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Wall Street firms slow in reporting infractions to FINRA

The Financial Industry Regulatory Authority (FINRA), Wall Street’s self-reporting system that allows investors to vet stockbrokers and other financial professionals, says that it has a persistent problem with financial firms not reporting infractions properly or in a timely manner.

FINRA, which shares oversight of Wall Street with federal agencies such as the Securities and Exchange Commission (SEC), requires financial firms to disclose employee infractions within 30 days. Those records, ranging from serious criminal offenses to minor customer complaints, are then entered into a database known as the Central Registration Depository. Individual investors use the 30-year-old system to check out a stockbroker’s history, including employment, criminal records and client lawsuits. Institutions use the database to investigate job candidates.

FINRA depends on Wall Street, which finances its operations, to update the records. But dozens of new cases show that critical information is missing, out of date or erroneous. And Wall Street has a checkered history of reporting infractions by brokers. When regulators last cracked down on disclosure violations in 2004, the sweep ensnared nearly 30 securities firms. At the time, the National Association of Securities Dealers, FINRA’s predecessor, fined brokerage firms a collective $9.2 million for failing to report customer complaints and criminal convictions properly. That same year, Morgan Stanley was hit with a $2.2 million penalty, the largest ever levied against a firm for disclosure issues, for failing to appropriately report 1,800 incidents of customer complaints and other problems. In 2010, the regulator suspended 56 brokers for failing to report previous infractions, up from 34 in 2006. Annual fines rose to $2 million from $1.6 million over the same period.

In one of the most prominent cases in 2010, FINRA fined Goldman Sachs $650,000 for failing to disclose that a trader, Fabrice P. Tourre, and another employee had received an SEC “Wells” warning that the agency was considering an enforcement action against them. Tourre was the only individual named in the SEC fraud case against Goldman Sachs last year, which accused the investment bank of misleading investors about subprime mortgages. Tourre purportedly was ”principally responsible” for marketing the bonds. Goldman, without admitting or denying any wrongdoing, settled the SEC’s charges in July 2010 for $550 million – one of the largest fines ever paid by a Wall Street firm. The charges against Tourre are pending.

Also in 2010, FINRA fined Citigroup $150,000 for filing inaccurate disclosures regarding about 120 brokers who had been fired or resigned after being accused of theft or fraud. In its disciplinary action, FINRA said that Citigroup ”hindered the investing public’s ability to access pertinent background information.” It fined JPMorgan Chase $150,000 for similar violations in 2009.

FINRA soon will face another test. Policy makers are considering whether to expand its responsibilities, giving the regulator oversight of tens of thousands of investment advisers, on top of the 600,000-plus brokers it already under its purview.

March 2nd, 2011|Categories: Commercial Transactions Due Diligence|Tags: , , |

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|Categories: Commercial Transactions Due Diligence|Tags: , , , |

Fraudulent credentials rampant in China

Media sources report that scholars in China say that fraud in education and scientific research, and faking credentials to get work or advance in careers is staggering. With frequent news of falsified resumes by prominent officials and company heads, employers in the country have adopted stricter background checks of job candidates.

According to news reports, Fang Zhouzi, known for exposing plagiarism and academic fraud in China, said that Tang Jun, who was president of Microsoft’s China operations from 2002 to 2004, had falsely claimed in his autobiography that he earned a doctorate degree from the California Institute of Technology, when in fact, the degree was bought from California-based Pacific Western University, known as a “diploma mill.” The scandal was later dubbed the “fake credentials gate” by Chinese media.

Several media publications also brought up the case of Zhang Wuben, who through television shows, DVDs and a best-selling book, convinced millions of people that raw eggplant and immense quantities of mung beans could cure lupus, diabetes, depression and cancer. Zhung’s patient consultations, for which he charged $450 for ten minutes, were booked solid through 2012. But when Chinese journalists dug deeper into Zhung’s background, they learned that contrary to his claims, Zhung was not from a long line of doctors (his father was a weaver) nor did he earn a degree from Beijing Medical University. His only formal education was a correspondence course that he took after losing his job at a textile mill.

