Scherzer Blog

Seven individuals charged by SEC in global warming scheme

The Securities and Exchange Commission (SEC) today charged seven individuals with perpetrating a fraudulent pump-and-dump scheme in the stock of a sham company that purported to provide products and services to fight global warming. The scheme resulted in more than $7 million in illicit profits from the sales of stock in CO2 Tech Ltd. at artificially inflated prices. The company, based in London, touted impressive business relationships and anti-global warming technology innovations, but was found to have no significant assets or operations.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, the scheme was enacted through Red Sea Management Ltd., a Costa Rican asset protection company that laundered millions of dollars in illicit trading proceeds out of the United States on behalf of its clients. Charged in the in the fraudulent pump-and-dump scheme were: Jonathan R. Curshen, a Florida resident who founded and led Red Sea, David C. Ricci and Ronny Morales Salazar of Costa Rica, who were Red Sea stock traders, Ariav “Eric” Weinbaum and Yitzchak Zigdon of Israel, who were Red Sea clients, Robert L. Weidenbaum, of Florida, who was a stock promoter and operator of CLX & Associates, and Michael S. Krome, a New York lawyer who allegedly wrote a fraudulent opinion letter. Without admitting or denying the allegations in the complaint, Ricci settled the SEC’s charges by agreeing to an injunction against future violations of these provisions and a penny stock bar.

In a related criminal action, charges brought by the Justice Department’s Criminal Division were unsealed today against Curshen, Krome, Salazar, Weidenbaum, Weinbaum, and Zigdon. The defendants were charged variously with conspiracy to commit securities, mail and wire fraud, violating securities regulation laws and obstruction of justice.

February 18th, 2011|Criminal Activity, Fraud, Green Technology|

Tyson Foods charged with violations of the Foreign Corrupt Practices Act

The Securities and Exchange Commission (SEC) today charged Tyson Foods Inc. with violating the Foreign Corrupt Practices Act (FCPA) by making illicit payments to two Mexican government veterinarians responsible for certifying its Mexican subsidiary’s chicken products for export sales.

The SEC alleged that Tyson de Mexico concealed the improper payments by putting two veterinarians’ wives on its payroll but they performed no work for the company. The spouses were later removed from the payroll and their payments were processed with invoices issued for “services.” Tyson de Mexico paid the veterinarians, who were responsible for certifying Tyson’s chicken products for export and served as official Mexican government veterinarians at Tyson facilities, a total of $100,311. It was not until two years after Tyson Foods officials first learned about the subsidiary’s illicit payments that its counsel instructed Tyson de Mexico to cease making the payments.

The SEC further charged that in connection with these improper payments, Tyson Foods failed to keep accurate books and records and failed to implement a system of effective internal controls to prevent salary payments to phantom employees and the payment of illicit invoices. The improper payments were recorded as legitimate expenses in Tyson de Mexico’s books and records, and included in Tyson de Mexico’s reported financial results for fiscal years 2004, 2005 and 2006. Tyson de Mexico’s financial results were, in turn, a component of Tyson Foods’ consolidated financial statements filed with the SEC for those years.

Without admitting or denying the SEC’s allegations, Tyson Foods consented to the entry of a final judgment ordering disgorgement plus pre-judgment interest of more than $1.2 million and permanently enjoining it from violating the anti-bribery, books and records, and internal controls provisions of the FCPA. The proposed settlement is subject to court approval.

In a related criminal action announced today, the Department of Justice (DOJ) charged Tyson Foods with conspiring to violate the FCPA and violating the FCPA. The DOJ and Tyson Foods agreed to resolve the charges by entering into a deferred prosecution agreement. Tyson Foods also agreed to pay a $4 million criminal penalty.

February 12th, 2011|Fraud|

FBI arrests lecturer for lying about credentials

Various media sources reported last week that the FBI arrested William G. Hillar, 66, who for a decade posed as a retired Green Berets colonel with wide-ranging military expertise and established himself as a lecturer, workshop leader and trainer in the public and private sectors. Hillar was charged in the U.S. District Court in Maryland with one count of mail fraud for payment he received from the Monterey Institute of International Studies in July 2010, according to published reports. He faces a maximum prison sentence of 20 years if convicted. News reports quoted U.S. Attorney Rod Rosenstein saying that “Hillar was living a lie and based his entire career on experiences he did not have and credentials he did not earn. He was never a colonel, never served in the U.S. Army, never was deployed to exotic locales and never received training in counter-terrorism and psychological warfare.”

