Wednesday, May 18, 2011

Federal Judge Acquits Glaxo Attorney

On May 10, 2011, Lauren Stevens, former associate general counsel for GlaxoSmithKline, was acquitted of six criminal charges surrounding allegations of obstruction and providing false answers to an FDA inquiry in violation of 18 U.S.C. 1519.

In November 2010, Stevens was indicted on four counts of making false statements, one count of obstruction of justice, and one count of falsifying and concealing documents related to GlaxoSmithKline’s off-label marketing of the anti-depressant, Wellbutrin. Last month, U.S. District Court Judge Roger Titus dismissed the charges after finding that prosecutors had given inaccurate and incomplete information to the grand jury about Stevens’ key defense--that she depended on the advice of counsel. However, the DOJ re-indicted Stevens after dismissal and the subsequent hearing ensued.

Steven’s case is noteworthy for several reasons. First, it raises concerns with in-house counsel that deal with federal government agencies, including those handling FCPA investigations or answering compliance-related questions from the DOJ, SEC, and FDA. Second, it involved an attorney safe harbor provision housed in federal statutes, which protects attorneys who rely on the advice of outside counsel. Finally, Ms. Stevens was not accused of taking part in the actual underlying wrongdoing, but was still charged in connection with the wrongdoing. This is unusual because “in most off-label drug cases, the government charges senior business executives, not attorneys” according to John Wood, former U.S. Attorney in Missouri.

Judge Titus’ ruling was equally unusual—in his tenure as a federal judge, he had never granted a directed verdict of acquittal before the defense presented its case—until now. In his opinion, Titus wrote, “I believe that it would be a miscarriage of justice to permit this case to go to the jury. There is an enormous potential for abuse in allowing prosecution of an attorney for the giving of legal advice. I conclude that the defendant in this case should never have been prosecuted and she should be permitted to resume her career.”

In coming to his decision, he stated, “it is clear that [Ms. Stevens’ statements made to the FDA] were made in good faith which would negate the requisite element [of specific intent to commit a crime] required for all six of the crimes charged in this case.” Moreover, “GlaxoSmithKline did not come to Ms. Stevens and say, assist us in committing a crime or fraud. It came to her for assistance in responding to a letter from the FDA.”

Titus said Congress designed the safe-harbor provision to protect an attorney who is zealously representing her client and “that vigorously and zealously representing a client is no a basis for charging an offense [of] obstruction of justice.” Titus concluded that Steven’s responses to the FDA “were in the course of her bona fide legal representation of a client and in good faith reliance of both external and internal lawyers for GlaxoSmithKline...[and] every decision that she made and every letter she wrote was done by a consensus.”

Accordingly, "I conclude on the basis of the record before me," Judge Titus said, "that only with a jaundiced eye and with an inference of guilt that's inconsistent with the presumption of innocence could a reasonable jury ever convict this defendant."


The SEC has provided a Wells notice regarding its intention to file civil charges, according to publicly traded life settlements company, Life Partners Holdings, Inc. Life Partners Holdings, Inc. is the parent company of Life Partners, Inc., “one of the oldest and largest life settlement companies in the United States” according to its website.

Life Partners and other life settlement companies purchase “unwanted” life insurance policies from the owners of the policies who may or may not be the insured. The purchasing company then proceeds to re-sell fractional interests in the policies to third parties. The “Life Settlement Provider” purchases the policy for an amount below the net benefit of the policy. Since the third-party purchasers of the interests, through a Life Settlement Broker, are in part responsible for the ongoing premiums on the policy, the amount of time between the purchase of the fractional interest and the death of the insured is a critical element in the investors risk/return evaluation. According to The Wall Street Journal, the Wells notice issued to Life Partners provides notice of impending charges against the company and two top executives related to these critical “life-expectancy estimates.”

