Welcome to the September edition of Mishcon Fraud Watch. Its aim is to provide businesses and their advisors with a snapshot of what has been happening in the world of fraud in the last month.
We make no judgment whatsoever as to the morality, legality or appropriateness of the conduct which forms the subject matter of this bulletin. We simply aim to bring these matters to the attention of those involved in the prevention, detection and investigation of fraud.
Liverpool and Sheffield are taking legal action against the UK Government, alleging that £650 million of their EU funding allocations have been slashed and "gerrymandered" as a political bribe to ward off the threat of Scottish independence after the funds were re-directed to Scotland, Wales and Northern Ireland earlier this year.
The Times, 23 August 2013
Securities and Exchange Commission (SEC)
The SEC has charged Chad McGinnis a former systems administrator at Vermont-based Green Mountain Coffee Roasters, and his friend and business associate, Sergey Pugach, with repeatedly obtaining quarterly earnings data and trading in advance of its public release. Together, they garnered $7 million in illegal profits.
SEC press release 2013-144, 2 August 2013
The SEC has charged Bank of America along with subsidiaries Banc of America Securities LLC (now Merrill Lynch, Pierce, Fenner & Smith) and Bank of America Mortgage Securities with defrauding investors in an $855 million offering of residential mortgage-backed securities by failing to disclose key risks and misrepresenting facts about the underlying mortgages.
SEC press release 2013-148, 6 August 2013
The SEC announced that it had filed charges against Bernard H. Butts, Jr., a Miami-based attorney, for perpetrating a prime bank scheme. The SEC also charged Fotios Geivelis, Jr. (who uses the alias Frank Anastasio), Douglas J. Anisky, James Baggs, Sidney Banner, and Mr. Manner's company, Express Commercial Capital, and obtained an emergency asset freeze against Mr. Butts. The SEC alleged that Mr. Butts acted as an escrow agent to enable Mr. Geivelis and his company, Worldwide Funding III Limited, to defraud investors by convincing them to invest more than $3.5 million in a trading program that never existed. The SEC charged all of the defendants with violations of anti-fraud and securities laws, and is seeking disgorgement, penalties, and injunctions.
SEC press release, 9 September 2013
The SEC announced that Badin Rungruangnavarat, a Thailand-based trader, agreed to settle charges that he traded on inside information relating to Shuanghui International Holdings' proposed purchase of Smithfield Foods. The SEC had previously obtained a freeze of Mr. Rungruangnavarat's U.S. brokerage account. The settlement agreement calls for a payment of $5.2 million in disgorgement and penalties, but does not require Mr. Rungruangnavarat to admit any wrongdoing.
SEC press release, 5 September 2013
The SEC announced charges against Ronald Feldstein, a New York money manager, and two purported investment funds, Mara Capital Management LLC and Vita Health of America LLC, for conducting a free-riding scheme between September 2008 and February 2009, wherein Feldstein opened brokerage accounts in the names of purported investors and purchased securities without the money to actually pay for the purchases. According to the SEC, Mr. Feldstein planned to pay for the purchases with the proceeds of the sale of the securities if the price went up, but would walk away from the purchases if the price went down. Mr. Feldstein purportedly caused more than $2 million in losses to three brokerage firms through this scheme. Additionally, the SEC alleged that Mr. Feldstein solicited an additional $500,000 from investors that he used for personal expenses, rather than investing the money.
SEC press release, 3 September 2013
The SEC announced that Philip A. Falcone and his advisory firm, Harbinger Capital Partners, agreed to settle charges that Falcone improperly used fund assets to pay personal expenses, favored certain customer redemption requests over others, and conducted an improper short squeeze in a Canadian manufacturing company's bonds. If approved by a New York federal court, the settlement would require Falcone to pay more than $11.5 million in disgorgement, interest, and penalties, as well as impose a give year bar from the securities industry. Harbinger would have to pay a $6.5 million penalty. Both defendants would also admit wrongdoing.
SEC press release, 19 August 2013
Pei-Shen Qian, a struggling Chinese artist is accused of faking dozens of paintings as part of an elaborate $80 million New York art fraud. Pei-Shen Qian created the works for dealer Glafira Rosales, who sold them to galleries as genuine newly-discovered masterpieces by modernists such as Jackson Pollock and Mark Rothko. Rosales has been charged with fraud, but contests the charges.
Telegraph, 19 August 2013
Kazakhstan's largest paper company, Kazakhstan Kagazy, has taken legal action against its founders in London amid allegations of a £100 million fraud. Baglan Zhunus, Maksat Arip and Shynar Dikhanbayeva are accused of diverting the money from the paper, recycling and logistics group into companies they controlled.
The Times, 7 August 2013
National Statistics Fraud
A new report has claimed China may be overstating the size of its economy by publishing "wilfully fraudulent" inflation and GDP statistics for more than a decade. It is claimed that on-going discrepancies since 2000 have widened each year to produce an 8 to 12 per cent, or $1 trillion, overstatement of China's true GDP and a gross misrepresentation of the speed and size of their economic growth.
The Times, 16 August 2013
Mishcon de Reya
Mishcon's Fraud Watch is published by the Dispute Resolution Department of Mishcon de Reya. Widely recognised as the leader in the field of fraud investigations, the Department has pioneered the use of financial fraud techniques in numerous fields, including the rapidly growing areas of theft of confidential information and counterfeiting. The Department founded and run both the International Fraud Group, made up of international legal fraud specialists and the Financial Risk Group, for risk and compliance officers.