Media reports further stated that Hillar’s alleged deception was exposed in November 2010 after several Monterey Institute of International Studies students questioned the authenticity of his military exploits and knowledge of international human trafficking. Their suspicions prompted the Institute to ask Hillar to document his background. But Hillar cut off all communications and took down his “Bill Hillar Training” Web site. Immediately after Hillar became the subject of a criminal investigation, the Institute said it was changing its policy to require full background checks on lecturers and anyone involved in teaching.

According to media reports, Hillar’s client list included approximately 40 agencies and schools across the country, ranging from FBI and army units to local and state police agencies between Idaho and Georgia. Federal officials said evidence shows that Hillar was paid more than $100,000 for teaching and speaking engagements during his facade.

So what was Hillar’s actual military record? News reports said that from 1962 to 1970 he served in the Coast Guard as an enlisted sailor and reached the rank of radarman 3, according to FBI Special Agent David Rodski.

Hillar said he plans to return to teaching once released, according to media reports.

February 2nd, 2011|Fraud|

Beware of background investigation companies that offer FBI NCIC checks

All you need to do is type in a few key words into Google and headlines pop up promising easy access to FBI criminal records. But when you click on the link, it goes nowhere or to a background screening company’s Web site which then states that it searches public records only, and makes no further mention of the teasing lead.

And except for a few non-government entities, such ones performing authorized criminal justice functions under contract with law enforcement agencies, entities whose purpose is to provide information to authorized agencies to facilitate the apprehension of fugitives or locate missing persons and stolen property, or similar objectives, and federally chartered banking institutions, their bank subsidiaries and direct affiliates, the records are off-limits to the public. Of course, an individual can request his/her own record, typically for a personal review, to challenge the information on file, to meet a requirement for adopting a child in the U.S. or internationally, to satisfy a mandate to live, work, or travel in a foreign country, or to obtain certain professional licenses.

So exactly what is the FBI’s National Crime Information Center? The NCIC, as it is commonly known, is the United States’ central database for tracking crime related information. Maintained by the FBI’s Criminal Justice Information Services Division, the NCIC is interlinked with similar systems held by each state. Data is received from federal, state, local and tribal law enforcement agencies, along with railroad police, and non-law enforcement agencies, such as state and federal motor vehicle registration and licensing authorities.

The NCIC was launched January 27, 1967 with five files and 356,784 records. By the end of 2009, it amassed more than 15 million active records in 19 files, separated into seven property files containing records of stolen articles, boats, guns, license plates, parts, securities, and vehicles, and 12 person-related files containing information in connection with supervised releases, national sex offender registry, foreign fugitives, immigration violators, missing persons, protection orders, unidentified persons, U.S. Secret Service protective list, gangs, known or suspected terrorists, wanted persons, and identity theft. Also a part of the system is the Interstate Identification Index, which provides images that can be associated with NCIC records to help identify people and property items.

The database is not infallible. Its many critics say that the underfunded system is limited in content, contains errors and has outdated information. But the black market for NCIC records is flourishing, despite risks of prison time and financial penalties. While in most instances the motivation for misuse is monetary gain, in an extreme example of personal incentive, a former law enforcement officer in Arizona obtained NCIC information from three other officers and used it to track down and murder his girlfriend.

January 26th, 2011|Educational Series|

What is FATF?

FATF, which is the acronym for the Financial Action Task Force, and also known by its French name, Groupe d’action financière (GAFI), is an inter-governmental policy-making organization founded in 1989 by the initiative of the G7. The FATF Secretariat, headquartered in Paris, is comprised of over 30 countries, and has a ministerial mandate to establish international standards for combating money laundering and terrorist financing.

The primary functions of the FATF are to monitor members’ progress in implementing necessary measures, review money laundering and terrorist financing techniques and counter-measures, and promote the adoption and implementation of appropriate measures globally. To date, over 180 jurisdictions have joined the FATF or a FATF‐style regional body, and committed at the ministerial level to implement FATF standards and evaluations. In performing its activities, the FATF collaborates with other international bodies involved in combating money laundering and terrorism financing, and has established mutual evaluations (see monitoring implementation of the FATF recommendations.)

The FATF does not have a tightly defined constitution or an unlimited life span, and thus periodically reviews its mission. The current mandate of the FATF (for 2004-2012) was subject to a mid-term review and was approved and revised at a ministerial meeting in April 2008 (see FATF standards.)