Allegations of fraud related to life expectancy estimates received public attention almost a decade ago in connection with Mutual Benefits Corporation in Florida1. In that case, a doctor providing medical reports in support of life-expectancy estimates was indicted and pled guilty to securities fraud in 2007 and the company was ultimately placed under receivership. The SEC took action as well, and federal litigation followed in 2005 which was in part centered on whether or not viaticals or life settlements qualified as “investment contracts” and were therefore securities under federal securities laws.

In 2009, this law firm procured a settlement on behalf of an investor in a suit filed against a life settlement broker/investment advisor that made multiple grossly unsuitable recommendations to our client for the purchase of hundreds of thousands of dollars of life settlements. The value of the investments were based primarily upon the life-expectancy of insured persons who proved to be nearly immortal, despite promises of near-death status at the time of the viatical purchases. The Missouri Securities Division had previously taken preliminary action, albeit belatedly, against both Mutual Benefits Corporation (in 2004) and our civil defendant (investor complaint received in 2004, Cease and Desist Order issued in the fall of 2006), but both the Securities Division and the Missouri Department of Insurance failed to garner a remedy for the investors or take action against the investment advisors and broker-dealers that failed to supervise the representative/life settlement broker/insurance salesman. In sum, it seems the more things change, the more they stay the same!

1The State of Florida also filed a criminal charge in 2001.

Tuesday, May 17, 2011

Study Finds It Might Be Better to Fight the SEC & FINRA Than Settle

A study conducted by financial services law firm Sutherland Asbill & Brennan finds that it sometimes pays for broker-dealers and registered representatives to take on regulators. The study analyzes the outcomes of disciplinary and administrative proceedings between October 2008 and September 2010—the SEC’s 2009 and 2010 fiscal years.

Some key findings:

57% of the time, the SEC fails to prove fraud charges, but FINRA had a 100% success rate (4 of 4 fraud charges were proven).

33% of SEC respondents were successful in receiving reduced sanctions when cases were appealed from SEC Administrative Law Judge (ALJ) to the full Commission

33% of the time the ALJ or the Hearing Panel imposed lower monetary sanctions than the amount FINRA or SEC staff initially sought, but 33% of the time the ALJ or Hearing Panel imposed higher monetary sanctions.

28% of SEC respondents got charges dismissed compared with 8.6% of FINRA respondents (out of 237 litigated charges)

FINRA respondents represented by counsel were significantly more successful than pro se respondents. Since 2006, only one pro se FINRA respondent successfully got charges dismissed.

Often firms and individuals think it is better to settle with the regulators. However, based on the findings of this study, in some circumstances—usually where fraud is charged, respondents will fare better if they come before a judge or hearing panel. Further, the study purports to establish that there might not actually be a “settlement discount,” which is a tactic used by the regulators to incentivize settlement before entering into litigation. However, the study admits that the sample used to determine this finding is not likely a representative sample.

The bottom line: seek legal counsel before making the decision to settle or litigate. Again, the study only finds that litigants are more successful some of the time over those who settle.

Monday, May 16, 2011

FINRA's Ketchum Testifies Before Subcommittee on Oversight and Investigations

On May 13, 2011, Richard Ketchum, Chairman and CEO of FINRA, testified before the House Subcommittee on Oversight and Investigations. Ketchum's testimony related to the changes made at FINRA as a result of the Special Review Committee, established in 2009 by the Board of Governors, which conducted a review of FINRA's examination program as it related to the detection of fraud and Ponzi schemes. Specifically, he focused on the Special Committee's findings relating to the Ponzi scheme perpetrated by R. Allen Stanford. Stanford was behind the orchestration of a fraudulent, multi-billion dollar investment scheme centering on an $8 billion CD program.

Ketchum testified that between 2003 and 2005, the National Association of Securities Dealers—FINRA's predecessor entity—received information from at least five sources claiming that the Stanford CDs were a potential fraud. Despite the existence of these red flags, FINRA did not launch an investigation of whether the Stanford CD program was a fraud until January 2008.

