinbase), a large cryptocurrency exchange platform. Ishan Wahi is charged with providing information about what crypto assets Coinbase would be listing to Nikhil Wahi and a third co-defendant, Sameer Ramani. Nikhil Wahi and Ramani are alleged to have made at least 25 purchases of crypto assets based on material non-public information provided by Ishan Wahi in advance of at least 14 different Coinbase listings, amounting to $1.5 million in realized and unrealized gains. U.S. Attorney Damian Williams said of Nikhil Wahi's plea, "Today's guilty plea should serve as a reminder to those who participate in the cryptocurrency markets that the Southern District of New York will continue to steadfastly police frauds of all stripes and will adapt as technology evolves." Ishan Wahi has entered a not-guilty plea and is scheduled to appear in court on March 22, while Ramani remains at large.
Exec Sentenced to Over Two Years Jail Time for Defrauding Veteran-Owned Small Businesses Program: Michael Angelo Padron was sentenced to 27 months in prison after a jury convicted him of wire fraud and conspiracy to defraud the U.S. Padron's company Blackhawk Ventures LLC (Blackhawk) was awarded construction contracts through the Small Business Administration's (SBA) Service-Disabled Veteran-Owned Small Business and 8(a) programs which were meant for service-disabled veteran-owned small businesses. Padron is not a service-disabled veteran. He was convicted of conspiring with two business partners, only one of which was a service-disabled veteran, to improperly obtain the contracts. In their sentencing memorandum, the government asked for an 18-level increase (which could have led to a sentence of more than nine years) based on their assertion that the defendant's scheme resulted in an actual loss of $6,299,766, the value of the contracts. However, the court sided with Padron, holding that in the Fifth Circuit, loss is "the 'difference between the contract price and the fair market value of services rendered' to 'reflect[ ] the contracting agencies' losses under their respective contracts—the difference between what they paid and what they received." On that basis, the court found that because there was no evidence Blackhawk failed to provide the government with the contracted services, there was no actual loss.
Third Circuit Limits §2B1.1 Loss to Actual Loss: In November 2022, the Third Circuit Court of Appeals ordered resentencing for Frederick Banks, finding that "the District Court erred when it applied the loss enhancement because Banks' crimes caused no actual loss." Banks was convicted of wire fraud and aggravated identity theft in 2019 and sentenced to 104 months based on his scheme to defraud Gain Capital Group by opening accounts for foreign currency exchange, making electronic deposits into the accounts from bank accounts with insufficient funds, and then attempting to complete withdrawals or transfers before the lack of funds was detected. The scheme was unsuccessful and Gain Capital never transferred any money to Banks. The district court applied a 12-level enhancement to Banks' offense level during sentencing, due to the court's assessment that loss under the sentencing guidelines included "intended loss," noting that although Banks did not receive any money from Gain Capital, he "intended to cause a loss in a pecuniary amount in excess of $250,000." The Third Circuit reversed the sentence and held that the ordinary meaning of the word "loss" contained in the sentence enhancement "is the loss the victim actually suffered." The decision is significant for white collar defendants whose sentences are generally driven by the loss calculation.
Editors: Katherine E. Pappas, Ian A. Herbert, Lauren E. Briggerman
Authors: Maame Esi Austin, Sarah Barney, Alexandra Beaulieu, Samuel B. Cutler, Connor W. Farrell, Calvin Lee, Cody Marden, Helen Mitsuko Marsh, Sandeep A. Prasanna, Alexandra S. Prime, Jesse Schwab, Caroline J. Watson, Surur Fatema Yonce
Contributors: Kirby D. Behre, Nicole Gökçebay, Sandra M. Hanna, Paul A. Leder, Timothy P. O'Toole, Joseph A. Rillotta, Alex L. Sarria
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