The exposure of Zhang’s fake credentials gained media focus and started a new round of scrutiny into the dishonest practices that plague Chinese society, and the Chinese government has vowed to address the problem. To facilitate employers’ checks of their job candidates, the China’s Ministry of Education released a list of approved Chinese-foreign jointly-run schools and a list of overseas colleges. And employers now have a greater awareness of the value of background investigations. Zhu Shibo, manager of recruitment at the China International Intellectech Corporation, one of the country’s leading human resources service providers, told media sources that the company has received unprecedented commissions to investigate job applicants. A typical background investigation includes highest education verification, employment experience confirmation and criminal record searches.

February 8th, 2011|Categories: Compliance Corner for Employment Decisions|Tags: , , |

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|Categories: Compliance Corner for Employment Decisions|Tags: , , |

More on legal troubles from employer misuse of social media information

Legal experts say that litigation resulting from employer misuse of social media information is likely to rise, at least until more case law is established. And even if the company prevails in such lawsuits, there may be reputational risks as the cases grab national spotlight.

Media sources reported that next week, for example, a National Labor Relations Board judge will rule whether American Medical Response of Connecticut illegally fired a worker after she criticized her boss on
Facebook. In what labor officials and lawyers view as a ground-breaking case involving employees and social media, the NLRB stepped in to argue that workers’ criticisms of their supervisors or companies on social networking sites are generally a protected activity and
that employers are violating the law by punishing workers for such statements. According to media reports, American Medical denied the board’s allegations, stating they are without merit, and that “the
employee was discharged based on multiple, serious complaints about her behavior.” The company added that “the employee was also held accountable for negative personal attacks against a coworker posted publicly on Facebook…”

Media sources reported on another pending case, filed in Georgia against a school district, a former high school teacher is claiming that she was essentially forced to resign over Facebook photos that
showed her drinking alcohol during a European vacation.

And in a case settled in 2009, two workers in New Jersey sued their employer, Hillstone Restaurant Group, after they were fired for violating the company’s core values. According to court documents, their supervisors gained access to postings on a password-protected
Myspace page meant for employees but not managers. The jury found that the employer violated the federal Stored Communications Act and the equivalent New Jersey law, and awarded the employees $3,403 in back pay and $13,600 in punitive damages. Hillstone appealed before the parties reached an undisclosed settlement.

Labor relations pros caution that before taking any adverse action based on social media postings, the employer should consider whether the information could be construed as a complaint or report of inappropriate or unlawful behavior. This includes, but is not limited
to discrimination, harassment, unpaid overtime and other wage violations, or any activities that may trigger an employee’s whistleblower protection.

January 23rd, 2011|Categories: Compliance Corner for Employment Decisions|Tags: , |

Lawsuit shows legal risks in using information from social media

Media sources reported that a settlement was reached January 18, 2011 in a civil rights case re C. Martin Gaskell v. University of Kentucky, whereby the University agreed to pay Gaskell and his attorneys $125,000. Gaskell was a leading candidate in 2007 to be the director of a new observatory at the University of Kentucky; however, he was denied employment allegedly in part because of his apparent views on evolution. Media reports and court documents stated that during the candidate selection process, committee members conducted searches on Gaskell on the Internet, and discovered his personal Web which contained an article entitled “Modern Astronomy, the Bible, and Creation” among other notes. The sources also reported that “Gaskell had given lectures to campus religious groups around the country in which he said that while he has no problem reconciling the Bible with the theory of evolution, he believes the theory has major flaws. He recommended students read … critics

[of evolution] in the intelligent-design movement.”

According to the Courier-Journal, the University “acknowledged that concern over Gaskell’s views on evolution played a role in the decision to choose another candidate.” But it argued that this was a valid scientific concern, particularly with regard to the prospect that “Gaskell’s views on evolution would interfere with his ability to serve effectively as director of the observatory. And there were other  factors, including a poor review from a previous supervisor and UK faculty views that he was a poor listener.”

January 19th, 2011|Categories: Compliance Corner for Employment Decisions|Tags: , |

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|Categories: Commercial Transactions Due Diligence|Tags: |

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|Categories: Commercial Transactions Due Diligence|Tags: |

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|Categories: Commercial Transactions Due Diligence|Tags: , |

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|Categories: Commercial Transactions Due Diligence|Tags: , , , |
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