January 18th, 2011|Educational Series, International|

Unauthorized Banks List

The Office of the Comptroller of the Currency (OCC) issues alerts to provide information about entities engaged in unauthorized banking activities, both offshore and domestic. The alphabetical Unauthorized Banks List, which contains bulletins from 1994 to the present, is intended to aid in the search for names of such entities and detail the problem that prompted the issuance.

January 12th, 2011|Educational Series, Fraud|

Prime Bank Frauds

Prime bank schemes generally claim that investors’ funds will be used to purchase and trade “prime bank” financial instruments on clandestine overseas markets, and generate huge returns. However, neither these instruments, nor the markets on which they allegedly trade, exist. To legitimize the schemes, the promoters distribute documents that appear complex, sophisticated and official. They frequently tell investors that they have special access to programs that otherwise would be reserved for top financiers on Wall Street, or in London, Geneva and other world financial centers. Possible profits of 100% or more with little risk also are touted.

The fraudsters target individuals and entities, including municipalities, charitable associations and other non-profit organizations. They advertise in national newspapers, such as USA Today and The Wall Street Journal, and often avoid using the term “prime bank note” in their spiel. In fact, investors are told that the programs do not involve prime bank instruments so that they appear legitimate.

The Office of the Comptroller of the Currency (OCC) posted the following warning signs of “prime bank” investment fraud:

Excessive guaranteed returns

Promises of unrealistic returns, of 20% to 200% monthly, at no risk, are the hallmarks of prime bank fraud.

Fictitious financial instruments

Despite credible-sounding names, the “financial instruments” at the heart of any prime bank scheme simply do not exist. Fraudsters frequently claim that the offered financial instrument is issued, traded, guaranteed, or endorsed by the World Bank (Department of Institutional Integrity or Operations Evaluation Department), International Monetary Fund (IMF), Federal Reserve, Department of Treasury, International Chamber of Commerce (ICC), or an international central bank.

Extreme secrecy

Fraudsters maintain that the transactions must be kept confidential by all parties, making client references unavailable. They describe the transactions as the best-kept secret in the banking industry, and assert that, if asked, bank and regulatory officials would deny knowledge of such instruments. Investors may be prompted to sign nondisclosure agreements.

Exclusive opportunity

Fraudsters claim that the investment opportunities are by invitation only, available to a handful of special customers, and historically reserved for the wealthy elite.

Complex presentations

Explanations often are vague about who is involved in the transaction or where the money is going. Fraudsters cover up the lack of specificity by stating that the financial instruments are too technical or complex for non-experts to understand.

January 12th, 2011|Educational Series, Fraud, Risk Management|

Some call the new U.K. Bribery Act “The FCPA on Steroids”

The new law, called the Bribery Act, takes effect in April 2011. It resembles the U.S. Foreign Corrupt Practices Act (FCPA) which bars companies that trade on U.S. exchanges from bribing foreign government officials to gain a business advantage, but the Bribery Act goes beyond the FCPA by not just prohibiting illicit payments to foreign officials, but also bribes between private business people. It holds even if the individual who makes the payment does not realize that the transaction was a bribe.

And the Act’s impact extends beyond U.K.-based companies. It applies to entities with any “business presence” in the U.K., regardless of where the act of briberyoccurs. It also covers bribery by any person with “close connections” to the U.K., including both British citizens and citizens of others countries “ordinarily residing” in the U.K.

According to the Ministry of Justice, the law basically creates three criminal offenses: 1) giving or accepting a bribe designed to induce someone to perform a function improperly; 2) bribing a foreign public official with the intention of obtaining a business advantage, and 3) failing to prevent bribery.

Legal experts say that the most significant development in the law is a company’s strict liability for failing to prevent bribery (by an employee, a joint-venture partner or a subsidiary.) Under the Act, the company can be penalized with an unlimited fine for such actions, and further can be held liable for the acts of bribery by a person “associated” with the company who is trying to obtain a business advantage for the company. And unlike the FCPA, the Act does not exempt from prosecution what are commonly known as “facilitation payments.” (In some parts of the world, it is common practice to pay a small amount of money to ensure that an otherwise legitimate permit is approved in a timely manner.)

While the British government released some draft guidance on the Act in late 2010 and more definitive text is expected in 2011, it is unclear how vigorously the law will be enforced or what resources will be committed to investigating and prosecuting the suspected violations. Ultimately, it will be up to the courts to determine the true impact of the new law.