Ketchum testified that FINRA missed a number of opportunities to uncover the Stanford firm's role in the CD scheme. First, FINRA's Dallas office cut off an investigation because they were unsure of the full scope of FINRA's investigative authority and because they believed that the offshore CDs upon which the Ponzi scheme were based were not "securities" regulated under federal securities laws.

Second, FINRA procedures at the time did not set forth criteria for escalation of a matter to senior management or the use of specially trained investigators based on the gravity and substance of the fraud allegations.

Third, FINRA's Dallas staff did not adequately document communications with the SEC, or discussions within FINRA itself, regarding the CD program.

Finally, FINRA at the time did not have a centralized database that gave examiners direct, electronic access to all relevant complaints and referrals associated with a firm. Consequently, no individual FINRA staff member was ever aware of all of the "red flags" related to the Stanford firm.

Following the investigation, the Special Committee made recommendations which sought to remedy the weaknesses revealed at FINRA. Among the recommendations were the following strategic objectives:

(i) greater emphasis should be placed on the detection of fraud;
(ii) potential fraud situations and other situations presenting serious potential risk to investors should be escalated promptly and properly;
(iii) examination staff should be diligent in pursuing potentially serious issues, exercising an appropriate degree of skepticism;
(iv) all FINRA operating units should closely coordinate and communicate in carrying out the examination program; and
(v) FINRA should provide additional resources to strengthen its cause examination program.

As a result of these recommendations made by the Special Committee, Ketchum stated that FINRA made the following changes:
  • FINRA created the Office of Fraud Detection and Market Intelligence in October 2009. This group houses the Central Review Group, Office of the Whistleblower and the Insider Trading and Fraud Surveillance teams, and is responsible for the centralized intake and triage of regulatory filings and investor complaints.
  • FINRA enhanced its examination programs and procedures in a variety of ways intended to help FINRA better detect conduct that could be indicative of fraud. Some of the enhancements FINRA has made to its examination program are: 1) focusing resources on highest-priority matters; 2) enhanced expertise of regulatory staff; 3) enhanced use of third-party and other information; and 4) multi-year technology enhancement plan.
  • FINRA has increased communication and coordination with the SEC relative to our respective programs. FINRA and SEC staffs meet routinely to share details about strategic design and tactical delivery of information to the respective regulatory programs of each organization.
  • In late 2010 FINRA created a new Office of Risk to begin the process of strengthening its ability to identify high-risk firms, branch offices, brokers, activities and products through broader data collection and more comprehensive analysis.
Ketchum concluded by stating that these steps will cause FINRA to become a more effective regulator, especially in terms of enhancing its ability to quickly identify and investigate conduct that could indicate fraud or other serious customer harm. A complete copy of Ketchum's statements can be found here. The SEC's litigation release with regard to the Stanford Ponzi scheme can be found here.

Client’s Ponzi Scheme Gets Law Firm and Attorney Sued

A bankruptcy trustee filed suit April 28th against Estate Financial Inc.’s (EFI) former attorney and her employing firm, Bryan Cave LLP, alleging that their legal advice led to more than $100 million in losses from over 1,500 investors.

The complaint claims that Bryan Cave LLP, an international law firm with lawyers in St. Louis, and one of its attorneys from its Los Angeles office, Katherine Windler, failed to advise EFI to conform to various California and federal laws.

The suit, filed in the central district of California, alleges that Windler and Bryan Cave were retained to conduct a compliance review and audit of EFI’s business practices. The compliance review revealed that EFI was in violation of “countless real estate, securities and corporate laws, rules and regulations.” According to the complaint, regardless of this knowledge, Windler “counseled EFI to continue its current business activities,” which allegedly allowed EFI principals Karen Guth and Josh Yaguda to steal over $100 million from investors through a ponzi scheme. The scheme involved selling membership interests in a fund held by EFI, the Estate Financial Mortgage Fund, LLC, under restricted or expired permits. The complaint cites to various documents and email communications between Windler and EFI’s principals evidencing her purported knowledge of the fraud.

In 2009, Guth and Yaguda pleaded guilty to 26 felony counts of fraud. Guth is serving 12 years in prison and Yaguda 8 years.

This lawsuit serves as a tragic reminder to attorneys that performing in accordance with the rules of professional responsibility should always be at the forefront of any client matter. It also provides a chilling warning to corporations about the need for reputable and honest compliance counseling.

Wednesday, May 11, 2011

Man Convicted of Eleven Counts of Fraud in Connection with Business Opportunity Scheme

Yesterday, May 10, 2011, a federal jury in Miami convicted Sirtaj Mathauda of nine counts of mail fraud, two counts of wire fraud, and conspiracy related to a fraudulent business opportunity scheme according to a Department of Justice Press Release.

The complaint charged Mathauda and his co-conspirators of operating bogus companies known as Apex Management Group, USA Beverages Inc., Omega Business Systems and Nation West Distribution. According to the complaint, “the companies operated largely out of phone rooms in Costa Rica and marketed to residents in the United States.”

The companies sold “business opportunities” to own and operate vending machine routes, beverage distributorships, and greeting card distributorships. These opportunities were sold as a complete package, including retail display racks or vending machines, access to high-traffic locations, and assistance in maintaining and operating such businesses. However, the promises of good locations and business assistance were fabricated.

Based on evidence presented at trial, salesmen in the phone rooms told potential customers that the companies were located in the United States and would provide profitable distribution routes for either the vending machines or retail display racks. Further, salesmen asserted that the companies had a track record of success. This so-called “record of success” was backed by phony references pretending to be satisfied customers of the companies.

Mathauda owned, managed or worked at the fraudulent companies in Costa Rica between 2004 and early 2009. Several of his co-conspirators Dilraj “Rosh” Mathauda, Stephen Schultz, Silvio Carrano, Donald Williams, Patrick Williams and Gregory Fleming, previously pled guilty in Miami in connection with their roles in these fraudulent business opportunity scams.

All of the defendants were charged as part of the government’s continued nationwide crackdown on business opportunity fraud. A stance supported by Tony West, Assistant Attorney General for the Justice Department’s Civil Division who stated that “The Department of Justice will continue to prosecute aggressively those who are exploiting consumers to make a quick buck for themselves.” The DOJ is honing in on business opportunity fraud because it “imposes major financial hardship on innocent, hardworking victims” especially now during tough economic times.

Financial Crisis—Hollywood Worthy?

Yes. Well, at least HBO thinks so. On May 23, 2011, the movie “Too Big To Fail” will premiere on HBO. The movie is based on Andrew Ross Sorkin’s book of the same name detailing the financial meltdown three years ago. The movie attempts to capture the “behind the scenes” look at the men and women who were pivotal in determining the fate of the global economy in the weeks after Wall Street collapsed and the housing marketing imploded. The narrative focuses in particular on Henry Paulsen’s perspective, Secretary of the Treasury and former chairman and CEO of Goldman Sachs.

According to Sorkin “this story and this particular film and the book was really an opportunity to try to take the public inside the room so they could see what happened, so they could actually see the decisions that were made and what the opportunities were and the choices were that they actually had.” “In hindsight, everything looks black-and-white. But with 20/20 hindsight, it's different. When you're actually there, the choices were very different. And I think that this particular project really puts a focus on that. You get to see really what we were up against and how this was perhaps the most catastrophic thing that had happened in our economy since the Great Depression and that we were really on the edge. People don't really appreciate often how close to the edge we really were," he says.

The portrayal of the financial crisis boasts a star-studded cast including James Wood, Paul Giamatti, Tony Shalhoub. A synopsis of the film and scenes from the actual movie can be viewed on HBO’s website.

This isn’t the first time real-life financial and corporate disasters have been the subject of entertainment. In 2005, the documentary film “Enron: The Smartest Guys in the Room” was produced chronicling the 2001 collapse of the Enron Corporation. Several movies about big-time fraudster Bernie Madoff are in post-production and are slated to come out this fall, including a spoof, “Tower Heist,” an action comedy starring Ben Stiller.