January 5th, 2011|Educational Series, Legislation|

New Hong Kong accounting rules raise concerns of fraud

Just as global investors are turning to Hong Kong for stakes in China’s growth, they will no longer be able to rely on the comfort of a Hong Kong auditor signing off on financial statements—or more importantly, a local regulator to hold the auditors accountable. A recent change in rules for accounting standards on the Hong Kong’s stock exchange is
raising concerns that fraud will slip through the regulatory cracks. The new rules will cut costs for mainland companies seeking to list in Hong Kong if they choose to prepare one set of financial statements instead of two, but now the companies will have to rely on mainland Chinese authorities to root out fraud.

The rules also go against the trend in other jurisdictions, where regulators are pushing for more due diligence. In the U.S., where 21 of the 27 foreign offerings this year were Chinese, the Public Company Accounting Oversight Board warned auditors not to rely on financials prepared by mainland Chinese accountants and urged them to visit China to check out the companies.

January 5th, 2011|Fraud|

Turning to lie detectors for investment confidence

Media reports say that amid the still unsettled regulations in the wake of the financial crisis, affluent investors are turning to behavioral specialists, looking to find things in the faces and phrases of their fund managers that may not be revealed in financial statements.

Eccentric screening techniques are nothing new to Wall Street. Seigmund Warburg, founder of the investment bank S. G. Warburg & Co., was known for subjecting customers and employees to psychological tests, and evaluating hand-writing samples of job applicants. And these days, requests for deception detection are on the uptick, as acknowledged by lie detector professionals who are turning down repeated orders to analyze subjects for Wall Street firms.

Earlier this year, intelligence sources disclosed to the publication Politico that the CIA, within tight guidelines of its employment policies, allows agents to moonlight in the private sector, and that some of them work as “human lie detectors.” Calling deception detection an “arcane field,” Politico reported that such experts recognize the verbal and nonverbal cues that indicate someone may be lying, and the people under scrutiny never know they’re being evaluated. Politico recounted an incident from 2005 where a large hedge fund, through a third-party, retained CIA-trained analysts to remotely listen in on a quarterly earnings status call from executives at UTStarcom. During the call, the agents noted some suspicious responses by the interim CFO, and specifically about revenue recognition. They subsequently cautioned that the company most likely would post poor results in the third-quarter. And sure enough, the prediction came true: a day after the below-expectations results were released, the stock closed at $5.64. It had been trading at $8.54 when the CIA listened in on the call in August.

So exactly what verbal clues tipped off the agents? In this case, it was a “detour statement” when the interim CFO qualified his response to a revenue recognition question by referring back to an announcement from a previous quarter, and avoided further comments on any related issues. The executives on the call also projected low confidence, had an underlying concern and did not readily come forth with information.

According to corporate lie detection experts, there is a myriad of verbal clues that may be indicators of dishonesty. Shifts in language patterns, such as switching from the first person to the third person, i.e., suddenly speaking on behalf of “the firm” or “the team,” and quick “rehearsed” responses may be red flags. Statements that contain the words “honestly,” “frankly” or “basically” and phrases such as “as I said before” and “I swear to God” also have been linked to deception. Attacking the questioner with “How dare you ask me something like that?” too may point to someone who is uncomfortable with the untruth, as well as having a selective memory as indicated by the phrase “to the best of my knowledge.” Additionally, complaints – “How long is this going to take?” – and overly courteous responses – “yes, sir” – have been found common in liars.

And of course there are physical indicators of lying, with the main ones being facial twitches, changes in breathing tempo, and dilated pupils. Professional human lie detectors say that people who are uneasy with deception will show that in motions such as micro-expressions—brief flashes of fear or other changes in a face—or concealing positions like crossing legs, or sitting motionless. Shifting anchor points, grooming gestures such as adjusting clothes, hair or eyeglasses, picking at fingernails, and cleaning the surroundings by straightening paper clips on the table or lining up pens are also possible indicators of honesty transgressions.

Skeptics, however, abound. In a May 2010 report, even the Government Accountability Office called into question the effectiveness and the scientific foundation of deception detection techniques. And many experts agree that even the most common dishonesty signs are not universal and detection is most effective when the analyst can establish an “honesty” pattern and then look for deviations.

When screening a fund manager, investors still like to see experience, a consistent record and good returns. And a comprehensive background investigation that provides such information may be more predicting of future behavior and honesty than a Pinocchio’s nose. But human lie detectors can identify “hot spots” for extra probing, and combined with a traditional due diligence, buy investors a reasonable peace of mind.

January 4th, 2011|Educational Series, Fraud|

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