Whether truthful portrayals or light-hearted comedies, it seems we will be reliving the financial crisis and surrounding events for years to come, moving forward both in real and reel time.

Wednesday, May 4, 2011

SEC Whistleblower Program: Compliance Nightmare or Missed Opportunity?

As part of Dodd-Frank Wall Street Reform and Consumer Protection Act passed last summer, the Securities and Exchange Commission was given the authority to establish a whistleblower program with monetary incentives as a way to entice individuals to come forward about corporate financial wrongdoings. Section 21F provides that whistleblowers who provide new information to the SEC about financial misconduct are able to collect monetary awards totaling between ten and thirty percent of the sanctions recovered through civil or criminal proceedings that total more than $1 million. The SEC characterizes “new information” as information that is original and “based on independent knowledge not already known to the Commission nor taken exclusively from public sources.”

According to the SEC, the new whistleblower authority will help the agency maximize its resources and effectiveness by increasing the number of high-quality tips that it might not otherwise receive without the incentives in place. SEC spokesman, John Nester, has already reported that that SEC has seen a “significant increase in high-quality tips.”

However, the whistleblower program is highly controversial. Many argue that such an incentive program pits employees against employers and creates a disincentive for employees to utilize internal compliance structures mandated by the 2002 Sarbanes-Oxley Act. According to Susan Hackett, senior vice president and general counsel for the Association of Corporate Counsel, the new program encourages “a lot of people who are being opportunistic or who are looking to actually help create problems they can then profit from.” She argues that compliance culture morphs from a “let’s fix it” attitude into a self-enterprising one, which creates clear compliance challenges. Tom Quaadman, vice president of the Capital Markets Competitiveness at the U.S. Chamber of Commerce takes a similar stance. Both advocate that whistleblowers should first be required to make use of internal reporting and investigative systems before submitting their complaints to the SEC. Further, these organizations call for a ban on monetary recovery for individuals who were engaged in the underlying misconduct before reporting. Quaadman asserts that whatever rules are finally implemented need to operate in such a way so as to promote good corporate behavior, not employee contrivance.

Another concern about the proposed Whistleblower Program is that there will be an increase in the number of frivolous allegations. This concern arises from acknowledgement that whistleblower complaints can act as a double-edged sword: they can be instrumental in identifying and correcting corporate misconduct but often, such complaints are made by underperforming employees in an attempt to advance personal grievances against their employer.

To counter these arguments, proponents of the whistleblower program cite to other successful programs with robust monetary rewards like that under the False Claims Act, which helped facilitate large settlements with pharmaceutical giants Pfizer and Eli Lilly for corporate misconduct. They take the stance that individuals who become aware of misdeeds are not eager to blow the whistle, but merely do so to keep their jobs or do what is right. Even among supporters, there is dissonance regarding the scope of the SEC’s proposed program. Some advocate for a broader definition of “whistleblower” and others are skeptical about the program’s potential for success because of limited resources and the program’s failure to address coordination of investigations between overlapping federal agencies.

In November 2010, the SEC released its proposed set of rules that will be used to implement the whistleblower program. The comment period for these rules expired on December 17, 2010, but the SEC has not issued final rules yet. Under the deadline set by Dodd-Frank, the SEC was supposed to have its final rules for the Whistleblower Incentives and Protection Program in place by April 21, 2011. In an April 26 interview, Mary Shapiro, chairman of the SEC, disclosed that the SEC is “now finalizing its whistleblower rules.” However, according to the SEC’s implementation calendar, the planned finalization of the rules is slated to be released between now and July. So far, the only completed installation of the program is the establishment of the new Whistleblower Office and appointment of Sean McKessy as the new director of that office.

Despite the delay in final rules and implementation, whistleblowers are currently protected from retaliation and entitled to applicable monetary rewards because Dodd-Frank provided temporary rules applicable for anyone who came forward after July 22, 2010. These temporary rules remain in effect until the SEC passes its final rules.